$1.5 Billion in Cash for the Working Class…at No Cost to Taxpayers

March 8th, 2010 by Al Lewis (alewis)

The federal government excels at throwing money at problems, no surprise given decades of practice.  They don’t need my help with that, which is why these posts always propose solving problems without throwing money at them. 

Today we tackle the “Tax Refund Anticipation Loan,” a total rip-off even as compared to the rest of the consumer-lending industry.    These loans work like this:  Tax preparers determine a client’s tax refund, and then offer to “advance” it, less fees and interest.  The problem is that “fees and interest” often amount to about 15% of the refund.   Refunds show up two weeks after filing anyway, which means that people are paying APRs that often approac h four figures for that two-week loan.

Multiply the 8-million of these loans by those fees and interest charges and you are looking at $1.5-billion being siphoned off from the working class.

The “inside the box” solution, as suggested on another blog, is to make these loans illegal http://www.paydayloanfees.info/news/Refund-anticipation-loan.html.   However, there are people who need the money and, in any event, making consumer loans illegal just drives them underground, increasing price and the potential for loan-sharking.

www.whytheheck.com instead proposes that the IRS simply add a line to the Form 1040 after the “This is your refund” line that says:  “Check here if you prefer 99% of this loan immediately deposited in your bank account as payment in full.”   (For people who don’t have bank accounts, 98% could be printed out in a check in the tax preparer’s office, with the other 1% going to the tax preparer for use of his printer.)

Even while giving consumers a big break, the government would actually make money on this transaction because its 1% “haircut” exceeds its cost of capital for those two weeks.  So everybody benefits.

The argument against this idea?   It would encourage fraud.  But the government doesn’t do anything to tax returns between filing and refund other than check math and plausibility – exactly the same level of scrutiny that it could do under this proposal. 

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12 Responses to “$1.5 Billion in Cash for the Working Class…at No Cost to Taxpayers”

  1. philr Says:

    based on your abortion posts I’m guessing you’re a Democrat but you would make an excellent Republican because you always point out things that the Democrats haven’t done anything about because they’re such idiots

  2. alewis Says:

    This site finds equal fault with both parties. You might recall that the abortion essay was actually a compromise. When the Republicans were in power, they didn’t do this either. I don’t understand what the problem is…

  3. soxfan Says:

    based on this math, you’d get a better deal from loan sharks. why does Obama let this ripoff continue? what is the reason for not getting rid of it?

  4. georgia Says:

    i worked for a tax prep company ten years ago as a seasonal tax preparer. they give you a bonus to sign people up for these loans. and so many fees!

  5. kilroywashere Says:

    GOOD IDEA BUT WHY SHOULDN’T THE IRS JUST GIVE PEOPLE 100% OF THEIR REFUND RIGHT AWAY??? WHY 99%???

  6. psyday Says:

    you should do soemthing like this for payday loans. There is a big article in the TImes today about what a ripoff they are

  7. yankeesfan Says:

    Soxfan and Geogia are right but payday loans are even worse. Credit card loans are close behind. You could do a whole website just on consumer lending

  8. worcesterbob Says:

    CAN YOU TELL US WHY YOU ASKED FOR IDEAS ON THE RADIO THE OTEHR DAY BUT THEN WE SEND THEM IN AND YOU DON’T PRINT THEM?

  9. alewis Says:

    Um, ‘cuz they aren’t any good? Look at this idea — everyone benefits (except a few middlemen). no government expenditures involved, no increase in the deficit. Actually the deficit goes down, albeit imperceptibly. Also, I am not interested in political rants. Plenty of other blogs for that.

  10. sara Says:

    On Dan Rea Tuesday night you said that it was bad to get a big health care benefit and Dan said what’s wrong with that? I didn’t qutie get what you two were saying/ HOw is it bad to get a big health care beneift?

  11. Cyberfool Says:

    For those seeking a good deal one option is Turbo-Tax after the cost of the software there aren’t anymore costs. Also through their affiliate programs you can convert some of your refund into Gift Cards for food/entertainment/shopping.

    One year we filed a return, and profited over $100 by getting several gift cards some as low as 75 cents for every Dollar of Face Value. I think Outback, Red Lobster, and Home Depot $100 cards were $75 actual cost.

    I am not affiliated with any of the companies above, nor can I guarantee that the same benefits/cards are still available, but it is worth looking into.

  12. Derek Says:

    My idea is:

    Electric generating Windmills of various sizes could be purchased by property owners. They would have these set up on their personal property. Then electric power is feed directly into the locally existing Electrical Grid. Power generated could first pay off the expense of the Windmill(s). Once the windmill is paid off, it then becomes a credit or a profit for the property owner. We could manufacture these Windmills in Massachusetts as well…Clean Power and Jobs too!

    Derek
    Mansfield, Ma

    PS I couldn’t call the Night Side show, because I called the show last night… but I’d still like that hat.

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