SF Chronicle Nails Big Consumer Ripoff

April 11th, 2010 by Al Lewis (alewis)

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/04/09/ED7H1CSB4H.DTL

During tax season, millions of people become victims of government-licensed loan sharks. That temporary storefront in your local neighborhood might say “tax preparation,” but in some cases it should say “high-cost loans.”

Here’s how it works: After these tax preparers calculate a customer’s tax refund, they offer a 90 percent payout on the spot, a so-called Tax Refund Anticipation Loan. For example, if you’re due a $100 refund, the preparer might offer you $90 in cash immediately in exchange for signing over your rights to the $100.

Since refund checks normally arrive in 10 to 15 days anyway, that $10 “haircut” is almost 1 percent per day in interest - about what loan sharks charge. Yet almost 9 million lower-income customers accept these offers. In fees and interest, the loans drain these taxpayers of more than $1 billion annually.

Naturally, consumer advocates have proposed abolishing them. But trying to outlaw a free market service would simply drive it underground (think Prohibition). Also, some people really do need the money quickly - otherwise, why borrow it in the first place?

Instead of making these loans illegal, how about simply making them obsolete, freeing up cash for those 9 million consumers while saving the government money? The IRS could achieve this dual benefit by adding a single line to the federal tax return: “Check here if you would like 99 percent of your refund immediately deposited in your bank account instead of 100 percent mailed to you.”

Even that 1 percent haircut for a two-week “loan” carries a high enough interest rate that the government would make money on these instant refunds; borrowing money for two weeks costs the government much less than 1 percent. More important, these taxpaying consumers would save more than $1 billion per year. (Some customers of tax preparation companies do not have bank accounts and would have to pay an extra percent or two to the tax preparer to print the refund check in his or her office. Even so, they are better off than with a high-cost loan.)

It’s not just the storefront customers who would benefit. Anyone due a refund could get 99 percent of it instantly to pay down high-interest credit cards or to just spend sooner, benefiting the entire economy.

So why isn’t this standard IRS policy? It’s not because of fraud concerns. The preliminary tax return analysis done before issuing refund checks is pro forma. The IRS simply reviews the math and income-expense documentation electronically, while real fraud can take years to detect. The IRS can’t argue that this proposal requires congressional approval, because it doesn’t cost the government anything or require any new laws.

It could simply be an idea whose time has come. It’s hard to imagine any legitimate reason not to see this option on our 1040 forms next year. It’s an easy way to save consumers and the federal government billions just by providing an alternative to usurious moneylenders.

 

Al Lewis is credited with inventing disease management; he seeks out original economic policy ideas on his Web site www.whytheheck.com and pays $500 to $1 million for the best ones.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/04/09/ED7H1CSB4H.DTL#ixzz0knGPwBBg

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