The Effect of Public Disclosure on Reported Taxable Income: Evidence From Individuals and Corporations in Japan

The behavioral response to public disclosure of income tax returns figures prominently in policy debates about its advisability. Although supporters stress that disclosure encourages tax compliance, policy debates proceed in the absence of empirical evidence about this, and any other, claimed behavioral impact. This paper provides the first such evidence by examining the behavioral response to the Japanese tax return public notification system. The analysis suggests that, when there is a threshold for disclosure, a non-trivial number of both individual and corporate taxpayers whose tax liability would otherwise be close to the threshold will under-report so as to avoid disclosure — a response in the opposite direction from that stressed by supporters of disclosure. An analysis of corporations’ financial data offers no evidence that these companies’ taxable income declined after the end of the disclosure system.