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Game Theory 101: Romney Should Release His Tax Returns post here (same as below but with correct formatting): you have been following the 2012 campaign, you know that Mitt Romney has not released his tax returns from before 2010. This has caused speculation that Romney did something wrong during 2008 or 2009--anything from finding interesting (but legal) tax shelters for his Bain Capital income to participating in the IRS's 2009 amnesty program. Romney has held firm, claiming that rivals are attempting to divert attention from important campaign issues to his tax life. Of course, this has backfired, inadvertently causing more speculation.I did not fully appreciate the strategic aspects of the situation until reading this blog post from Daniel Shaviro. In it, he makes an important insight:"Romney's reluctance to release any pre-2010 tax return might be that what it would show is worse than all the heat he is taking for non-disclosure."I thought that was an interesting intuition. However, I have realized that it wrong, at least in the long run. No matter bad Romney's pre-2010 tax returns are, they cannot be any worse than the speculation he will eventually receive.To see why, imagine that one of three things is true about Romney: (1) he did nothing wrong, (2) he did something politically embarrassing (like find ridiculous tax loopholes), or (3) he did something blatantly illegal (like something that would have made him participate in the 2009 IRS program). Option 1 is a non-issue. Option 2 is not politically expedient but not altogether damning; Romney could even take some of the heat off by claiming to be the best candidate to shut down these loopholes given his first-hand knowledge of the tax system. Option 3 is game over.The public intuitively understands that if (1) were true, Romney would have come forward already. Maybe he is reluctant to let everyone know he made gazillions of dollars those years, but that is a hell of a lot better than the beating he is receiving right now. So we can eliminate option 1 from the list. This is inference #1.That leaves us with option 2 and option 3. But if both are possible, then our rational expectation of Romney's sleaziness falls somewhere in between 2 and 3. In other words, we believe on average that Romney is worse than the guy who found tax loopholes but better than the guy who did something illegal. However, that implies that Romney should come forward if he is type 2; releasing his returns will prove that he is not as bad as the average between 2 and 3 and thus leave Romney's reputation in better shape.As such, the only type who does not come forward is the worst type. Put differently, by not releasing his returns, the public should rationally infer that the worst thing is true. This is inference #2.For now, the public seems to understand inference #1 but not inference #2. However, it is only matter of time before they draw that conclusion; after all, it is logically valid. So, for now, Romney can get away without releasing the documents. But over time, things will only get worse as the public slowly reaches inference #2.If I were Romney's advisor, I would have him release the documents immediately. Whatever is on them cannot be as bad as where this public speculation is headed. The decision is whether to handle the blow-back now--three months before the election--or wait until October. Clearly the former is the better option.
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