Farm (revenue leasing)
Farming or tax-farming is a technique of financial management in which the management of a variable revenue stream is assigned by legal contract to a third party and the holder of the revenue stream receives fixed periodic rents from the contractor. It is most commonly used in public finance, where governments (the lessors) lease or assign the right to collect and retain the whole of the tax revenue to a private financier (the farmer), who is charged with paying fixed sums (sometimes called "rents", but with a different meaning from the common modern term) into the treasury.
Farming in this sense has nothing to do with agriculture, other than in a metaphorical sense.
Etymology
There are two possible origins for farm.
Derivation from classical Latin
Some sources derive "farm" with its French version ferme, most notably used in the context of the
Derivation from Old English
According to other sources, the word farm comes from
Valuation of a farm
The tenant of a farm can only make a profit after carefully assessing its value. While modern financial management theory employs scientific formulae for such calculations, astute financiers of the past would have understood them well, whether done mentally or by making marks in the sand.
To determine the maximum rent they are willing to pay, the tenant estimates the long-term average yearly gross value of the revenue stream, based on past records and accounts, adjusting for any new circumstances affecting the future. They then deduct a risk element and a discount for the time value of money.
The risk is related to the possibility of some debts forming the revenue stream being defaulted on or paid late, leading to variability in the revenue. The resulting figure becomes the maximum rent the tenant offers to the farm's lessor. The tenant's profit is the excess of revenues extracted from the farm, less the rents, administration, levying, and collection expenses.
The tenant's skills lie in negotiating a favorable rent by overstating the riskiness of the cash flow stream and effectively managing the assigned debts as a skilled debt-collector and manager. They must ensure their ability to enforce debt payments, including resorting to legal action and paying standard fees for bringing a lawsuit under the government authority that is the farm's lessor. The tenant acts as a principal, not the lessor's agent.
Historical use
Roman Empire
Tax farming was originally a
Feudal England
Medieval English kings frequently made grants "in
William, king of the English, to all the
Medieval Egypt
The Chief Rabbi of Egypt, Sar Shalom ben Moses was accused of tax farming, which led to his excommunication by Maimonides.[10]
Ottoman Empire
The
Other uses
Besides the Romans, historical examples include the tax collection methods of the
Sometimes, as in the case of Miguel de Cervantes, the tax farmer was a government employee, paid a salary, and all money collected went to the government.[citation needed]
Advantages
Tax farming was an important step in the history of
Disadvantages
The key flaw in the tax farming system is the tension between the state, which seeks a long-term source of taxation revenue, and the tax farmers, who seek to make a profit on their investment in as short a time as possible. As a result, tax-farmers often abuse the taxpayers in various ways, tending them to switch their economic activity from strategic long-term projects to short-term revenue generation. In barter systems, tax farmers commonly undervalue taxes in kind, reselling the goods to create a second profit source. Such abuses stifle economic growth by restricting the ability of the tradesman to reinvest in his business, limiting the quantity of taxes generated over the long-term.[citation needed]
Modern-day
Indian sub-continent
In Bangladesh and India tolls on bridges and roads and dues from public properties such as lakes and forests are often leased to private persons or firms.[citation needed]
United States of America
After the 2008 financial crisis, the city of Chicago needed money and a deal was made to sell all 36,000[4] of the parking meter spots in the city for 75 years for 1.15 billion dollars to a firm called Chicago Parking Meters.
Disambiguation
Privatized tax collection
Tax farming is not synonymous with modern privatized tax collection, where private individuals or companies collect taxes and pass them to the state in return for a commission or fee, without bearing any risk consequent of default by the taxpayer. Tax farming is speculative, meaning that the tenant of the farm bears the full risk of defaulted debts. In addition, a tenant is often required as a term of the lease to make an early rent payment, which must be financed from his own resources until the revenue stream subject to the farm has started to be collected.
Factoring
In the
Simple commutation
In 1999 the National Board of Revenue in Bangladesh (NBR) negotiated with cigarette producing firms a minimum amount of
See also
- Fee farm grant
- Hollow state
- Maona
- Octroi
- Pacht: the system of tax farming in the Dutch East Indies
- Privatized tax collection
- Public-private partnership
References
- ^ Larousse Dictionnaire de la Langue Francaise Lexis, Paris, 1993 "Ferme: contrat par lequel un proprietaire abandonne a un locataire l'exploitation d'un domaine moyennant le paiement d'un loyer" (contract by which a proprietor transfers the exploitation of a holding to a tenant by means of the payment of a rent); Cassell's Latin Dictionary, ed. Marchant & Charles
- ^ Larousse, op.cit.
- ^ Century Dictionary and Cyclopedia, "farm".
- ^ Mantello, Rigg, Medieval Latin: an introduction and bibliographical guide, 11.3
- ISBN 0-19-866121-5
- ^ Balsdon J.: Roman Civilization, Pelican, 1965
- ^ Roman-taxes at unrv.com
- ^ Cahill, Thomas. How the Irish saved civilization: the untold story of Ireland's heroic role from the fall of Rome to the rise of medieval Europe. Anchor Books, Doubleday, 1996, p. 26.
- ^ Douglas, David C. & Greenaway, George W., (eds.), English Historical Documents 1042–1189, London, 1959. Part II, Government & Administration, part C, The Sheriff & Local Government, p. 433
- ^ Rustow, Marina (2010-10-01). "Sar Shalom ben Moses ha-Levi". Encyclopedia of Jews in the Islamic World.
- ISBN 978-0-674-39565-7.
- ^ "Iltizām | tax system". Encyclopedia Britannica. Retrieved 2021-09-23.
- ^ John Butcher and Howard Dick, The Rise and Fall of Revenue Farming: Business Elites and the Emergence of the Modern State. St. Martin's Press, 1993
- ^ [1] Archived 2011-05-14 at the Wayback Machine [2] Archived 2010-07-31 at the Wayback Machine
- ^ Chowdhury, Faizul L. NBR's attempt at Tax Farming - fixed amount of VAT on Cigarettes in 1999, 2007 : Desh Prokashon, Dhaka.
Further reading
- Chowdhury, F. L. (2007), NBR's attempt at Tax Farming – fixed VAT on Cigarettes in 1999, Desh Prokashon, Dhaka.
- Levi, M. Of (1988), Rule and Revenue, California Series on Social Choice and Political Economy (13), University of California Press.
- Stella, P. (1992), Tax Farming: A Radical Solution for Developing Country Tax Problems? (September 1992). IMF Working Paper No. 92/70.