Tax debt collection enforcement: When are collateral tax sanctions effective due to their prompt impact?

While the emerging empirical literature shows that collateral tax sanctions (CTSs) – such as driver’s license suspensions or passport denials – appear to be effective instruments to enforce tax debt collection, there are still few theoretical arguments to explain why. In this paper, I model enforcement of tax debt collection and provide a new rationale for why it could be efficient to use CTSs in combination with monetary fines. I argue that a CTS influences a debtor immediately after its imposition and affects more strongly those debtors who have higher chances of escaping debt payment, which is in contrast to the monetary fine that is often delayed in payment and non-enforceable. I show that, in a model where debtors might be temporarily income constrained to various degrees, this prompt influence of CTSs may be critical when debtors differ in ability to escape debt payment. It is because CTSs help target the punishment toward tax debtors who delay payment to avoid debt, rather than those who delay payment due to limited income. According to the numerical calculations, CTSs are socially optimal if the share of income-constrained tax debtors is not too large or high-income individuals are sufficiently wealthy.