Three Essays on Tax Collection

The purpose of this dissertation is to explore questions about the government's contractual choice of tax collection between tax farming and tax bureaucracy. It is commonly assumed that tax collection is an inherent function of the government. However, historically governments commonly contracted with private agencies known as "tax farmers" to enhance their tax collection capacities until the nineteenth century. Tax farming is an efficient tax collection method, but it encouraged private tax collectors to exploit taxpayers to maximize their own expected return. The dissertation tries to answer the following three research questions. First, why did governments outsource tax collection to tax farmers until the eighteenth century, and why have governments fully developed their own tax bureaucracy since the nineteenth century? Second, what are the conditions under which each tax collection contract is optimized, and what are the expected values of optimal tax collection contracts? Third, what are the effects of different tax collection contracts on administrative effectiveness and procedural fairness in contemporary government? To explore these questions, I have used the theory of agency where the principal (the government) incentivizes the agent (the tax collector) to input a high level of effort to implement delegated tasks by offering performance-based compensation. Alternatively, the principal can force the agent to input a minimal necessary level of effort by setting a monitoring system with fixed compensation. The study examines the tax collection process, exploring questions about the government's contractual choice of tax collection methods, outsourcing or insourcing the tax receivables collection process. To explore this understudied aspect of the governments' tax collection process, I explore both the effectiveness and fairness of the tax receivables collection process. My first essay is from a historical perspective, my second essay address a theoretical model of the process, and my third essay examines the process empirically across the 50 states. The first essay (Chapter 2) reviews tax collection history in Europe, the Islamic world, and Asia through the lens of the theory of agency to explore the question of why tax farming had been predominant until the eighteenth century, and why government-run tax bureaucracy have been predominant since the nineteenth century. The historical analysis focuses on identifying generalizable underlying mechanisms of tax collection contracts and key exogenous factors affecting the government's choice of tax collection contract forms. The second essay (Chapter 3) analyzes optimal conditions and relative value--the net effect of costs and benefits--of tax collection contracts through the development of a formal model of tax collection underpinned by the historical review and theory of agency. The dynamic and static optimization processes will be used to generate comparative statics. The third essay (Chapter 4) measures the effects of different contract forms on administrative effectiveness and procedural fairness in tax collection. Using panel data for the years 2000 to 2011 in state governments in the U.S., I test the following key hypothesis: delinquent tax collection outsourcing is financially effective, but it negatively impacts procedural fairness, such as the taxpayer' rights, in tax collection. The results imply two things. First, in terms of the administrative effectiveness, private tax collection reduces tax administration cost, but it has no statistical effect on the recover delinquent taxes. Second, in terms of the procedural fairness, private tax collection increases the number of tax appeals filed in the tax appeal division within state tax department, but it decreases the number of tax appeals filed with outside-independent tax appeal agency.