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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.

Why is this the case? Maybe our congressmen are a bunch of history buffs so imbued with the spirit of our republic that they remember the Boston Tea Party too well and are scared of how the populace might revolt if they ramp up tax enforcement. But keep in mind that we are talking about tax enforcement here, which is the I.R.S.’s job, and not tax law, which is Congress’s responsibility. In other words, Congress is happy to set the tax rates that it does; but it doesn’t want to be seen as giving too much comfort to the bad cops who have to go out and collect those tax dollars.

So maybe they need to relabel their effort to get all the tax money that is owed. Since Congress approves so much money for the War on Terror and the War on Drugs, maybe it’s time for them to launch a War on Taxes — well, really, a War on Tax Cheats. What if they could demonize the tax cheats so thoroughly, emphasizing that the “tax gap” (the difference between taxes owed and money collected) is about the size of the federal deficit: would that make it more politically palatable to give the I.R.S. the resources to collect the money that is owed? Maybe they could put pictures of tax cheats on milk cartons, on flyers at the post office, even on America’s Most Wanted. Would that do the trick? Would a properly managed War on Tax Cheats fix the problem?

For now, we’ll have to settle for the I.R.S. turning over the job to collection agencies who will collect some money but not nearly as much as is owed. Which means a lot of money — a lot of tax money, that is, collected from the people who don’t cheat — continuing to go down the drain.

[Update: Paul Krugman’s Monday Times column also addresses the I.R.S. plan; here’s the link, though it may only work if you subscribe.]