The Failure of Privatized Tax Collections

By Christopher Brauchli

"My civil neighbor, the tax-gatherer, is the very man I have to deal with, for it is, after all, with men and not with parchment that I quarrel,-and he has voluntarily chosen to be an agent of the government."
--Henry David Thoreau, Civil Disobedience
It was impossible to know how it would turn out. Of course, there were a few hints. But they were so subtle that only someone with a bit of brain would have picked up on the clues. And it seemed like such a great idea-turning delinquent taxpayers over to private collection firms that make contributions to politicians instead of letting the Internal Revenue Service attend to that mundane task-that no one would have foreseen the disastrous outcome.

The idea got its start as a result of the American Jobs Creation Act of 2004. The purpose of the act was not simply to create jobs. It was to transfer to the private sector jobs that had theretofore been performed by the public sector almost certainly a guarantee of success since conventional Republican wisdom is that whatever the public sector can do, the private sector can do even better. (That approach reached its zenith in Iraq where Dick and George turned over lots of the work formerly done by U.S. troops to private contractors who, the two pals believed, could do it more efficiently and cheaply than U.S. government personnel.)

In 2005 the IRS began farming out delinquent tax collections to private collection agencies. Three debt collection agencies were initially used and two of them had special qualifications for the work. They had made significant financial contributions to politicians. Pioneer Credit Recovery came from the district of Rep. Thomas M. Reynolds of New York and one of the things that qualified it to be a debt collector for the federal government was that it had given congressional candidates and political action committees $117,450 since 1995. Mr. Reynolds received $16,250.

Linebarger Goggan Blair & Sampson of Austin, Texas and its employees and spouses gave political candidates and PACs of both parties more than $400,000 between 1995 and the time the program was started. (After 2007 the firm was fired although the government isn't saying why that is. It might have to do with the fact that the firm made a $2000 donation to the mayor of Mansfield, Texas a month after he was elected or it may have had to do with the vacation it paid for a contract officer in Chicago that got the firm fired from doing work for that city.)

Mark Everson who was the commissioner of the IRS at the time outsourcing tax collection was decided on admitted that outsourcing tax collection is more expensive than keeping it in house. He nonetheless supported the privatization of collection efforts claiming he could not get sufficient funding to permit him to hire more public sector tax collectors. (Following that ill-fated decision Mr. Everson left the IRS to head up the Red Cross where he served only long enough to begin an affair with the member of his staff that resulted in his loss of the job. When he left the IRS and began working at the Red Cross his 18-year old daughter said having left the IRS people would again like him. She was inadvertently prescient.)

According to a report in the Washington Post the program has been a disappointment. The goal of the program was to collect $1 billion from deadbeats owing $25,000 or less. Instead, most of those folks have gotten a tax holiday. Instead of collecting $1 billion, the private debt collectors only collected $49 million. The cost of the program was $98 million suggesting to the mathematically swift that it produced a net loss of $49 million.

Commenting on the program in a statement on the floor of the Senate, Senator Ben Cardin of Maryland observed that Nina Olson, the National Taxpayer Advocate told Congress that the IRS was losing at least $81 million a year by using private debt collection companies. She observed that if the $7.65 million spent by the IRS to operate the program were spent instead on its automated collection system it would generate $153 million in revenue. Not everyone would agree with her.

Jim Ramstad is the ranking Republican on the Ways and Means Oversight Committee. He is unimpressed by the statistics furnished by Ms. Olson. He said the "real choice is whether we use private collection agencies or let these tax debts go uncollected. I hope we don't take an enormous step backward in our efforts to close the tax gap by eliminating a program that's working." He didn't say what part of the program is working. He'll probably want to explain to Ms. Olson and Senator Cardin (and Senator Byron Dorgan of North Dakota, another critic) the part that is working since they are apparently unaware of its successes. He may also want to explain it to his constituents.

Christopher Brauchli
brauchli.56@post.harvard.edu
For political commentary see his web page http://humanraceandothersports.com