The IRS began outsourcing part of its tax collection responsibilities to private companies last week. Senators Byron Dorgan and Patty Murray responded today by introducing a S. 3887, a bill to end the private tax collection initiative. See Dorgan's Press Release. Co-sponsors include Senators Barbara Mikulski (D-MD), Patrick Leahy (D-VT), Diane Feinstein (D-CA), Daniel Akaka (D-HI), John Kerry (D-MA), Edward Kennedy (D-MA), Joseph Lieberman (D-CT) and Frank Lautenberg (D-NJ).
The law permitting outsourcing dates back to 2004, when an at first little-noticed provision was added to the law allowing privatization. See this detailed story in the Dec. 6, 2004 Christian Science Monitor.
Why was privatization adopted, when it will be the easy collection jobs that go to paid collectors--the "low-hanging fruit". Surely, it will please the various businesses that make money out of collecting other people's debts. As the Christian Science Monitor story notes, "The Association of Credit and Collection Professionals (ACA) lobbied Congress to win approval of the privatization measure." Id. And surely it will please those right-wing organizations that undermine our long-standing collective wisdom that government is the way we collectively serve the common good by arguing, even against empirical evidence to the contrary,that the best government is no government. See, for example, the views of Tax Foundation president Hodge quoted in the same newsline.
Private debt collection is "far more effective than government workers doing the job," adds Scott Hodge, president of the Tax Foundation. The federal government has already sold to private collectors bad debt resulting from the student loan program, farm loans, and Small Business Administration loans. "It's a sound business-collection practice."
Similarly, Pete Sessions (Republican Representative from Texas) has claimed that private collections make sense instead of an "additional, expensive federal bureaucracy." See this 2005 Fox News story. But surely the Representative realizes that tax collection is the core statutory responsibility of the IRS and not a new layer of federal bureaucracy. As a representative of private collectors said in the same story, private collection is not going to replace the IRS. Id. In fact, its the private collectors that represent the "additional, expensive ... .bureaucracy."
But is private debt collection even "far more effective" as the Tax Foundation's Hodge claimed? The answer, based on a government experiement, is a resounding "no." A 1996 experiment showed the IRS spent as much as it collected through privatization. Id. In fact, privatizing tax collection is fiscally foolhardy--adequate funding for IRS functions would bring in much more tax revenues, without the enormous cut (up to 25%) provided by the legislation to private companies. See this Sept. 8, 2006 Clarion Ledger item and the statement by Colleen Kelly. Even IRS officials admit the IRS can collect taxes more efficiently than it can pay private collectors to do the job: "Clearly if you had new money to put on the table it could probably be done more effectively," said Linda Stiff, the IRS deputy commissioner of the small business/self-employed division. Id. Commissioner Mark Everson even testified before the House Transportation-Treasury Appropriations Subcommittee that the IRS could do the job more cost-effectively.
And there are numerous privacy and other concerns about privatizing this quintessentially government function, discussed in the items mentioned above as well as an earlier posting on this blog, here. Historical perspective doesn't make the idea appear any better. See Joseph Thorndike's September 2004 "Historical Perspective: the Unhappy History of Private Tax Collection" for a tale from America's early experiment with privatization of this function. Today's problems are severe enough that the Clarion Ledger titled its piece "Are Aliens to Blame for Law Outsourcing IRS Tax Collections?" (and led Paul Krugman to compare the effort to 16th century mercenaries), though Mark Resnik concluded, in his 2005 Outsourcing Federal Tax Collection article, that there could be a role for rigorously controlled private collection to supplement a reinvigorated IRS collection process. Blogs have picked up the theme of problems: see, for example, "argmax" and "will to exist", which note that one of the three firms hired for the first outsourcing contracts is a law firm where a former partner went to jail for paying bribes to win a collection contract. And of course, having private collectors in on the action makes possible more scams where people pose as private collectors acting for the IRS, creating more problems for taxpayers who have acknowledged they owe the taxes. See this Tulsa World article.
So the Tax Foundation view that government functions are per se better handled by business entities both disregards the inefficiencies of privatization of these kinds of quintessential government functions and minimizes important American values that see government as a way for us to cooperate in acting for the common good with special responsibility for, and direct accountability to, the American people.
The murmurs of concern about privatizing tax collections have started to sink into Congress's conscience. Back in June, the House voted not to fund future outsourcing efforts, putting language in H.R. 5566 that prohibits spending on the privatization of IRS collection efforts after this month. See this report by Jenny Mandel on GovEx.com. But the Senate Finance committee didn't include the same amendment. See this post on OMB Watch. Several Senators urged the IRS Commissioner Mark Everson to delay the actual start of private collection until the Senate could act, in light of the House's strong vote and plans for similar legislation in the Senate. See NTEU press release. (Letters from Byron Dorgan, Edward Kennedy, and Patty Murray are available in BNA's Tax Core-congressional documents.) Now, as noted at the outset, those and other Senators have co-sponsored a bill introduced in the Senate to end the outsourcing initiative.
All things considered, it is difficult to justify the tidy profit this outsourcing will provide to private businesses handling extraordinarily sensitive personal information about American citizens when the IRS can do a better job with less money, more accountability to the American people, and more in harmony with basic American views about tax collection as a government function.
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