The Welfare Impact of Corporate Tax Privacy

Abstract

Under Internal Revenue Code, Section 6103, most of the information contained in corporate tax returns is not publicly available. This paper investigates what corporations would do if they had access to other corporations’ returns and what investors would do if they had access to corporate returns — the ultimate concern is how these behavioral responses would affect welfare. The analysis suggests that corporate tax preparation and sheltering technology would become more widely available as firms learned from each other’s returns. This would shift investment away from firms that have relatively good tax preparation and sheltering technology and toward firms that are relatively more productive. Socially wasteful expenditure aimed at lowering effective tax rates would also fall. Tax rates would likely need to rise in order to maintain government revenue, but the increase in productivity and decrease in socially wasteful expenditures would be welfare improving. The additional information that investors would gain would improve investors’ estimates of the returns and risks of investing in each corporation, which would also be welfare-improving.