Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Summary of WP/92/70
“Tax Farming--A Radical Solution for Developing Country Tax Problems?” by Peter Stella
Despite serious problems with tax administration in developing countries, the search for and examination of alternative institutions for tax assessment and collection have been stunted, argue Tanzi and Casanegra de Jantscher (1987), by the assumption made in most theoretical tax models that administration is costless. Far from being costless, administration may be considered a primary concern for many developing countries. What is necessary is a theory of the second best in tax administration to complement that of the theory of the second best in tax policy.
This paper examines tax farming as an alternative tax collection mechanism. Tax farming is a practice whereby the right to collect certain taxes is auctioned off to private sector collectors. If, as conventional wisdom suggests, this technique minimizes government administrative costs and results in more efficient tax collection, it would have great appeal for developing countries where lack of administrative capability and resources makes tax administration difficult.
Some authors have suggested that tax farming might significantly improve tax collection. However, an examination of the historical record reveals that the administrative savings of tax farming are largely illusory and that the popularity of the system--in use for over three thousand years--can be explained by its ability to generate more gross revenue than the alternative, direct government collection. However, this very characteristic is the major drawback of tax farming. Because the system leads to overzealous tax collection, a government concerned with justice and equity in tax collection would be forced to expend considerable resources on monitoring private tax collectors. If taxpayer abuse is to be avoided, only those activities where there is little ambiguity and room for interpretation could be privatized. The scope for privatizing the core functions of tax administration appears limited.