Tax Farming: A Radical Solution for Developing Country Tax Problems?

Abstract

Ineffective tax administration is a chronic problem in many developing countries. A radical solution is tax farming, whereby the right to collect certain taxes is auctioned off to private sector collectors. Proponents argue that it minimizes administrative costs and results in more efficient collec- tion. The purported gains are largely illusory, however. Because the system leads to overzealous collection, a government would have to expend con- siderable resources on monitoring private tax collectors. If taxpayer abuse is to be avoided, only unambiguous activities could be privatized. The scope for privatizing the core functions of tax administration thus appears limited.