The ancient Greeks did not invent tax collections, but they did improve upon tax collection methods by developing a system called tax-farming. Tax-farmers – private outsourcing contractors – bid at public auctions to secure a contract to collect taxes. In time, other nations including Egypt, Rome, Spain, France, and Britain followed in the footsteps of the Greeks, attempting tax-farming.
Each learned the same lesson – private collectors do a more efficient job, but they must be monitored closely to discourage corruption and maintain the trust of citizens. As James Madison said, “All men having power ought to be distrusted to a certain degree.”
In the United States, the most visible form of tax-farming began in 1975 and has grown to include thirty-nine state governments. As outsourcing expanded and attracted numerous cities and counties, opposition was inevitable. When federal civil servants considered the potential loss of employment, agency heads and collective representatives banded together to discourage the outsourcing process.
The commissioner of the Internal Revenue Service (IRS) and the president of the union representing IRS employees (NTEU) are on record as being opposed to outsourcing.† Even Malcolm S. Forbes in the October 1995 edition of his magazine stated, “This idea is a bad one. Sure, enforcers outside the federal government might be more ‘efficient’ and cheaper, but any such savings are not worth the price of this gross invasion of privacy.”
Negative Trust Flow
Beliefs such as these gave birth to a nationwide study to determine if the public perceives a difference in trust where the collection of taxes is handled by a U.S. government official versus outsourcing the process to a private collector.
To create a baseline, Congress set aside $13 million in the IRS budget to test privatized tax collection. The Private Sector Debt Collection Pilot Project was a program designed, implemented, controlled, and reported by the IRS. Because the potentially adverse results of the project could affect the continued function of the IRS Collection Division, the conclusion that “the pilot program was not a successful business venture” is not surprising.
A close reading of that 1997 report reveals substantial double counting of expenses as a way to “prove” the inefficiency of privatized tax collection. IRS employees assigned to monitor the project charged their total cost (including payroll) to the contractor. Additionally, the contractor was charged with the IRS “projection” of revenue that those IRS employees would have collected had they not been assigned to oversee the project, $30.55 million in loss opportunity costs.† Adjusting the double counting reveals that collection of taxes through outsourcing is, in fact, extremely efficient.
In April 2000, the private study was undertaken to determine if the public would perceive that privatized tax collection is as acceptable as collection handled by civil servants. The statistically valid nationwide survey revealed that the public does not perceive private collectors and government employees as being equal, Indeed, it revealed an immense difference when it comes to privacy, communication, authority, and efficiency.
The 41-question survey reflected federal, state, county and municipal levels. Each entity was viewed using 50 separate demographic categories (including gender, age, marital status, household size, education, employment status, profession, and income). Out of a total of 2,050 tests to determine equal acceptance of the two entities, only seven were in the acceptable statistical range; but the specific demographic population for those seven was too small to make a definitive statement.
In Whom Do We Trust?
Results from the April 2000 study reveal that privacy is definitely the most important issue to citizens. However, when asked if they would trust a private tax collector as much as the government on the issue of privacy, the study participants answered with a resounding “No.”
Reality, though, clearly indicates that the public’s perception of which entity is most trustworthy is misplaced. The privacy protection record of the federal government is below acceptable limits of the public. According to a GAO report, confirmed illegal browsing by IRS employees in fiscal year 1994 was 288 cases.† In 1995 this increased to 439 then to 411 the following fiscal year. Public reaction led to the passing the Taxpayer Browsing Protection Act. Intentionally revealing tax information became punishable; employees caught committing this violation forfeit their government positions and risk a one-year prison sentence.
Not surprisingly, privacy violation by contracted tax collectors is nearly nonexistent. Both the private study in April 2000 and the IRS project revealed that very few, if any, complaints have been filed by citizens who believe their privacy has been violated by private collectors. In reality, the public should trust the private collector more than a government counterpart.
Tax records contain information that most individuals consider extremely confidential. The IRS and other taxing agencies have historically been privy to detailed monetary resources and non-monetary lifestyle habits of every citizen. Because of this high level of personal knowledge, a lack of privacy protection is of great concern. Only the government collecting Internet information or the illegal disclosure of medical information brings as much Congressional attention as when citizens discover their tax records have been illegally browsed and disclosed.
Currently, public interaction with privatized tax collectors has proved to be successful. Nevertheless, public perception appears to be hindering advancement of outsourcing to the remaining U.S. states as well as the federal level. To increase the trust of citizens, ancient Greeks responded by inventing public accounting. Outsourcing in the tax collection field in the U.S. will continue to grow in acceptance as long as strict monitoring is also included.
Roger Holt is a doctoral candidate (business program) of the Nova Southeastern University/School of Business & Entrepreneurship.
Lessons from the Outsourcing Primer
- In tax collection, citizens are more concerned about privacy of their personal records than they are about the efficiency of the collecting entity.
- Although the facts reveal that privacy violation by contracted tax collectors is nearly nonexistent and that there have been numerous violations by the government, the public perceives the government to be a more trustworthy collector.
- Private tax collectors do a more efficient job, but they must be monitored closely to discourage corruption and maintain the trust of citizens.
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].