Stacey Rolland
What Do We Mean by Privacy? Using Tax Data Privacy as a Guide
Stacey L. Rolland, December 2020
Until we started sharing our most personal information online, the single place Americans handed over detailed personal information was to the Internal Revenue Service (IRS). Tech companies and their relationship with Americans’ personal data now stand in the place that the IRS stood for the last 150 years. The history of tax data privacy can serve as a useful lens through which to view the current debates about Americans’ right to privacy.
The history of tax data privacy presents a focused view of the evolution in the concept of Americans’ data privacy. Three schools of thought about privacy emerge from that evolution:
- No expectation of privacy based on the “nothing to hide” argument
- Right to privacy
- Reasonable expectation of privacy (inspired by 4th Amendment protections)
To understand better the data privacy issues of today, it helps to understand how modern concepts of data privacy developed.
Privacy as Cloak to Hide Wrongdoing / “Nothing to Hide”
The “nothing to hide” argument, while traditionally applied to arguments in favor of government surveillance programs, can be used to explain the origins of tax data privacy over 150 years ago. At its core, this argument states that privacy is not threatened unless wrongdoing or illegal activities are exposed, and if activities are exposed, the person committing the wrongdoing does not have a right to keep it private.
The first income tax in the United States, established within the Civil War Income Tax Act of 1862, was based on the “nothing to hide” theory of privacy. Tax information could be “posted on courthouse doors and published in newspapers to promote taxpayer surveillance of neighbors.”[1],[2] While the validity of this tactic was debated into the 20th century, the concept of tax confidentiality as a cloak for wrongdoing persisted. In 1898, President Benjamin Harrison stated, “each citizen has a personal interest, a pecuniary interest in the tax return of his neighbor. We are members of a great partnership, and it is the right of each to know what every other member is contributing to the partnership and what he is taking from it.”[3]
The philosophy that privacy should not be a concern for law-abiding taxpayers and the tactic of disclosing tax returns to force accurate reporting by taxpayers continued to be debated by Congress through the establishment of the modern individual income tax via The Revenue Act of 1913.[4]
The Right to Privacy
It is important to note that the modern income tax established under the Revenue Act of 1913 was imposed only on the very wealthiest Americans. Public interest in their personal affairs was growing with the expansion of the tabloid press. It is no coincidence that opposition to the “nothing to hide” theory of tax data privacy would be sparked by the so-called Robber Barons who bristled at the notion of the public scrutinizing their financial data.
Treasury Secretary Andrew Mellon was himself among those most affluent taxpayers. His views about the publication of tax information echoed the sentiments of Samuel Warren and Louis Brandeis in their seminal 1890 work The Right to Privacy about the confidentiality Americans deserve from the press and the right to be let alone. In 1925, Mellon testified before Congress in favor of a right to tax privacy and saw the issue as one of tabloid fodder, stating “there is no excuse for the present publicity provision except the gratification of idle curiosity and the filling of newspaper space…”[5]
Despite Mellon’s arguments regarding his right to tax privacy, the public turned against the notion when it was revealed that many of the wealthy elite had legally paid nothing in federal income taxes during the Great Depression. Congress responded to public outrage in 1934 by introducing measures to expose even greater light on tax information. The bipartisan solution was to shame taxpayers into paying their fair share by making public all of the details found in wealthy Americans’ tax returns. From this information, the public could glean all sorts of information about the lives and financial affairs of the wealthy.
Opponents of the measure quickly capitalized on the recent kidnapping of the Lindbergh baby and stoked fears of kidnappers using publicized income tax information to identify worthwhile targets, despite the fact that the vast majority of Americans did not pay income taxes and would not be affected by the plan. The provision was repealed even before it took effect.
From the 1930s to the 1970s, tax data privacy settled into a no man’s land where tax returns were treated as public record but were only open to inspection under Presidential executive order. The nothing-to-hide argument was no longer used to justify open disclosure of tax information and the right to privacy was not was not embraced to create legal guardrails around disclosure.
Reasonable Expectation of Privacy
Two major factors propelled data privacy out of the no man’s land. One was the expansion of Fourth Amendment protections with Katz v. United States in 1967 and its introduction of the reasonable expectation of privacy.[6]
The second event was Watergate and its revelations of unrestrained information-sharing across the government and political abuse of government information, in particular of tax data. When it was revealed that Nixon Administration officials sought from the IRS information about their political “enemies,” Congress passed strict detailed tax confidentiality rules that continue in force today as section 6103 of the Internal Revenue Code.
The basic principle codified within section 6103 was that taxpayers have a reasonable expectation of privacy, and IRS abuse of that expectation of privacy could lead to loss of public trust and impact cooperation with the tax system. Section 6103 provides detailed and transparent guidance for the protection and confidentiality of tax data. It expressly details narrow exceptions to confidentiality, pertaining mostly to the effective administration of the tax system. It also requires recordkeeping, safeguard, and oversight reporting, and provides for criminal penalties and private right of action.
Not everyone agreed that privacy in tax administration was a positive thing for the United States. Some continue to adhere to the notion of “nothing to hide” and believe tax privacy acts to obscure white collar crime, organized crime and fraud. Nevertheless, section 6103 and the taxpayer’s reasonable expectation of tax data privacy has stood over the last 40 years.
Conclusion
The days when the government enforced the tax system through public shaming are long past. We have embraced the notion that we disclose our tax returns to the IRS confidentially and that the government has a duty to not disclose that information to others, but for limited necessary circumstances. We have a well-established expectation of privacy in our tax data.
Americans appear to be grappling with the privacy schools of thought when it comes to the collection, use, and disclosure of their personal data in technology. While Professor Dan Solove documents the common view of “nothing to hide” attitude regarding government surveillance that was prevalent in the early 2000s, attitudes are shifting as more and more of Americans’ personal data is collected and analyzed outside the surveillance realm and within the commercial space. Americans are increasingly uneasy about the commodification and misuse of their personal data by tech companies, though attitudes often depend on the context in which the data is collected.[7]
It would appear that more recent data privacy scandals like Cambridge Analytica, massive data breaches at companies like Capital One, Facebook, Equifax and Uber, and negative public attitudes about microtargeted adtech marketing tactics, is pushing Americans beyond their acceptance of a reasonable expectation of privacy.
That uneasiness has sparked calls for privacy to be recognized and protected as more than a reasonable expectation and, instead, as a fundamental human right.[8] We could very well be entering the next chapter in the evolution of privacy.
[1] Department of the Treasury, Office of Tax Policy. Report to the Congress on Scope and Use of Taxpayer Confidentiality and Disclosure Provisions, Vol. 1: Study of General Provisions. Washington, D.C., October, 2000.
[2] Norway, Finland, and Sweden currently publicly disclose individuals’ tax information based on their cultural sense of trust that all citizens will work and pay taxes. See Doyle, Alister and Alistair Scrutton. Privacy, what privacy? Many Nordic tax records are a phone call away. Reuters. April 12, 2016.
[3] Treasury, supra note 1.
[4] The Revenue Act of 1894 made it unlawful to print or publish tax information, while the Revenue Act of 1913 stated tax returns could be inspected by the public through the President’s discretionary power. The Revenue Act of 1924, in turn, required publication of tax information. Christina N. Smith, The Limits of Privatization: Privacy in the Context of Tax Collection, 47 Case W. Res. L. Rev. 627 (1997).
[5] Treasury, supra note 1.
[6] The Reasonable Expectation of Privacy Test within Katz is a two-part test: 1) an individual has exhibited an actual/subjective expectation of privacy, and 2) the expectation is one that society is prepared to recognize as reasonable. If both of these requirements have been met, and the government has taken an action which violates this expectation, then the government’s action has violated the individual’s Fourth Amendment rights.
[7] See Pew Research Center, November 2019, “Americans and Privacy: Concerned, Confused and Feeling Lack of Control Over Their Personal Information.”
[8] For example, Apple CEO Tim Cook has expressed support of privacy as a fundamental human right.