With the arrival of Tax Day next week away, an article in The New York Times this week details the latest way in which the working poor serve as a profit center for American business. By siphoning off hundreds of dollars in fees from some of the nation’s neediest taxpayers, the $100 billion tax preparation industry–from small neighborhood storefronts to big time chains like H&R Block–can diminish the economic lifeline that tax refunds have come to be for millions of America’s struggling families. Alongside payday loans and car title loans, questionable tax preparation fees for the poor underscore how corporations profit from poverty. Even as more people fall further behind economically year after year, the financial sector will find a way to make money off of it.
The challenge is that tax refunds are one of the important ways that America fights poverty. Close to 50 million Americans are in poverty. Close to one out of three blacks, and one out of four Latinos is poor. Most of those who are in poverty work and have children.
A Critical Tax Rebate for the Poor…
Starting under President Clinton and expanded under President Bush, the Earned Income Tax Credit (EITC) was instituted to transition millions of American families from welfare to work as Aid to Families with Dependent Children, welfare’s official name, was wound down and eliminated. The point was to make low-wage work pay. That’s because without the credit many families can’t earn enough to live. Even with the credit, large numbers of the working poor, especially those without children, have jobs but remain officially in poverty. Regardless, the credit is crucial piece of anti-poverty policy.
Each year the Federal government returns $60 billion to 26 million struggling households in the form of the EITC. According to the Center on Budget and Policy Priorities (CBPP), a non-partisan think tank, the EITC keeps 10 million people out of poverty, half of them children. The average size of the benefit is $2,900 and makes a big difference in the life of recipients. As the Center on Budget and Policy Priorities points out, the children of EITC beneficiaries "are likelier to do better in school, are likelier to attend college and earn more as adults."
But like middle and upper income tax payers, working poor tax payers need help in getting their returns together. The problem is that low-wage can often be temporary meaning that a worker may have multiple employers during the course of the year. Moreover parents raising children have to document other income sources such as child support or financial assistance from another relative. The need to understand how to file correctly spurs low-wage workers to seek out tax prepares.
As the Times lays out, as if on cue, the tax preparation industry responds to the need. As early as December "they begin showing up in empty storefronts in neighborhoods where empty storefronts are easy to come by" the Times reports.
…And a Profit Center for Tax Preparers
Tax preparation businesses, which generate $10 billion in profits annually, can charge the working poor hundreds of dollars for what is to them routine work that can take a matter of minutes. Supermarket cashier Brittany Dixon told the Times that for a half an hour of work, the tax preparer charged $400. "That is a car note" Dixon says.
The fact that these fees can represent more than one out of seven dollars that the average EITC recipient gets, as in Dixon’s case, shows how tax preparation can hurt a family’s bottom line.
Arriving in the spring, the EITC refund helps keep poor families afloat for the rest of the year. It provides emergency funds for an unknown such as a broken tire, is used to pay for back-to-school needs or day care over the summer. Given how close these families are to the edge, the slightest financial change can push them right over. The hundreds of dollars that that an EITC recipients fees contribute to the multi-billion dollar tax preparation industry could easily cascade into financial disaster. Missed car payments, which could result in Dixon’s case, and the inability to get to work can translate into lost jobs and worse.
Poverty and Big Business
But skimming money off of the working poor at tax time isn’t the only way that the poor are big business. In fact they face an array of predatory financial practices that make poverty an even heavier financial burden and harder to escape. Given that 50 percent of Americans are either in poverty or one step away from being poor, who makes money off of the most vulnerable must come into sharper focus.
All of this is why Professor Thomas Edsall of Columbia University last year wrote in The New York Times, that there are "multiple pathways eager moneylenders have found to profit from the cash needs of the poor."
A prime example is payday loans in which struggling lower-wage workers borrow small amounts of money as a bridge between paychecks. The multi-billion dollar payday loan industry generates massive profits by charging interest rates of up to 400 percent and tacking on additional fees on loans which average just $350.
As the Center for Responsible Lending points out, even moderate income households of $35,000 don’t generate enough income to cover basic household expenses. This fact underscores the driving force behind the working poor turning to these loans: the basic desire to make ends meet.
The difficulty is that these financial instruments are structured so that they can’t actually ever be paid back. Taking-out even one loan spurs borrowers to take out a second to cover the expenses from the original debt and so on. This "treadmill," as the Center for Responsible Lending calls it, of repeat borrowing is where financial companies make their profit: it’s why many offer the first-day loan for "free" in order to get borrowers in the door.
Though designed for the poor, America’s wealthiest banks make money off of them. Bank of America, JP Morgan Wells Fargo and others finance them through different storefront names and are all profiting handsomely from these sky-high short-term loans.
Payday loans flow out of the historic redlining of poor districts where poor communities and communities of color were systematically denied traditional financial and banking services provided to other areas. Though redlining is now illegal, banks have little incentive to reverse their legacy of discrimination. That’s because there’s money to made off of payday loans rather than on traditional accounts. And it’s why Democratic Senator Elizabeth Warren of Massachusetts has suggested that post offices begin offering a broader range of financial products: doing so would be scale-back payday lending abuse.
The same is true for auto title loans in which car owners use their automobile as collateral for short-term loans. Though the average loan is $951 for car title loans, with annual interest rates of up 300 percent a borrower could end up paying $3,093 (PDF) back to the financial institution which made the loan in the first place.
Tax preparation, payday loans and car title loans show the multiple ways in which the poor serve as a profit center for America’s biggest corporations often at their own expense. Individuals who take out payday loans, for example, are more likely to default than those who do not.
As the country examines ways to fight poverty and income inequality, surely one place to start is to ameliorate the financial hardship of the working poor which helps fuel the bottom lines of America’s most storied companies.