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Source link: http://archive.mises.org/5472/are-capitalists-bamboozling-the-poor/

Are Capitalists Bamboozling the Poor?

August 16, 2006 by

For lack of a better term I am dubbing it Woods’s Law: whenever the private sector introduces an innovation that makes the poor better off than they would have been without it, or that offers benefits or terms that no one else is prepared to offer them, someone — in the name of helping the poor — will call for curbing or abolishing it.

Last time I noted the crusade against rent-to-own stores. This time it’s something you may not have heard of: the tax refund anticipation loan (RAL). It works very simply: consumers borrow against their anticipated refund from the IRS, and then pay the loan back when their refund checks arrive. These short-term loans ranged from $200 to $7,000 in 2004.

FULL ARTICLE

{ 26 comments }

Curt Howland August 16, 2006 at 9:42 am

The statement that the public sector is not held to as high a standard as the private sector cannot be over emphasized.

In more general forums, when I mention that the government has limited liability, people ask me what that means. I tell them, solders are not prosecuted for murder. Police are not prosecuted for murder. IRS agents are not prosecuted for theft no matter how much they take. Etc.

N. Joseph Potts August 16, 2006 at 10:32 am

I hope my comment isn’t TOO far off the subject of this excellent article. I believe one of the attractions of RALs is to joint filers of whom one (spouse, usually) wishes to eliminate the possibility that the other will get his/her hands on the refund check (yes, I acknowledge both filers must sign the tax return).

The refund check goes to the creditor (H&R Block?) rather than being delivered in the mail to the taxpayer’s address, as would happen without the RAL. The proceeds of the RAL are “secret money” to the one who goes to the trouble of actually filing the return. What kind of interest rate might THAT be worth?

I may never have gotten an RAL, but I HAVE been married. Twice.

This theory is strictly my own.

Don B August 16, 2006 at 10:49 am

An outstanding article. It occurred to me while reading it that the essential nature of things can be reduced to one simple equation:

Ignorance X Arrogance = Government.

Greg August 16, 2006 at 11:25 am

Excellent article.

It’s worthy of note that tax ‘refunds’ in many cases have been turned into another redistribution program. Many low income people receive ‘refunds’ that exceed the amount paid in. So why not pay the higher RAL fee? It’s free money to them.

billwald August 16, 2006 at 12:08 pm

Everyone bamboozles the poor. It takes a real specialist to bamboozle the rich.

This item which has been discounted 25% that the poor person blows his “refund” to purchase – Is it a set of tools needed for his employment or is it a toy? In the USofA, the poor are mostly poor because they can’t plan ahead and defer gratifing nonessential desires. Under what political or economic system can they be protected from themselves? I can’t think of any.

What does this have to the police problem? The essay is disjointed.

Bill Ott, With-holding Hater. August 16, 2006 at 12:10 pm

The whole concept of a RAL is based on the stupidity of keeping money in government accounts gaining interest instead of keeping it in the hands of those who actually own it.

So get rid of with-holding and let the poor folks keep their money and not need an RAL.

This is also a product of the tax returns from the Earned Income Credit. So that is two stupid government programs that spawn this industry.

RE Howard August 16, 2006 at 12:46 pm

I worked for HR Block for a season. The fee is much higher than $89. The whole process including the flow of the interview is designned to obsure the fee until the client can be tols how much money he can have tomorrow. Then he is directed to an “approved” check cashing service whre he is fleeced of another $39. Get rid of the EITC and raise the stnadard deduction to $20,000 so that most of the so-called poor don’t even file a return.

M Mathea August 16, 2006 at 2:23 pm

Just a minor point to RE Howard. I believe you are confusing the interest charge with the total cost of the tax return incluging “application fees” The actual interest payment is in the $90 range.
From my experience, I own a number of locations, not HR, the vast majority of the customers taking out the loan are part of the income redistribution class. I agree there are better ways to run government finance, but sure is a great retirement income source.

M E Hoffer August 16, 2006 at 2:38 pm

Even calling these RALs “loans”, is deceiving. Moreso, they(HRB, in this instance) are merely factoring an Account Receivable. In a Factoring transaction, it is the Payor’s Credit Rating that is of Prime importance, not the Payee’s. In this instance the Payor is ol’ Uncle Sugar, his ownself, still thought to be a AAA risk.

The idea that the “high” interest rate being charged(on RALs) is to cover some kind of “loan risk” to a “bad credit” is yet more (intentional?) confusion added to this poorly covered topic.

Francisco Torres August 16, 2006 at 3:17 pm


This item which has been discounted 25% that the poor person blows his “refund” to purchase – Is it a set of tools needed for his employment or is it a toy?

It does not matter, billwald. The point is that the person WANTS to purchase it.


In the USofA, the poor are mostly poor because they can’t plan ahead and defer gratifing nonessential desires.

The problem with such statements as “nonessential desires” is that they stem from value judgements, which are always different depending on the person making them – value is subjective. You or me may deem a certain item as “nonessential”, but it may be deemed as ESSENTIAL by a different person, and neither of us are anybody to say that such a person is wrong – that would be pedantry. Keep that in mind.


Under what political or economic system can they be protected from themselves? I can’t think of any.

Totalitarian Statism is the perfect system to protect us and the poor from ourselves – we just have to give up all of our freedoms – what could be simpler???


What does this have to the police problem? The essay is disjointed.

Mr. Woods is making the point that people hold the government on much lower standards than the private sector. Using the police as an example, he shows how people resign themselves to the fact of government’s incompetence, when at the same time not tolerate a minimum of error from the private sector. The result is that people consider government incompetence as the norm.

This goes hand-in-hand with the fact that some people are suspicious of anything that the private sector does, while at the same time dismissing any egregious or destructive behaviour from the public sector like, oh I don’t know: stealing our hard-earned money?

Brent August 16, 2006 at 5:44 pm

To M E Hoffer,

>The idea that the “high” interest rate being charged(on RALs) is to cover some kind of “loan risk” to a “bad credit” is yet more (intentional?) confusion added to this poorly covered topic.<

You missed the point, sir. The point was that (at least some of) these people who desire RALs can’t get credit in other places, such as from credit cards.

You also miss the more important point that an actor need not compare the RAL lender against all other potential lenders (of cash). It is sufficient, in defense of RALs, to simply state that the actor (taxpayer) would rather have the cash sooner and pay the fee to the RAL lender than to wait for the government to “refund” his cash to him/her later.

Brent August 16, 2006 at 5:54 pm

I forgot to add that an RAL is, in fact, a loan – it is not “deceiving” to call it that. The lender of the cash to the taxpayer is not the government, but a private firm. I don’t see how this is different than a PayDay Loan.

As far as risk of payment (that is, the risk that the government won’t come through with the refund cash) is concerned, that is but one possible reason why the interest rate is positive, but not the only one.

M E Hoffer August 16, 2006 at 6:36 pm

Brent,

What? about Factoring receivables don’t you understand?

And, with this: “I don’t see how this is different than a PayDay Loan”, try prying open an eyelid, or two. With the “PayDay” loan, the borrower is the credit risk, in the transaction.

With the “RAL”, ol’ Uncle Sugar is the credit risk. HRB is doing nothing more than Factoring an Account Receivable. An AR from an org. with, “still”, a AAA credit rating.

Also, what’s the point of this: “that is but one possible reason why the interest rate is positive, but not the only one” ?

Jim Fedako August 16, 2006 at 8:24 pm

If there is outrageous profits to be made, the best action for the do-gooder is to simply start a company that does the same yet charges 1/4 the price. Based on the ill-gotten-gains line of though, you will still reap a huge profit and you will benefit all similarly situated money-seekers since you will be reducing the cost of all RALs on the market.

In addition, how does a RAL differ from other examples of time preference. The poor who purchase soda at the quicky mart are expressing a desire for soda now, eventhough the quicky mart price is probably 50% over that found at the local Wal-Mart. Calculate that at an annualized rate. Yet no one labels such price differences as immoral.

Brent August 16, 2006 at 10:28 pm

M E Hoffer,

The RAL lender (firm) is giving up ITS cash to the borrowers (taxpayers). Think about this… I doubt HRB or anyone else is going to “charity lend” out millions of dollars.

So what about the credit risk of “Uncle Sam”? I doubt there is zero credit risk, as some borrowers (taxpayers) may find a way to lie about their taxes and thus the size of the expected refund may be less than expected. But assume there is no credit risk, so what? If you want to borrow money from a firm, there is going to be a charge (fees, interest, whatever you want to call it). Have you calculated the potential interest for a bounced check, or a credit card with late fees, or a utility bill past due? When you anualize the “penalty”, the interest rate can be over 1000%!

An Anarchist August 16, 2006 at 11:42 pm

You have to understand that the capitalists and the leaders TOGETHER are the true state! Down with the capitalist system which exploits the poor and leaves them penniless.

Jonathan August 17, 2006 at 12:02 am

If you consider overpaying your taxes due as a loan to the Government, then a RAL is paying someone to borrow money from yourself. Why give the money to the Government in the first place? If people are so “smart”, then they would play it so that they owe money to the IRS while placing the witholding money into an interest bearing account. Then on April 15th, pay the IRS and keep the interest.

quincunx August 17, 2006 at 1:22 am

‘If people are so “smart”, then they would play it so that they owe money to the IRS while placing the witholding money into an interest bearing account.’

Not everyone can avoid paying witholding tax. You are supposed to submit your W-4 to the employer, who must verify that its mostly correct. How do you manage to avoid it?

‘You have to understand that the capitalists and the leaders TOGETHER are the true state! Down with the capitalist system which exploits the poor and leaves them penniless.’

You have to understand that ansoc theory is a bunch of crap. You may want to see the previous discussion on the topic:

http://mises.org/daily/2197

be sure to read the comments:

http://blog.mises.org/archives/005124.asp

BTW, if one takes you literally, you are correct: the gov will eventually get rid of the penny.

M E Hoffer August 17, 2006 at 3:04 am

Brent,

Do yourself a small favor: Execute a web search using the keywords: Factoring, Factoring definition.

Then, see if the vaunted “RALs” are anything but Receivables being Factored.

Yancey Ward August 17, 2006 at 8:56 am

“Bamboozling” implies deceit in the transactions, or a process of hiding certain aspects (the size of the fees, for example) of the signed contract for the RAL. Such actions, when unintentional, are open to civil suits, and if such actions are a deliberately designed and long-running process-actual deceit- then the actions are open to actual criminal prosecution under laws already on the books.

However, the setting of limits on fees charged is just plain stupid and patronizing. As Jim Fedako points out, attacking the size of the fee charged as being illigitimate would mean that many other kinds of transactions are also illigitimate and should be banned or regulated.

Francisco Torres August 17, 2006 at 12:17 pm

An Anarchist:
You have to understand that the capitalists and the leaders TOGETHER are the true state! Down with the capitalist system which exploits the poor and leaves them penniless.

You mean all capitalists? Even those that suffer from the State’s interventions and regulations? Don’t be silly – entrepreneurs exist to provide people with what they want by means of voluntary transactions, whereas the State exists to take by force. The reason some capitalists get cozy with the State is the same any other group does: to receive some kind of undeserved favour. However, this is an indictment on the State and not capitalism.

MG August 17, 2006 at 5:36 pm

ME Hoffer, I understand your point to be: Since an RAL is more like factoring an account receivable than a loan, there is an injustice done to the taxpayer paying for the transfer of an AR because the one gaining the AR should be the one paying for it, due to the government’s “‘still’ AAA” credit rating and the practically zero chance of default on the AR.

The argument relies on an assumption that both the taxpayer and the company gaining the AR value the AR approximately equally (that is, that both have similar, competitive uses for the AR in the interim between tax theft and tax receipt – this is, in fact, what is being implicitly valued in the exchange of the AR). The company receiving the AR, however, undoubtedly invests the AR to higher returns than the taxpayer (both prior to and after receipt of the account), and in that capacity it makes sense to think the company should pay for gaining the AR, because they value the money more highly.

The investments that could be made by the taxpayer on the basis of his or her AR in the interim between tax theft and tax “refund” are minimal to nonexistant, however (potential reasons might include lack of information and/or credit worthiness). The opportunity cost to the taxpayer of not having the AR thus is not the same as the company’s because it does not account for possible interim investments.

So what is the taxpayer’s opportunity cost? It is the difference between having the money resource now or later, and the taxpayer getting rid of the AR also is likely operating on a higher time preference (they value less money now more highly than more money later). The taxpayer pays to give the AR because they are unaware of the opportunity cost to the company of not having the AR, and are thus incapable of using this information to gain more bargaining power.

I agree the RAL seems more like factoring an account receivable, and I agree that it seems like the taxpayer giving up their account receivable should be the one getting paid up to several dollars short of the estimated value of the AR (discounted for any probability of tax deceit in order to gain a higher refund). The refund money to the taxpayer is essentially money now and money later, however, and the interim investment potential of the AR to the company is not a bargaining tool for the taxpayer. This lack of information imposes a cost on the taxpayer, but then again, there is a cost to gaining information(=overcoming the costs of specialization?) as well.

So even though I agree with you, that it is a slight injustice for the taxpayer to be paying to receive their own money, I agree with Mr. Woods that it is silly to outlaw RALs, because they do represent some efficiency gain: all else equal, RALs speed up the return of stolen property to its rightful owners.

M E Hoffer August 17, 2006 at 7:26 pm

MG,

With this: “there is an injustice done to the taxpayer paying for the transfer of an AR because the one gaining the AR should be the one paying for it, due to the government’s “‘still’ AAA” credit rating and the practically zero chance of default on the AR.”– Simply, No.

I am saying that: the idea of Credit Risk, that may be construed to the taxpayer, does not apply.
The idea that there may be some kind of “Return Fraud” is bizarre– these firms do Not offer RALs on “home-brewed” 1040s– Hello, they are Not stupid.

And, I am saying that these firms are Not offering “loans” in the traditional sense, they Are factoring receivables, which is a vastly different transaction. Also, I am saying that: These firms that are calling these transactions: “Loans”, are less than fully honest, at the minimum.

Am I the only with access to Google.com?

They are pages of lawsuits against HRB pertaining to their RAL practice(-s). To say nothing of their high and higher fee IRA accounts/shennanigans.

MG, I’m not sure where you schooled-up on your Finance, but anytime you’d like to pay me Par+ for my AR, because:”The company receiving the AR, however, undoubtedly invests the AR to higher returns than the taxpayer (both prior to and after receipt of the account), and in that capacity it makes sense to think the company should pay for gaining the AR, because they value the money more highly.”– reinforce your credit lines, and let me know~~

Yancey Ward August 18, 2006 at 9:11 am

M E Hoffer,

There is not essentially zero risk of not recovering the RAL. Even though HRB sells them based on returns it has completed for taxpayers, there is risk that the taxpayer has not provided the proper information for the return. For example, claiming nonexistent dependents or not reporting all income received, etc. So there is credit risk involved.

M E Hoffer August 18, 2006 at 11:00 am

Yancey,

Strictly speaking, there’s a difference between outright Fraud and a bad Credit Risk.

You speak of “dependent inflation”, that’s indicative of one filing a long form 1040. If HRB is really susceptible, at this late date, to that kind of Fraud, it is, to me, just another hallmark of their Greed. They are either not investing in, fairly simple, predictive software to catch the potential discrepencies, or shortchanging their own “training” processes.

Personally, I really don’t care, I think HRB should circle the drain. How HRB’s business model, that includes their RALs and high-fee IRAs, squares with the sprit of Mises’ Human Action, is beyond me. I never understood that Mises was a proponent of business practices that border on, or are, fraudulent.

John Powers August 21, 2006 at 10:47 pm

M.E.,

Of course if that were the case (HRB is making a huge amount of money on such practices), in even a mildly free market, there would be a slew of competitors.

You are mostly free to start a competitive service charging less. I doubt it is all that profitable. Seems like a pain in the neck to me.

JBP

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