Unbiased Analysis of Today's Healthcare Issues

Privatizing Tax Collection

Written By: Jason Shafrin - Aug• 31•06

The New York Times reports (“IRS Enlists Help…“) that the Internal Revenue Service will begin to subcontract collection of delinquent tax payments to private firms.  The article states:

“…the I.R.S. will turn over data on 12,500 taxpayers — each of whom owes $25,000 or less in back taxes — to three collection agencies. Larger debtors will continue to be pursued by I.R.S. officers.

The move, an initiative of the Bush administration, represents the first step in a broader plan to outsource the collection of smaller tax debts to private companies over time. Although I.R.S. officials acknowledge that this will be much more expensive than doing it internally, they say that Congress has forced their hand by refusing to let them hire more revenue officers, who could pull in a lot of easy-to-collect money.”

As an economist, I would like to briefly compare the incentives of private tax collectors and the government tax collection.  Privately owned debt collection firms likely want to collect as much money as quickly as possible in order to maximize profits.  This is a good thing if compels more citizens to pay their taxes on time. 

Since government employees do not have a profit motive, it is likely that government collections rate would be lower.  The statement in the NYT that using private debt collection is more expensive is due to the fact that 22% to 24% of all cash received by the firms will be used as their commission.  One benefit to using government tax collectors is that without the profit motive, the IRS agents have an incentive to be more “fair” in the case that the ruling of delinquent payment was incorrect. 

The Economist’s View blog relates some of the arguments of Paul Krugman.  Krugman believes that the trend of privatizing administrative and military government functions could make this country one ruled by tax farmers and mercenaries.  Another issue to consider is how secure a taxpayer’s private financial information will be in the hands of a private firm.

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One Comment

  1. […] On Thursday I mentioned the Treasury Department’s plan to turn over some of the collection of deliquent taxes to private companies.  In most modern societies of the Western world, tax collectors are salaried employees of the state.  This was not always the case.  A 2006 paper by Cosgel and Miceli aim to create a model as to why governments choose the tax collection systems they do.  They also examine the tax collection methods of the Ottoman empire to help support their thesis.  The authors claim that the agency relationship between the government and the tax collectors is the determining factor as to which system is chosen.  The three competing methods are 1) share contract, 2) rent contract and 3) wage contract.  I will discuss each in detail below. […]