Tax Farming: The Effects of Contracting Out Delinquent Tax Collection on Tax Collection Performances in County Governments in the U.S.

Abstract

Is contracting out a county’s delinquent tax collection more efficient than making public employees responsible for it? Based on the public choice theory, existing literature on the history of tax farming, and the theory of agency, we hypothesize that contracting out a county’s delinquent tax collection is likely to increase tax collection efficiency. To test our hypotheses, a pooled cross-sectional analysis was conducted using the merged data of 345 counties in the United States from 1997 and 2002. The empirical results show that outsourcing a county’s delinquent tax collection statistically reduces property tax revenue per dollar of financial management expenditure. The outsourcing also reduces the total tax revenue per dollar of financial management expenditure, but not at a statistically significant level. These findings raise t he question of why county governments use private debt collectors even though outsourcing delinquent taxes is not efficient from a financial perspective. Key Words: Outsourcing Tax Collecting, Tax Farming, Local Governments, Financial Performance