The annual income-tax filing season has begun and, as every year, most taxpayers will receive a refund. It is a mirage designed to make the tax look like a gift. And an insult to transparency. That word, of course, now covers almost anything. But not all forms of transparency serve the same purpose. There is a horizontal, or reputational, transparency, which exposes citizens to one another. And there is a vertical, or fiscal, transparency, which exposes the state and its managers to taxpayers.
\nA fresh example of horizontal transparency is the European Union’s new pay-transparency directive, inspired by Scandinavia. It will require companies with more than 100 employees to publish pay statistics by sex, explain any gap above 5 percent and disclose salary ranges in job postings.
\nNorway keeps tax records searchable by individual taxpayer, which may discourage fraud and strengthen compliance. But it also mobilizes status emotions such as shame and envy.
\nThe effects are not always the advertised ones. In Denmark, mandatory publication of pay statistics by sex cut the gender pay gap by 13 percent—largely by restraining male wages. In Norway, income transparency widened the gap in subjective well-being between rich and poor: knowing what the neighbor earns does not make us more equal, only more conscious of inequality.
\nMore revealing than judging such laws is the contrast between how eagerly the EU promotes horizontal transparency and how firmly it limits the vertical kind. The same EU that now demands pay disclosure among workers has, since 1998, required consumer prices to include value-added tax without breaking it out. Citizens may learn what a colleague earns but not how much tax they pay on each purchase. Horizontal transparency is promoted; vertical transparency is prohibited.
\nYou do not need a Scandinavian transplant to grasp the difference. Think of a condo association. Imagine the property manager telling every owner what the neighbors earn—but never disclosing the special assessments. The socially useful form of transparency is not knowing the income of the people in apartment 4B. It is receiving the assessment with amount, date and reason, knowing you must pay it, and feeling the sting. In tax policy, most democracies do almost the reverse.
\nThe decisive transparency in a mature polity is not the one that looks sideways but upward. It clarifies the relationship between state and citizen by showing the latter how much they pay, when they pay it, and how much what they receive actually costs. It does not facilitate scrutiny among equals. It facilitates scrutiny of those who spend in our name.
\nOn vertical transparency, voters live almost in the dark, surrounded by false or muted signals: withholding calibrated so the annual return hurts less and ends in a refund; VAT hidden by law in the sticker price; payroll taxes concealed as “employer contributions”; and shadow invoices that display the cost of a public service while saying nothing about what the taxpayer has already paid for it. These are not isolated glitches. They amount to a systematic way of organizing, blindly, the relationship between the state and its subjects.
\nThe empirical evidence is clear. In a California supermarket experiment, posting tax-inclusive prices reduced demand by 8 percent: shoppers knew the tax existed but did not factor it into their decisions. When tolls are collected electronically rather than at a booth, rates end up as much as 40 percent higher. And when property taxes are folded into mortgage escrow, voters stop reacting to increases. The politically relevant information is not the information that exists but the information we cannot ignore. Fiscal opacity is not an administrative accident. It is a political resource.
\nPoliticians do not need academic studies to understand this. Within months of Spain’s Supreme Court assigning banks responsibility for paying the stamp duty on mortgage deeds, most regional governments took the opportunity to double the rate, from 0.75 percent to 1.5 percent. The increase was painless because voters no longer saw it. We may thank the court for its fidelity to semantics.
\nEach kind of transparency mobilizes different emotions, and that helps explain why opacity persists. Horizontal transparency recruits shame, curiosity and envy—and, above all, indulges our ancestral taste for gossip, poorly suited to a mass society of impersonal relations. Vertical transparency recruits loss aversion, the pain of paying and resentment at feeling deceived. The first uses our emotions to make us monitor one another. The second uses them to make us monitor those who spend in our name. That may be why we have demanded, and received, so much of the wrong kind of transparency: horizontal transparency flatters the citizen; vertical transparency disciplines the politician.
\nCorrecting that bias means making the cost of the state visible: reducing withholding so the annual tax return usually ends with money due, not money back; showing on pay stubs the full gross wage and the total tax burden on labor, with salary credited and taxes debited simultaneously but in separate entries; abolishing the fiction that distinguishes between contributions “paid by the employer” and “paid by the employee”; and eliminating shadow invoices that advertise the cost of public services while concealing the taxes already paid for them.
\nSome will say that such transparency would change little, because voters will remain selective, tribal and self-interested. Others will say the opposite: that it would change too much, because it would end up casting doubt on public services. Both objections have some basis. Both also underestimate the individual’s capacity as a citizen. Fiscal transparency will not, by itself, make our preferences cease to be contradictory. It only needs to make the fiction more costly, make incompatible promises harder to sell and improve the assignment of responsibility. A tax system that systematically hides from taxpayers what they pay biases collective choices before they are even made.
\nNor does making payment visible disable the state. In Switzerland there is no generalized withholding at source: most residents file a return, receive an assessment and pay, sometimes in installments; and taxation is often put to a vote. In Singapore, after filing, personal income tax can be paid in as many as 12 monthly installments.
\nThey are different from the European model and more ambitious in making the bill visible, but they converge on what matters: the bill is perceptible. Neither Switzerland nor Singapore suffers from weak state capacity. Quite the opposite. Switzerland spent 33.2 percent of GDP in 2023 and Singapore roughly 18 to 20 percent, versus an OECD average of 42.6 percent. Both rank near the top of the World Bank’s government-effectiveness indicators. State capacity does not require opacity. It requires legitimacy and civic maturity—and both improve when the cost can be felt.
\nNot all transparency serves the same function, and we have preferred the kind that pleases us most: looking at the neighbor rather than at the bill. Taxpayers who do not feel what they pay cannot judge what they receive.
\nAutomatically translated with AI
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