Nobody's Arrears: The Collection Incentive Problem in a Tax Split Between Two Governments

Abstract

A tax collected by one government for the benefit of another creates an incentive problem that appears only at the margin of collection. While taxpayers comply, the arrangement functions and the split is invisible. Where they do not, the resulting arrears belong disproportionately to a party that cannot pursue them and only fractionally to the party that can. This article specifies the problem, shows that its severity is determined by the ratio of the collector's retained share to its marginal collection cost, and derives the conditions under which a shared instrument will under-collect relative to an unshared one. Indonesia's surcharge mechanism, in force from 5 January 2025, provides a case in which the retained share is 34 per cent, the collecting province bears the whole marginal cost of recovery, and the receiving jurisdictions hold no recovery power. Evidence from 35 jurisdictions is consistent with the predicted pattern: attainment on the annual vehicle tax was 90.0 per cent with wide dispersion, and six of 35 jurisdictions exceeded target, while the aggregate remained ten percentage points short. The article argues that the arrangement is defensible on collection-efficiency grounds and defective on collection-incentive grounds, that these are separate questions frequently conflated, and that a remedy exists which preserves the first while addressing the second.