Paul Krugman thinks the Bush Administration using specialist collections shops to raise tax revenue is a scandal. His key point is that the collections shops charge 20% commissions, while it costs to IRS 3% to collect. Does that actually mean something bad is happening?
http://krugman.blogs.nytimes.com/2007/09/30/tax-farming/
This is a topic I'm close to professionally. Using collections agencies to raise taxes is completely consistent with responsible governance. Comparing this practice to tax-farming is just wrong; mis-leading economic analysis. He is making a mistake that he has probably told thousands of undergraduates to avoid: he is confusing the average with the margin.
A better economic analysis would recognize that:
(i) The most skilled collectors out-perform the average collector by a factor of about 3x. This is not surprising. The most skilled economists, baseball players and computer programmers are more productive than the average by even bigger factors.
(ii) The most skilled collectors tend to migrate to organizations where they get paid more for their skill. This is also not surprising. So, the best collectors tend to move to specialist collections shops. And the IRS is left with a pool of ever-less-skilled collectors.
(iii) Most people don't need collectors to make them pay taxes. The IRS needs collectors to deal with just a small slice of the population.
Given these very believable assumptions, it could be more effective and more efficient to use professional third-party collectors. Collectors on 20% commissions would work only with a thin slice of delinquent tax-payers. And would more than pay for their higher costs by collecting more money then the IRS collectors.
Clearly, it takes management skill to make this skills-matching happen. But if the author really wants to claim that something bad is happening, he needs to show that this perfectly plausible story is not playing out. Until then, comparisons with the Romans or with the ancien regime are just rhetorical smoke and mirrors.
Of course, Krugman could still be right about the scandal.
1 comment:
The issue I heard was more one of incompetent outsourcing (and an irrational fear of it, from a consumers perspective). So, whilst I completely agree with your note, and the stunningly obvious (you would have thought) value at the margin, I can see it being a mare. To whit, see this post on the original blog
"... The biggest problem with privatizing is that the IRS will feed the collection agencies trashy data, because the IRS is an agency of incompetent people with broken IT systems, trying to enforce an IRC that is an absolute snarl. ..."
If true, then I can see this being a real issue. The agencies and collectors are much more highly motivated to collect, but if they have data snafus then then bad press could be huge. And, as it is a federal government agency, I'm not clear what level of effective regulation would effectively prevent them.
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