What Happens When You Auction Off The Right To Tax Your People?

The ticket inspector flashed his identification.

I opened the app containing my valid ticket, only to find that my valid ticket had not transferred over to my new phone.

My smug ‘better luck next time’ demeanour shifted quickly to ‘hold on a second’.

I explained the situation to the ticket inspector, who calmly explained that while he believed me, he would have to issue me a fine, which I could then have voided by emailing proof of my valid ticket once I got it sorted — which I promptly did.

So I was disappointed when a letter arrived informing me that while my ticket had indeed been valid, and the fine cancelled, I still owed a small administration fee.

This letter was not signed by the city’s transit department, but rather by a private company.

This private company holds the contract to collect fines on behalf of the transit department.

The inspector who stopped me was less a public servant and more a mercenary — private muscle hired to enforce the rules and collect the revenue.

Why tell you about a trivial train fine?

So let me explain.

Two thousand years ago, Rome took this very idea much further.

It didn’t just sell the right to collect small fines. It auctioned off the right to tax entire provinces.

Today, governments are quietly doing a similar thing.

By the end of this Benchmark, you'll understand what happens when a government sells off its own machinery.

Show me the incentive…

In 123 BC, a Roman politician named Gaius Gracchus passed a law that changed how the empire raised money.

Rome had recently acquired the province of Asia, a rich slice of what is now western Turkey.

It needed to tax it. But Rome had almost no civil service to do the job.

So it held an auction instead.

Officials put the province's taxes up for bid. Syndicates of businessmen, known as the publicani, competed for a five-year contract.

The winner paid the state an agreed sum. Whatever it could collect from the province above that sum was profit.

Consider the incentive structure here.

The more a syndicate bid, the harder it had to squeeze to make a return. The winner was, almost by definition, the syndicate most confident it could squeeze hardest.

Rome got guaranteed revenue. It didn't need tax offices, clerks or assessors.

And the people paying these taxes weren't Romans. Since 167 BC, Roman citizens had paid no direct tax at all. The squeeze landed on conquered territories at the edge of the empire.

Back home, the business was popular. The publicani came mostly from the equestrian order, the wealthy class just below the Senate. But the historian Polybius wrote that nearly everyone in Rome had a stake in public contracts, as an investor or a worker. Cicero mentions shares in the tax companies changing hands, some at very high prices.

So the dividends of taxation in Asia flowed back to Rome.

Too big to fail, 60 BC edition

In 60 BC, Cicero wrote to his brother Quintus, then governor of Asia, about the governor's impossible job: keeping the publicani happy without letting them bleed the province dry.

By then, Rome already knew what happened when the balance tipped.

In 88 BC, King Mithridates of Pontus invaded Roman Asia. On his orders, towns across the province turned on the Romans and Italians living among them. Ancient sources put the dead at 80,000 or more. Years of simmering resentment at Roman tax collectors and moneylenders boiled over.

Rome fought back and won the war. The publicani came back.

But in 61 BC, they overreached.

The syndicate holding the Asia contract went to the Senate and admitted it had bid too much. It had got carried away in the competition, it said. It wanted a third of what it owed the treasury written off.

Cicero, usually a friend of the publicani, privately called the demand disgraceful, an admission of reckless speculation.

Cato the Younger blocked it. For months, the Senate was deadlocked.

But the syndicates had a powerful backer in Marcus Crassus, the richest man in Rome. And Crassus had a protégé who needed allies: Julius Caesar.

In 59 BC, as consul, Caesar pushed the rebate through. One third of the contract price, cancelled.

Sounds familiar, doesn’t it?

A private syndicate overpaid for a government franchise, lost money, and the state absorbed a third of the loss. Anyone who lived through 2008 will recognise the shape of it.

Eleven years later, with Rome under his control, Caesar changed course. In 48 BC he took the collection of Asia's main taxes away from the publicani. Under the emperors who followed, Rome slowly built the bureaucracy it had spent generations renting.

The taxman cometh (back)

In 2015, Congress ordered the IRS to hand some unpaid tax debts to private debt collectors. The IRS hadn't asked for it. It had tried outsourcing in 1996 and 2006, and abandoned it both times.

The collectors are paid commission on what they bring in. From 2017 to 2021, the IRS handed them more than 4 million cases, worth $36.8 billion.

But they collected only about $1.1 billion. Roughly three cents on every dollar.

Who were they chasing? Mostly people who owed $5,000 or less. Of those who had filed a tax return, more than half earned $50,000 a year or less.

In the program's early days, the IRS's own warning letter, telling people their debt was about to go to a collector, brought in 40% as much as the collectors themselves.

When the IRS's internal watchdog, the National Taxpayer Advocate, criticised the program, the collectors formed their own lobby group and accused her of misleading Congress.

At the local level, the auction dynamic is in play today, too.

When an American homeowner falls behind on property tax, many counties sell the unpaid bill to an investor. The county gets its money now. The investor collects the debt from the homeowner, plus interest set by state law: up to 18% a year in Florida and New Jersey, and up to 36% in Illinois.

If the homeowner never pays, the investor can eventually move to take the house.

Many counties run these sales as auctions, where investors bid down the interest rate they'll accept. Since the sales moved online, hedge funds and banks bidding in volume have come to dominate.

So a government sells the right to collect from its people. Investors compete for it. The winner keeps the spread.

Tax revenue as a service

If the state doesn’t build and maintain its own capacity to collect revenue, it will outsource it.

In 2025, as part of the Trump administration's drive to shrink the federal government, the IRS lost a quarter of its workforce in five months. Thousands of new hires were fired, and thousands more took buyouts to leave. By May, about a quarter of its auditors were gone too.

But the tax bills didn't shrink with the headcount. Someone still has to collect them (no tax revenue, no government).

Cash today beats cash later. Investors hunting for yield are happy to provide it. And once a contractor has a revenue stream, it has every reason to lobby to keep it.

No one has to be a villain for this to happen. The system simply pays whoever extracts most.

It doesn't have to work this way, though. Since January 2024, Australia's tax office has also sent overdue debts to a private collector. But that firm isn't paid on commission, and earns nothing extra for collecting more. Australia kept the contractor model, but removed the incentive.

Which brings me back to my train ticket experience.

My ticket was valid. The fine was cancelled. I'd done nothing wrong. But someone still got paid.

In 2018, the National Taxpayer Advocate found that 43% of the people private collectors had signed up to payment plans earned less than the IRS’s own allowance for basic living expenses.

To a collector, that isn’t a bug. It’s the moat, the thing every investor is taught to look for: something that stops customers drifting to a competitor.

The publicani had the deepest moat imaginable. Their customers couldn't shop around, couldn't negotiate and couldn't leave. Paying was the law.

The appeal is the same today. A tax lien paying up to 36% a year, secured against a house. A government contract that hands you a steady stream of accounts to chase. Revenue backed by the power of the state.

No wonder hedge funds bid for it.

But that moat comes with a catch the publicani learned the hard way. It exists only as long as the political system allows it.

In 59 BC, Caesar handed the syndicates a bailout. But 11 years later, the same man took their franchise away. The business that made them rich was a political favour, and it was withdrawn the moment it stopped being useful.

Hand a public function to a private business and you get a very efficient system.

The question, for the taxpayer and the shareholder alike, is: efficient for whom?

This week's quote:

'Even a bad sovereign feels more compassion for his people than can ever be expected from the farmers of his revenue.'

— Adam Smith, The Wealth of Nations

Invest in knowledge,

Thom

The Benchmark

Read more: The connection between coal-fuelled Nazi fighters & today’s diesel crisis

Enjoyed? Forward this edition to a future subscriber (or subscribe yourself). 

Connect: I post every day on LinkedIn