by Rex Sinquefield, December 13, 2012

In writing The Wealth of Nations, Adam Smith’s goal was to share the wisdom of how individuals, groups and governments behave within markets. In it he laid out four critical principles of a “good” tax or, more precisely, taxation that encourages rather than limits growth: equity, transparency, convenience and efficiency. On convenience, he wrote:

“What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” 

And on transparency, Smith offered this:

“The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to ever other person.”

It can be argued, as Adam Smith did, that taxing production or personal income is intrusive and destructive to the greater interests of the whole.  That being said, if local, state or federal governments are to siphon tax revenues from personal income or production, it is contingent upon a representative government to provide transparency to those paying the tax. Transparency allows taxpayers to clearly see how their money is spent on their behalf. Just as importantly, deeper study of the effects of taxation casts a light on how certain taxes affect where taxpayers decide to live and where businesses locate.

Since 1991, both the Internal Revenue Service (IRS) and the United StatesCensus Bureau have provided some very useful statistics that show how taxpayers move between our cities and states. The so-called IRS taxpayer migration data files provide taxpayers and policy makers with valuable insights into where America is growing, where it is contracting, and the likely causes and effects of this migration.  For example, cities like Austin,Texas, or NaplesFlorida, are growing rapidly  — while cities like Los Angeles or Chicago are losing their net adjusted gross income (Net AGI) in large droves. While the data may clearly reveal startling trends to the losing regions, this knowledge can be used to inform local communities on how to adapt to a pending economic crisis or, on the flip side, expand and support positive trends.

So why would anyone want to take away this insightful and powerful tool from taxpayers, the media, policy groups and our elected officials?

This reason is not clear, but recent reports by Jim Pettit at the National Review Online should be alarming hard-working Americans and economic development specialists across the country. According to Pettit, the IRS soon will discontinue access to the data files.  Discontinuing the public’s right to know how taxpayers are migrating is contrary to a representative government. The data on the Census Bureau website does not compare to IRS data in terms of quality or accuracy.

The irony of this IRS position comes at a time when state governments are upgrading their taxpayer protection and privacy systems to protect Social Security numbers.  Recently, the State of South Carolina has learned that encrypting all taxpayer files between state and federal government is an absolute must.  If our states must invest in data sharing protections in order to enable their taxpayers to file tax returns online, it seems reasonable that our federal government can at least explain where and how our money is moving.

Again, we can return to Adam Smith’s Wealth of Nations:

“The natural effort of every individual to better his own condition…is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.” 

The time is now for Congress to fix this departure from economic transparency and what could be seen as an impertinent obstacle to the freedom of choice and our natural compulsion to improve our lives.