How valuable is your privacy?

How much money are you paying to maintain your privacy? How much should you get to let others pry into your private information?

I recently attended a talk by MIT's Catherine Tucker about the cost of privacy, from the perspective of advertisers. Prof. Tucker and her co-author checked how changes in privacy rules in Europe, regarding what information can be collected about online web surfers, affected the accuracy of advertising and the profits of advertisers.

They conclude that increasing the privacy of web consumers significantly lowers the profits of advertisers, since they are now less able to target their advertising. This might lead companies to increase their advertising (to make sure they reach customers), or raise their prices, to compensate for lowered profits. In both cases the effect of increased privacy will eventually cost consumers more money, or create more annoyance.

Where else might privacy cost us money, and how much? Think for example about Tax Evasion.
Tax evasion does not mean handling your taxes smartly. It means hiding income and illegally not paying taxes.

It is estimated that the tax gap (the amount of tax illegally not paid) in the US is about 345 billion dollars ($ USD 345B), which is 15%-17% of total tax that should be collected in the US, while in Israel is it estimated at NIS 70-80 billion (roughly $20B).

What does that means? That on average Americans could pay roughly $2000 less in taxes every year, while Israelis could pay $4000 less per year.

Wouldn't you love to pay $2000-$4000 less in taxes per year? Would you be willing to let go of private information for this and let the IRS track all of your life?

I suspect many people would initially say "yes", if the offer is tempting enough.

So, why do people evade paying their taxes? The simple answer is the same for another famous question - because they can.
And why can they? Because the ability of a country to enforce tax rules depends on the information it has. Had the IRS had all of the financial transaction information it could have (including where do coins and notes go, every receipt, etc.), it would be able to track people who evade paying taxes with ease, and charge them this amount.

In reality, however, the IRS is required to spend money to find out more information (for auditing people, for example), so the harder people make it to gather the information, the less incentive the IRS has to go after them, and law abiding citizens end up paying more taxes.

Lets suppose the IRS comes to you and gives you an offer: "Give me direct access to all your bank accounts, credit card transactions etc., and I'll give you back $2000 every year".

As a law abiding citizen, you should have no problem giving up your financial privacy (assuming nothing else is done with it, of course), and especially for such a big refund - the result would be that whoever maintains his privacy will signal that he has "something to hide". He should then pay the extra $2000 per year, and get audited. Many of these people will turn out to be tax evaders, and will pay more taxes.

So, would you be willing to give up your privacy for some cash and catching criminals?

2 replies on “How valuable is your privacy?”

  1. Having friends like perth accountants, we often discuss tax. Somehow, the public has difficulty understanding why everything has to be taxed - from the food we eat, to the bedsheets we sleep on. And when we go to work, our income is still subjected to tax, only for tax experts to say that there is a tax gap. How ironic.

  2. You make a good point about tax reduction in the US, but is it really a solution that people will be happy with?

    Creating more control of the masses 'for the greater good' may seem like an ideal from an economic standpoind (that whould eventually reduce the amound of tax needed to be payed)but I disagree.

    I whould prefer to educate people in that taxes are there to serve the needs of their society.
    Making sure that people understand that they are contributing to the ecunomic problems due to their selfishness. If people can be made to see that taxes are a good thing if well spend they whould be less inclined too evade taxes.

    How this tax money is spend is however up to the goverment in place, and the society must have a certain degree of control of the system before they can trust the system. cuurently you could say that the world is in a state of 'system malfunction'

    I would rather see the 'need' for control removed then the enforcement of control.

    I consider privacy as one the basic needs of the human being.
    Loss of privacy whould only make people more dependend on 'big brother' to decide how they must live their lives. And again, I do not agree that morals and principles have a buying price.
    There is much more to life the material wealth, and of these tose things are our values.

    Freedom is a value that is advocated by the western wolrd, yet those in power will always feel treatend by what they can not control.

    People are then told that they have to surrender their freedom, privacy and autonomy for their own good.

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