Friday, January 9, 2009

Credit Cards: A Tax on “Being Poor”

A long time ago, credit card interest was deductible. I think it should be again. The present system is not fair—certain practices are not acknowledged for the substantively regressive hardship they present.

The Public Government Safety Net

In times of need, we may draw on savings or turn to friends, family, and community resources. But when these fall short, we look to government as our final safety net. Since the time of the New Deal, and later the Great Society, and as our society has become more affluent, we have tended toward acknowledging the importance of the role of government in protecting our weakest citizens. I have argued that a society that is both prosperous and humane should take on the goal of providing a safety net for reasons that go beyond mere charity.

Anything from food to clothing to health care to education still needs to be paid for when one has no job, and yet—whether by oversight or by deliberate design—the government isn't always racing in with help.

Unemployment insurance sometimes helps, but it is limited in its scope to less than the person was making while employed, so there's a problem right out of the box. And it doesn't cover health care, which is often tied to the employment and typically becomes very expensive at that moment of a layoff when the unemployed person is suddenly paying not only their own contribution but their employer's as well. Everyone's situation is different, but the point is this: the public safety net we now offer has holes in it big enough for people to fall through.

It's nice to say that people should always plan ahead, but sometimes they don't, and quite often they can't—probably more often than appeases the conscience of the Haves in a society that is increasingly sharply divided into Haves and Have Nots. But for whatever reason, the situation comes where help is required and no help is there even from the government.

And yet life must go on.

Payments for mortgages, medical bills, home heating (and cooling), and food must still be made even at times that are financially inconvenient.

Commercial Lines of Credit

So when you're out of work and have bills to pay or when you're sick and cannot afford health care, if the public government cannot help, and regular bank loans are not readily available, all paths lead to the option that doesn't pester you with stupid, demeaning, or embarrassing questions about why you need money when you're making no money—the option that doesn't force you to admit the obvious, that you wouldn't be asking for an unsecured loan if you had an asset to offer as collateral.

We are at our most vulnerable when we're out of work, and yet it's assumed that the free market will resolve matters. Yet the free market knows that it can prey on people in times like these and get concessions no reasonable person would want to make—because for an individual thus alone, thus abandoned by their job, there is no other option. These are often people who did not let their company down—their company let them down. And yet we treat them as if they have nothing to offer and throw them to the wolves by allowing them to negotiate credit at these most vulnerable of times.

Commercial business needs credit at these times, too. But the government makes lines of credit more easily available to them, and at much better interest rates. Many prospective businesses have no asset to their name and may well outright fail, even spectacularly, and yet loans are available to businesses at rates that are not 25%, 36%, 75%, etc.—the kinds of rates that the free market capitalists tell us are not usury and are merely the market working happily to reach a fair price.

It isn't that the risk of business is less. The entire business world just collapsed around a hard-working workforce, and even now the government is seeking to offer single-digit rates to businesses that have a track record of failure to get them back on their feet, while doing nothing to help hard-working individuals who have never failed to do their job. It's just that the Public Government cares more about business than about ordinary citizens , especially those at low income levels. Public Government actively monitors and manages the economic health of business credit. Not so for the lesser class—for people, especially people who are not “of means.”

It's become fashionable for people who have not run into economic difficulty to claim that everyone should cut up their credit cards and operate with no such safety net, but I find it doubtful that business would advise shredding their line of credit. Credit is necessary to span unpredictable variabilities in expenses and income. It's one thing to not use a credit card. It's quite another to not have one.

While a commercial line of credit is an ordinary business tool, a credit card really is not. For one thing, it is not adequately regulated. So thinking of it as a poor man's business tool is not quite right. Let's try an alternate metaphor more suited to the lack of control that ordinary people experience when dealing with credit cards.

Private Government, and Commercial Safety Nets

A credit card issuer is a kind of private government, issuing passports freely in times of calm, allowing you to pretend a credit card is really just a charge card, something you pay back every month.

Those who are not wealthy know another truth about these cards: They are a place to request economic asylum when bills get out of hand.

Government is “a compulsory territorial monopolist of protection and jurisdiction equipped with the power to tax without unanimous consent.”
  The Myth of National Defense, page 8, as quoted by Wikipedia

As private governments, they offer a safety net to their citizens not offered to many citizens of the United States. Yes, they take people at their most vulnerable. Yes, they dictate their own terms with no fear of retribution. Yes, they tax mercilessly. But they provide aid where the public government does not, shelter in life's most awful of storms. As horrible as they are, they are also the savior of many people because they offer a chance just to survive where there may be no other chance.

So if one doesn't have cash and no one, including the public government, is offering help, there may be little other option than to use credit cards if they are available. This is true even of people who have faithfully maintained a zero balance on their cards. Because when you need money, you take it where you can get it at the rates it is offered.

It's sometimes easy to get lulled into believing that all problems with credit cards are the result of casual overspending that could be avoided by merely applying more self-control. Doubtless that's sometimes true. But not always. It is important to see that credit cards often serve a critical societal function that is not so easily dismissed: They offer necessary economic insurance to those to whom the public government turns a blind eye.

Private Tax

Black’s Law Dictionary (sixth edition, page 1457) defines a tax as a “pecuniary [i.e., monetary] burden laid upon individuals or property to support the government,” and goes on to call it “a payment exacted by legislative authority.”

Credit card interest rates operate as a “private tax.” The operating costs of citizenship in the private government of a credit card issuer are paid for by these taxes. It's set high by the credit card companies and there's no one there to say it should be otherwise. Congress has better things to do. But with their silence, they give consent. And Congress does the various laws to stand that provide enforcement of whatever these private governments decide about how the lives of certain people will play out.

What the credit card companies decide is, effectively, law. It's easy for the affluent to say that people could opt not to use the cards, or they could go for a different card, but the decisions that bind one to a credit card company are made at times when these are really not options, and when there is no one there offering alternatives. Such assertions show callous ignorance of the true burdens of being poor.

And, of course, if these interest rates were really recognized as what they are, a tax, the real government, the public government, would allow a tax deduction, not just on investment-grade loans like rich people with houses can afford, but also on street-grade loans like ordinary people who can't afford houses are left to take. It's not normally considered ok to tax someone twice. But it is when it's the poor. Who's going to speak for them? They're too busy working to pay their taxes to complain.

It can happen that all of one's income is going into paying this private tax even while the government—the real one, the public one—is looking at the person's income and thinking all of that money is available to be taxed. The ordinary citizen, the person who depends on credit cards to make ends meet, does not get a break on this.

If they were a business, they could deduct this interest. Because the government that caters to business—the public government—cares about this matter. Not only does a business get a lower borrowing rate, it gets a tax break to help pay the interest on money borrowed. But private citizens of the private government, the government of the lesser class, get higher rates and no help from the public government in paying the interest.

They may be living at a subsistence level with all of the money they pay credit card companies going toward interest. That means they are creeping ever more into debt and yet the the public government is still taxing them as if they have net income they should be sharing—ironically, so that more affluent people, those who really do have net income, don't have to pay tax. No wonder the poor cannot climb out of this state. The basic accounting is simply not fair.

Handouts vs. Double Taxation

There are some who manage their finances in such a way that they save up money for emergencies. And sometimes this works. But it's disingenuous to say that this can always work. It's trivially possible to show that there are possible emergencies that can come up in life that are bigger than one has had time to save for. Those who don't run into this case should count themselves lucky, but should stop claiming that just because that worked for them it will necessarily work for others. In the general case, it simply can't. And while it's clear that an increased savings rate would be helpful, it's not a complete solution.

Also, insurances such as life insurance and medical insurance are luxuries that many simply cannot afford because they already have too little money to meet today's needs, much less tomorrow's. Such people go uninsured not because they are too stupid to realize that insurance matters, but because they simply have no other choice.

It would be nice if money were made cheaply available to poor people in urgent need, as it is to rich people and businesses in urgent need. But I'll make the case for that another day. We can't solve every problem at once. Sometimes people have to help themselves.

That's my point. A person asking to not be taxed twice is not asking for a handout. They are trying to help themselves. But if they are faced with double taxation, they are not going to be able to do that. To borrow a phrase so often heard from Republican lips (usually when talking about the need to reduce “onerous” taxes on millionaires): “it's their money.” It only becomes the government's money when the government sees the opportunity to prey on them. It isn't asking for a handout to say that a person who is not breaking even should not be taxed; it's just asking that the government refrain from kicking people when they're down by doubly taxing them.

Pay-As-You-Go Socialism

Maybe we'll fix some of these inequities in upcoming years—health care, for example—but we probably won't fix all of them. People will still have emergencies they're not prepared for. So since the US is not a socialist state, we offer the capitalistic alternative: “pay-as-you-go socialism,” in the form of credit cards, available at market prices to those too poor to qualify for the well-regulated and more affordable interest rates the federal government offers to people of means. And, realizing credit cards are their only available alternative, less-well-off consumers swallow their pride and agree to pledge allegiance to these private quasi-governmental entities and to pay whatever private tax is required, in exchange for the financial services they require to get them through times of need where the real, public government has left them helpless.

And perhaps this seems fair to die-hard fans of the free market. But I'm not so sure that's a fair analysis since, the terms under which these cards are offered are not really subject to market forces. And, importantly, people of greater means would not have to be going through this because they qualify for government-sponsored loans at much lower rates.

They're in this position not because of some crime, but merely because they're poor. Had they been a bit richer, they might have qualified for the better loan rates straight from the government, or for tax deductions. So yes, maybe they do voluntarily enter into the agreement with the credit card company once they realize they are involuntarily not part of the elite club of people who don't need to do that. But I find that way of saying it just a little disingenuous; pardon me if I prefer other phrasing.

When people of greater means have access to lower interest rates and tax deductions, while people of lesser means do not, social justice cannot be achieved. People who have very little option but to use high rate credit cards to get them through hard economic times must put up with a practice that amounts to double taxation tax on money already consumed by their payment of this private tax. If you don't like the terminology I've picked, it doesn't change the fact of the inequity. One way or another there is an extra tax that needs to be accounted for. Call it, if you prefer, a tax on being poor.

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Originally published January 9, 2009 at Open Salon, where I wrote under my own name, Kent Pitman.

Tags (from Open Salon): line of credit, paygo, pay-as-you-go, capitalism, socialism, government handouts, safety net, public taxation, private taxation, public tax, public government, private tax, private government, interest, interest deduction, deductible interest, great society, new deal, double taxation, taxation, charge cards, credit cards, politics