The Tax Collector Cometh

It is just as everyone feared. No sooner do the Democrats take over Congress than they begin to undo some of the legislation so carefully crafted by the Republicans when they were in control. A recent example of this distressing state of affairs manifested itself on July 18 when repeal of one of the best parts of the American Jobs Creation Act was approved by the House Ways & Means Committee.

The American Jobs Creation Act (AJCA) became law in 2004. It remembered by most of my readers as an international tax reform bill that eliminated the extraterritorial income exclusion that had been ruled illegal by the World Trade Organization. (I will say no more about that part of the Act since most of my readers are more informed about its provisions than I.) Tucked away in a little noticed corner of the Act, however, was a provision demonstrating the Republicans' belief that whatever government can do, someone in the private sector can do better. The Act provides that the IRS may use private debt collection companies to locate and contact taxpayers owing outstanding tax liabilities of any type and to arrange payment of those taxes by those taxpayers. The AJCA was a brilliant move by Republicans since any time one can privatize something the government has long done, that is of obvious benefit to the country.

Outsourcing collection procedures was expected to generate about $1.4 billion in revenue between 2006 and 2014. That is money that the IRS would not have collected because Congress refused to give it adequate funds with which to undertake collection efforts. Testifying before the IRS Oversight Board in 2002, Charles Rossotti, the former IRS Commissioner in the Clinton administration, said that if more revenue agents were assigned to debt collection every $1 invested in the effort would yield $30 in revenue. That would, of course, make the government bigger.

The joy of those who like anything that shrinks government was unbounded when the private tax collection provisions became law. Their joy was not diminished by the knowledge that the new program would cost the taxpayer $350 million out of the expected $1.4 billion it would collect, a figure 8 times higher than what the cost would be were collection efforts undertaken by the IRS. That's because the IRS set commission rates for private contractors at between 21% and 24% of the revenue collected by them. Similar efforts by existing IRS employees cost 3 cents for every dollar collected. Mark Everson, IRS commissioner under George Bush until May 4, 2007, has also said that IRS employees could undertake collection at less expense than collection agents.

The program flourished until the 2006 election when Democrats took control of both houses of Congress. One of the things they did was begin efforts to free the taxpayers from the clutches of private debt collectors.

On June 28, the House passed the IRS appropriations bill by a vote of 240 to 179. Democrats tried to get rid of the IRS's private debt collection program by reducing its budget from a little more than $250 million to $1 million. The effort failed. Deterred but not defeated efforts to get rid of the offending provision in the AJCA continued.

On July 18, the House Ways & Means Committee took action on H.R. 3056 that had the catchy name of the "Tax Collection Responsibility Act of 2007." An amendment to that act introduced by the Chairman and approved by the committee on a 23-18 vote repeals the use of private debt collection companies to collect federal income taxes thus restoring to the IRS the right to collect that which it is owed

If this amendment becomes law it will be a sad day as far as private debt collectors are concerned since it removes from their possible stable of clients one of the better ones. (A knock on the door from a private collection agency mouthing the mantra "I'm here from the government and I'm here to help you" is more intimidating than a knock on the door from a collection agent representing a friendly credit card company.) It is a sad amendment for those who like to see more of the taxpayers' dollars flowing into the hands of the private sector than into government coffers. It is a sad amendment for those who like to see the ranks of government employees shrink even if the shrinkage actually costs the federal government hundreds of millions of dollars. It is a welcome amendment for those who think that the federal government should do those things that it can do more efficiently and less expensively than the private sector. That is such a peculiar idea, however, that it is only believed in by Democrats.

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