Wednesday, September 13, 2006


Linda Beale has a great post explaining why outsourcing of tax collections is bad public policy. She focuses on the practical--outsourcing will, net/net, reduce overall governmental revenues. However, it seems to me that she misses one important point.

The goal of those who favor outsourcing will be advanced by outsourcing--the goal is to reduce governmental revenues. That's why over the last decade the budget for IRS's auditing and collection activities have been systematically reduced.

As I've noted before, the hobbling of IRS's audit and collection functions not only has a direct effect, that is, less audits and less resources devoted to collection lead to less revenue raised, but there's an indirect effect as well. That is, people have additional incentives to play "Audit Roulette," since the likelihood that they will be caught is radically diminished. As a result, taxpayers are less likely to correctly report and pay their tax obligations.

To some extent, of course, the shortfall caused by fewer resourses being devoted to enforcement is offset by increased computerization. As a result, it's simply more difficult to hide income. And, with the growth of the alternative minimum tax, the income tax has at its upper levels essentialy become flat, with fewer significant abilities to decrease one's income tax via aggressive use of deductions.

However, don't be fooled by those attempting to cut the IRS budget and who support outsourcing collections. Their goal is not greater efficiency, but less.

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