Should Tax Be King? A Global Review of the Role of Tax Claims in Insolvency Laws

An IMF Working Paper, authored by Irving Aw, Brendan Crowley, and José M. Garrido with the contribution of Kika Alex-Okoh, represents a landmark collaboration by the IMF Legal Department and Fiscal Affairs Department, with valuable input from the International Survey on Revenue Administration (ISORA) and the Tax Administration Diagnostic Assessment Tool (TADAT). This scholarly effort explores how different jurisdictions prioritize tax claims in insolvency cases and whether the state should continue to enjoy a privileged position over other creditors. Historically, tax claims have been seen as sovereign obligations, drawing on medieval traditions that gave kings first rights over debtors’ assets. However, as modern economies evolve, so too has the legal treatment of tax claims. The paper investigates whether this special status is still justified today or if it should be replaced with a more equitable creditor hierarchy.

The Global Legal Landscape: A Mosaic of Contrasts

Drawing on legal and fiscal data from 60 countries accounting for over 91% of global GDP and 84% of the world’s population, the authors uncover a diverse and often contradictory landscape. While 41 countries still grant general priority to tax claims, 19 have either abolished or strictly limited such priorities, with most of these being advanced economies. Legal protections for tax claims vary: some countries rely on general or special priorities, while others use statutory liens or real estate privileges. In civil law countries, priority can sometimes be granted without formal registration, while common law jurisdictions like Canada use deemed trusts, especially for VAT or employee withholding taxes. Even where general priorities have been eliminated, tax agencies in countries such as Australia and Germany can secure claims through alternative legal instruments. These differences show that the legal architecture surrounding tax claims is highly complex and reflects each country’s balancing of public versus private creditor interests.

Arguments for Tax Priority: Public Interest and Fairness

Supporters of tax priority argue from both moral and practical standpoints. First and foremost, tax revenues fund critical government functions, healthcare, education, and infrastructure, and therefore should be protected. The state is also considered an involuntary creditor, unlike lenders or suppliers who choose to extend credit. Tax debts arise by operation of law, not mutual agreement, justifying special treatment. Furthermore, tax priority can help maximize revenue recovery in insolvency, preserving public funds that might otherwise be lost. There is also an argument of fairness: without tax priority, powerful secured creditors might be repaid while ordinary taxpayers absorb the losses. Giving priority to taxes collected on behalf of the government, such as VAT or employee income taxes, is seen as especially fair; these are not funds owned by the business but held in trust for the state. In a notable policy shift, the UK reinstated secondary tax preference in 2020 specifically for such "held" taxes, arguing that businesses should not use this money to pay private creditors in insolvency.

Counterarguments: Efficiency, Transparency, and Economic Impact

Despite these claims, a growing contingent of experts and governments has voiced strong opposition to tax priority. They argue that the state, as the most powerful and diversified creditor, does not need extra protection and already possesses a robust enforcement toolkit. Tax priority distorts the equitable ranking of creditors, discourages lending, and reduces access to credit, especially for small and medium-sized enterprises. Critics also point to inefficiencies: tax agencies may become complacent, relying on their priority status instead of proactively monitoring distressed debtors. Moreover, tax claims are often opaque, unlike secured loans that are registered and visible; unpaid taxes may remain hidden from other creditors, creating uncertainty. Empirical data also weakens the case for priority: in Ireland, only 0.01% of tax revenue was recovered through insolvency in 2023; in Spain, this figure was around 0.1%, and in the UK, expected gains from reinstating limited tax priority were modest. These amounts are negligible in national budgets, but the corresponding losses can be devastating for small trade creditors and employees, raising concerns of distributive justice.

A Data-Driven Path Forward

One of the most important contributions of the paper is its call for an empirical, rather than ideological, approach. Many arguments in favor of or against tax priority rest on untested assumptions about creditor behavior, tax authority enforcement, and insolvency outcomes. The authors propose that countries should gather data on tax recoveries from insolvency proceedings, the number of tax-driven bankruptcy filings, and the effects of priority changes on tax morale and compliance. For example, data from Sweden, which does not grant tax priority, shows that the absence of priority has not resulted in noticeable fiscal deficits. Likewise, Australia, which also removed tax priority, has shifted toward more proactive enforcement using garnishments and director penalties. This suggests that effective tax collection is less dependent on legal priority than on administrative tools and institutional capacity. The IMF paper recommends transparency, time limits, and clear scope for any tax preferences, especially when public policy justifies targeted protection, such as for taxes held on behalf of others.

Should Tax Still Reign Supreme?

The decision to grant tax claims priority in insolvency is a policy choice, not a legal necessity. While public interest considerations are valid, they must be weighed against the economic costs and distributional impacts on private creditors. In the absence of strong empirical evidence, broad-based tax priority may do more harm than good. The paper urges governments to reconsider the longstanding assumption that tax should always be king. As advanced economies gradually shift away from this model, the debate is far from over, but its resolution, the authors argue, will depend not on tradition but on transparent, data-driven policymaking that balances fiscal needs with fairness and market efficiency.