100 Economics Question of the Day: An Intermittent Blog: This is the MBA Administration?

Saturday, August 19, 2006

This is the MBA Administration?

If David Cay Johnston didn't exist, it would be embarrassing to have to invent him.
Within two weeks, the I.R.S. will turn over data on 12,500 taxpayers—each of whom owes $25,000 or less in back taxes—to three collection agencies....The move, an initiative of the Bush administration, represents the first step in a broader plan to outsource the collection of smaller tax debts to private companies over time. Although I.R.S. officials acknowledge that this will be much more expensive than doing it internally, they say that Congress has forced their hand by refusing to let them hire more revenue officers, who could pull in a lot of easy-to-collect money. [emphasis mine]

The cash flow choices are simple:
The private debt collection program 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.

By hiring more revenue officers, the I.R.S. could collect more than $9 billion each year and spend only $296 million—or about three cents on the dollar—to do so, Charles O. Rossotti, the computer systems entrepreneur who was commissioner from 1997 to 2002, told Congress four years ago.

The math from that is also simple: Over ten years, the outside collection agencies will produce a net of $1.07B ($1.4B-0.33B). Over ten years, the IRS would produce $87.04B ($90B-$2.96B).

The net loss of owed tax revenues—all from low-level debtors—will therefore be approximately $85.97B.

And they're using reputable companies as well:
One of the three companies selected by the I.R.S. is a law firm in Austin, Tex., where a former partner, Juan Pena, admitted in 2002 that he paid bribes to win a collection contract from the city of San Antonio. He went to jail for the crime.

Last month the same law firm, Linebarger Goggan Blair & Sampson, was again in the news. One of its competitors, Municipal Services Bureau, also of Austin, sued Brownsville, Tex., charging that the city improperly gave the Linebarger firm a collections contract that it suggested was influenced by campaign contributions to two city commissioners.

And the reasoning is the same as the justification for outsourcing: capital classification advantages, not value maximization:
Under federal budget rules, money spent to hire tax collectors is treated as a discretionary expense, and Congress is cutting discretionary spending. In business terms, the rules treat the I.R.S. as a cost center, not as the government's profit center.

The private debt-collection program, however, is outside the budget rules because, except for the start-up costs, the collectors are to be paid from the proceeds.

So we have the failed outsourcing experiment, the failed privatization experiment, bogus accounting, and poor incentive alignment combined to produce nearly $86B in lost revenues. If there were any responsibility to the shareholders, the CEO would be fired.

(Cross-posted from Snark of the Day)


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