Would you choose moral preening over substantive solutions? If so, here’s your example for today, courtesy of Michelle Singletary’s column in the Washington Post:
When you’re living on the edge financially, you cannot afford convenience fees that go along with instant money. That’s why I dislike Refund Anticipation Loans, or RALs.
A RAL is a short-term loan backed by a person’s tax refund. Tax-preparation companies count on desperate people trying to get their refund as quickly as they can. But there’s a price for that speed.
What galls me is that there’s little, if any, risk to the lender — yet the loans often carry high fees. The Consumer Federation of America and the National Consumer Law Center have found that RALs cost from about $30 to more than $125 in loan fees. Some tax preparers also charge a separate application or document preparation fee of about $40. The consumer groups say the effective annual interest rate for a RAL can range from about 40 percent to more than 500 percent.
This type of loan takes advantage of the very people — cash-strapped taxpayers (sic) — who can ill afford the costs.
And so on. Of course, it’s also possible to say that this type of loan offers an advantage to cash-strapped taxpayers, and getting a benefit generally requires a cost. We may deem the terms unfavorably lop-sided compared to what we would agree, but that does not mean they are “unfair”. As long as both parties involved agree that the terms are acceptable enough to enter the contractual agreement, they are acceptable.
That almost gets lost in the buildup to the key argument.
Although the appeal is that you get your money fast, you in fact marginally speed up the delivery of your refund cash. The turnaround on the loans can be a day or two. However, taxpayers who file returns electronically and opt for direct deposit can receive refunds in 10 days or less.
Logic is a powerful tool. I’m glad it’s finally unleashed here. But it’s strange that the article isn’t a plea targeted to the millions of Americans who receive a tax-refund, the potential customers for this service. Instead, a proposal:
I would like to see a ban on these loans. …
Of course. And concluding the essay with a rumination on the IRS proposal to regulate such loans:
The longer they take to restrict the marketing of this useless product, the more it costs the poor.
We have Ms. Singletary’s subjective assessment that these loans are “useless”. Her judgment is a better stand-in than the person who takes the loan. Thus always with central planners.
This is not to argue that I like these loans. I don’t. Nor am I arguing that I think poor Americans will make good choices when the terms of the loan are terrible. Income is not an indicator of intelligence, and circumstance can force decisions that involve choosing the lesser of two evils. But I believe that people who take these loans are taking them for a reason. I do not pretend to know what that reason might be, nor will I speculate or pass judgment. Still, it’s logical to accept that quick access to most of the money they’re owed is better than no quick access to any of the money they’re owed.
I will make a suggestion for an objectively better topic than calling for a ban on financial transactions between consenting adults. Tell poor Americans to stop being interest-free lenders to the United States government and start being taxpayers who pay only the taxes they owe.
If poor Americans do not pay the government money they do not owe throughout the year, they will have more money throughout the year to pay for whatever inevitably builds from a lack of those dollars. They are much less likely to need a solution such as a refund anticipation loan. Or they can save they money in an account that pays interest, spending it at tax-time if they must have the irrelevant visceral feel of a large lump sum amount. That’s stupid, of course, if there are creditors at the door who will charge interest and fees for debts not payed, but it’s smarter than lending that same money to the federal government without interest while those creditors are calling. And the money has the benefit of being available immediately, beating even the two days of the RAL.
Interest-free loans masquerading as tax refunds are the problem, not an imagined capitalist conspiracy to screw the desperate poor.
“Tell poor Americans to stop being interest-free lenders to the United States government and start being taxpayers who pay only the taxes they owe.”
I agree that many if not all people should not have anything withheld from their income that isn’t required by law. They should keep the money themselves and pay their taxes later.
The trouble, the way our current system is set up, is that many people won’t be able to budget for their tax liabilities. When tax time comes, they won’t be able to pay.
So… maybe a better idea is to just stop taxing the poor.
OH, and I completely agree that we ought to teach financial skills to all kids. They’re incredibly important and they’re not taught.
I think the exemption should be as low as possible so that as many people as possible contribute to the system and understand that there is nothing “free” from the government. But I’m okay with a tax system that effectively exempts many poor people through the standard deduction. It’s always better to let people keep their money than to take it and give it back to them in an inevitably inferior form.
That said, most poor Americans already have a very low tax liability, if any. Even if they owe, generally, people should be claiming 1 extra exemption. That generally takes care of the problem. The rules allow it, so take advantage of it. When I was making very little money, that’s what I did and I never had a problem with owing taxes.