IRS Privatization

A big sign to date that we are moving towards a market-state:

If you owe back taxes to the federal government, the next call asking you to pay may come not from an Internal Revenue Service officer, but from a private debt collector. Within two weeks, 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 private debt collection program is expected to bring in $1.4 billion over 10 years, with the collection agencies keeping about $330 million of that, or 22 to 24 cents on the dollar.

Given these returns, it is clear that competitive pressures are nearly nill. Of course, this is almost certainly a bastardized system that is allocating contracts to cronies (as are almost all of these public-private boondoggles everyone is touting).

David Cay Johnston. "I.R.S. Hires Debt Collectors." New York Times. August 20, 2006.

It looks like the US implementation of the market-state concept is going to end up relatively badly implemented. What does that mean? Here's what a poorly executed US market-state look like in 15 years: A largely privatized state. Lots of crony capitalism due to a massively corrupted government. Huge disparities in wealth. Oodles of paramilitaries (think in terms of private security firms replacing the thousands of SWAT teams that have proliferated over the last couple of years). Radical increases in poverty. Urban decay on a grand scale. Immigration out of control. Wealth flight (to the Caymans).

The keys to making this work are ruthless efficiency (likely through extremely competitive marketplaces), incorruptibility, fairness (to a fault), transparency, platforms, and viable ecosystems. Anything less and it breaks (fragments) due to: your opportunity is at the expense of my opportunity...

Comments

[Alex]

John, that looks like a European vision of the US today.

[John Robb]

It gets worse. If this is how it gets built at home, imagine how it gets enacted globally.

It gets worse faster if we attempt to shape it through aggressive sys-admining (which will attempt to replicate a badly implemented market-state model everywhere). Opportunity fragmentation on a grand scale and into the vacuum, GGs.

[Dan tdaxp]

I presume then you believe a working market-state to be impossible, because no human system has the perfection you demand of a functioning market-state?

[John Robb]

Perhaps. However, these are the goals and not the reality. The key is how close you can get. We are lightyears away.

It can be done. Singapore may be a good example of a functioning mercantile market-state.

[James Bowery]

Where this stuff gets interesting is when the cronies turn on each other and try to collect "debts" from each other with their paramilitary retainers.

[Tangurena]

Dan, if the "collectors" are selected in an open, honest and transparent fashion, then a working market state would not only be possible, it would actually work. The current administration has made it clear that cronyism is the only permitted form of "outsourcing." Be that K-Street Project, or the no-bid contracts doled out to previous employers of, say, the VP. Rampant cronyism can and will destroy *any* country. Especially when the folks in power keep putting themselves above the law. And has kept many third-world countries from making the climb out of poverty. We, however, seem to be hell-bent on turning into a third-world nation.

[tdl]

Nice to see that the Ancien Regime is being reborn in the U.S. Tax farming was probably one of the most appalling forms of corruption in Europe (and the rest of world) and it is unfornute that we are slowly moving in that direction. I share the same reservations of where the world will be politically in the next 25 to 30 years. The fragmentation, however, that will result will be a net benefit over the next century. The market state would probably fail regardless of how well it was executed because it invests too much faith in centralized power (although not as much as the mercantalist state would,) even though it has a strong comittment to competitive markets it is not ideal. Fragmentation is the best political outcome we could have.

Also, I would imagine we will be better off with private security firms than with the SWAT teams of today. Something about equipping police forces like special forces units or armored infantry, but without the daily comittment to training, disturbs me.

Regards,
TDL

[purpleslog]

"this is almost certainly a bastardized system that is allocating contracts to cronies".

The way to avoid this is to have collection agencies to openly/electronically bid for bundles of collections against each other.

This drives down the percentage they keep and puts sunlight on everything.

Require them all to be public traded companies (or at least comply reporting-wise like publically traded companies).

[naum]

An interesting take from the Freakonomics blog:
http://www.freakonomics.com/blog/2006/08/20/how-about-a-war-on-taxes/

----

David Cay Johnston, who does an incredible job covering U.S. tax policy and other business issues for the N.Y. Times, today has an interesting article about how the I.R.S. is outsourcing the collection of back taxes to third parties—i.e., collection agencies. “The private debt collection program,” Johnston writes, “is expected to bring in $1.4 billion over 10 years, with the collection agencies keeping about $330 million of that, or 22 to 24 cents on the dollar.”

Maybe that seems like too big a cut to surrender. And maybe people will be worried about the collection agencies having access to their financial records (a concern that Johnston addresses in the Times article). But what’s most striking to me is that the I.R.S. knows who owes the money, and knows where to get it, but can’t afford to collect it itself because it is understaffed. So it has to hire someone else to do it, at a stiff price.

The I.R.S. admits that external collection is far more expensive than internal collection. Johnston cites current I.R.S. commissioner Mark Everson as saying so, as well as former commissioner Charles O. Rossotti, who told Congress that if the I.R.S. hired more agents, it “could collect more than $9 billion each year and spend only $296 million—or about three cents on the dollar—to do so,” according to Johnston.

Even if Rossotti was exaggerating by a factor of 5, the U.S. Govt. would still be getting a better deal by hiring more agents than by contracting to a third party that takes a 22% cut. But Congress, which oversees the I.R.S. budget, is famously reluctant to give the agency more resources to do its job. We touched on this subject in a column we wrote a few months back.

----

[a z]

I agree with TDL in that the result will fragment the US. I actually see an urban renaissance as oil prices continue to rise. I try to be optimistic. :)