Who Wins When Uncle Sam Loses? Social Insurance and the Forgiveness of Tax Debts

Abstract

Small-scale tax collections decisions have large-scale distributive consequences. The central question addressed in this Article is whether a deliberate government decision to forgive or to not collect a tax owed can be justified, given the distributive consequences that may result. In brief, the government’s decision not to pursue full collection of a delinquent tax debt may give rise to two types of distributive outcomes: First, the benefits of non-collection may be captured by the forgiven taxpayer’s other creditors. Second, the costs of non-collection may be imposed upon compliant taxpayers and the public through higher taxes, decreased government provision of goods, services, and social assistance, or other macroeconomic impacts. These distributive outcomes may outweigh the potential justifications for tax non-collection. This Article demonstrates, however, that a social insurance framework, which conceptualizes tax non-collection as a transfer of the risk of financial distress from the taxpayer to the government in exchange for payment of an insurance premium, may justify these distributive outcomes and may hence justify the non-collection of tax debts. Further research is required to determine the extent to which tax non-collection procedures should be used to deliver social insurance, particularly given the existence of other government-provided social insurance programs.