Shu-Yi Oei
Diane Ring and I just posted our new article, Leak-Driven Law, on SSRN. I had previously blogged about this paper as part of Leandra Lederman’s 2017 Mini-Symposium on Tax Enforcement and Administration, The abstract is here:
Over the past decade, a number of well-publicized data leaks have revealed the secret offshore holdings of high-net-worth individuals and multinational taxpayers, leading to a sea change in cross-border tax enforcement. Spurred by leaked data, tax authorities have prosecuted offshore tax cheats, attempted to recoup lost revenues, enacted new laws, and signed international agreements that promote “sunshine” and exchange of financial information between countries.
The conventional wisdom is that data leaks enable tax authorities to detect and punish offshore tax evasion more effectively, and that leaks are therefore socially beneficial from an economic welfare perspective. This Article argues, however, that the conventional wisdom is too simplistic. In certain circumstances, leak-driven lawmaking may in fact produce negative social welfare outcomes. Agenda-setting behaviors of leakers and media organizations, inefficiencies in data transmission, suboptimally designed legislation, and unanticipated behavioral responses by enforcement-elastic taxpayers are all factors that may reduce social welfare in the aftermath of a tax leak.
This Article examines the potential welfare outcomes of leak-driven lawmaking and identifies predictable drivers that may affect those outcomes. It provides suggestions and cautions for making tax law, after a leak, in order to best tap into the benefits of leaks while managing their pitfalls.
In this paper, we wanted to explore how leaks of taxpayer data in the offshore context have shaped international tax law and policy, both in the US and other countries. We especially were interested in the possibility that—while leaks might appear useful on the surface from a tax enforcement and informational standpoint—there are unexplored pitfalls and downsides to relying on leaks to direct lawmaking and policy priorities.
In the non-tax world, of course, leaks have suddenly become very salient, in terms of both their usefulness and their dangers. But (non-tax lurkers take note!) tax law has been dealing with leaks of taxpayer information and what they mean for tax enforcement for at least the past ten years. Of course, tax leaks have some distinctive characteristics that make them different from other types of leaks. For example, the tax leaks that are the subject of this paper are usually (though not invariably) leaks of private taxpayer data, rather than leaks about governments from government sources.
We do think that the framework we introduce in our paper for analyzing the upsides and downsides of leak-driven lawmaking can be applied to explore how non-tax leaks and reactions to them may be socially beneficial but could also lead to less than ideal results. In both tax and in other fields, the meta-issue is not just how governments and private actors can use leaked information to sanction bad behaviors, make decisions, or design laws. Rather, the issue is how the actions and responses of leakers, governments, journalists, international organizations and the public work together to create and promote certain outcomes. Once we understand the underlying dynamics, then we can consider how the outcomes they create should be evaluated, supported, or resisted.
If you’re working on leak-related scholarship in either tax or other fields, we’d love to chat.
The Surly Subgroup 
I’m looking forward to reading this!
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I’ve written some comments below. They may seem harsh, but I’m trying to be helpful. The idea of a paper on leaks is very good; it’s just that the paper seems to be straining to find a downside beyond simply that the privacy of innocent taxpayers is often compromised.
1. “First, leaks may generate unexpected cost increases that may outweigh the expected reduction in enforcement costs.”
No: the government is free to ignore the data. You might say that public opinion forces it to use the data, but that is desirable, unless the public is mistaken in the cost-benefit calculation. This is, however, a big negative for tax enforcement authorities, since they focus on the costs to their agency and not on the benefits to society. Really, as with the US whistleblower program, it sometimes seems as if the tax authority wishes nobody would create work for it by bringing tax cheats to its attention.
2. “Thus, like the reactions of Switzerland and France to the HSBC leak, and the U.S. and Switzerland to the UBS leak, the reactions of Luxembourg and the European Parliament reflect competing perspectives on the desirability of leaks”
Yes, kind of like the reactions of the mafia in murdering informants reflect competing perspectives on the desirability of the ability to testify of criminal witnesses. ”
3. “There is no question that the United States’ offshore tax enforcement initiatives have caused an increase in offshore revenues collected and in offshore tax compliance more generally, doubling the number of FBAR reports filed, and bringing many taxpayers into compliance via the OVDPs.232 Thus, from a pure revenue perspective, FATCA has had benefits. Yet FATCA is a controversial law. Many have complained about its costs and collateral consequences, as well as those generated by the other offshore tax enforcement initiatives.”
True, but, again, it’s not surprising that criminals complain when laws are enforced.
4. “In enacting FATCA, the U.S. may have failed to appropriately sort among differently situated taxpayers with offshore assets and may have also underestimated the costs (to both the IRS and others) of the new legislation.233”
True. But equally true is:
“In enacting FATCA, the U.S. may have succeeded in appropriately sorting among differently situated taxpayers with offshore assets and may have also overestimated the costs (to both the IRS and others) of the new legislation and not gone far enough with it.233”
Say which side you come down on, and why.
5. In the abstract, distinguish this paper on leaks from the literature on whistleblowing, as you do later on in the paper. You could say more about whistleblowing, discussing the monetary awards and the extent to which the government does and does not reveal wrongdoing.
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