They say the definition of insanity is doing the same thing over and over again and still expecting a different result.
We will soon find out whether our senators are truly insane.
Tucked into a dusty corner of the Senate’s Highway Trust Fund bill — legislation that must pass before the fund runs dry on July 31 — is a zombie proposal to hire private debt-collection agencies to hound delinquent taxpayers on behalf of the Internal Revenue Service.
The IRS has actually tried outsourcing tax collection activities to private debt collectors before, at Congress’s behest. Twice, in fact, over the last two decades.
Both times, the experiment was a disaster.
Privatizing delinquent tax collections led to complaints from taxpayers who got harassed and bullied by an industry known for rampant harassment and bullying, particularly of low-income people who don’t know their rights. In one oft-cited case, a private debt collector made 150 calls to the elderly parents of a taxpayer even after the collection agency learned that the taxpayer was no longer living at that address.
Perhaps more important, at least from a fiscal responsibility perspective, both times the program was scrapped because it actually cost taxpayers money on net, despite assurances ahead of time of the huge bounty it would lasso in.
The more recent period when privatization was piloted, from 2006 to 2009, Uncle Sam had been projected to gain more than $1 billion . Instead, it lost money. The net loss was small — a few million dollars — if you look only at the revenues brought in by the program versus the amount directly spent on it. But the net loss was actually more than $1 billion when you consider alternate uses for the money that the IRS was forced to spend on starting and administering the outsourcing program. (The IRS’s own unit for collecting the kind of delinquent tax debts the could be outsourced recovers about $20 for every $1 it spends.)
Yet for some reason — perhaps amnesia, a blind devotion to privatization at all costs, a desire to line the pockets of friends in the debt-collection industry, or a conspiracy to make Americans hate the IRS even more than they already do — this policy proposal just will not die.
It’s true that a lot of tax bills go uncollected, with millions of taxpayers collectively owing billions of dollars. Given limited resources — which have been getting ever more limited each year, thanks to aggressive, ongoing budget cuts enacted by Congress — the IRS has an extensive backlog of cases at any given time. That means it’s leaving money on the table.
But the solution is to just adequately fund the IRS, not hand over its responsibilities to private, for-profit companies that happen to be members of the industry that generates among the most complaints to the Federal Trade Commission. For all its flaws, the IRS actually happens to be pretty effective at collecting money. About twice as effective as the private debt collectors last time around, according to one estimate, even though the private companies were arguably working on the easier cases.
And that’s just looking at the short run. There’s also the problem of long-term goals, incentives and available tools.
As National Taxpayer Advocate Nina E. Olson noted in a letter to legislators last year, the IRS is tasked not only with collecting taxes, but also, by law, with determining when payment would cause such serious financial hardship for the taxpayer that he or she wouldn’t be able to afford reasonable basic living expenses. This flexibility exists for reasons of both compassion and cost-effectiveness. Forcing payment from a delinquent taxpayer who can’t pay as a result of (for example) an extended, bankruptcy-inducing hospitalization may land the individual in welfare programs that ultimately cost the government more than the overdue taxes owed.
The goal of IRS agents is to maximize long-term tax compliance, and to do what’s best for the government’s bottom line overall. Private debt collectors don’t care about what will happen to a delinquent taxpayer tomorrow or next year; they care about collecting the debt today, so they can bag their commission. Even if you tried really, really hard to design private tax debt collection contracts to get the incentives right, there are strict constitutional limits on how much the private debt collectors can do to achieve these long-term objectives. The Constitution says only the government can lay and collect taxes, which means that private companies, unlike federal agents, lack the legal discretion to restructure or forgive tax debts.
It’s an easy talking point to say markets work and therefore we should privatize as many government functions as possible. But that just doesn’t apply here. Sometimes, it turns out, government actually can do something better.