Hello and welcome to Extra Credit, a weekly overview of the news through the lens of debt!
This week, we tackle the economic forces that pull borrowers into debt and how centuries-old debt imposed on Haiti still affects the country today. But first, how the rich are using borrowing to their advantage.
Debt can mean a tax advantage for some and jail for others
ProPublica’s survey of billionaire tax returns has drawn more people to the strategies wealthy Americans use to avoid paying taxes. It turns out that one of those tactics involves the beneficial use of debt. There’s even a slogan for it – Buy, Borrow, Die – which was the subject of a recent Wall Street Journal article.
In articles for ProPublica and The Wall Street Journal, I was struck by how the wealthy have chosen to use debt as a strategy, while many borrowers I meet in my stories rely on loans because they have to. I called Edward McCaffery, a professor at the Gould School of Law at the University of Southern California, who says he coined the phrase Buy, Borrow, Die decades ago, to find out more about this. subject.
McCaffery said he started thinking about the idea a few years after starting his career as a tax law teacher, when he noticed how certain tax law doctrines can benefit the wealthy. For example, the realization requirement, which means you don’t pay taxes on an asset until it produces cash.
This allows the wealthy to build up their wealth tax-free. For most of us, it would seem that the problem with this method is that “sooner or later you have to sell,” he said. But this is actually not the case. As long as someone is rich enough to live on a percentage of their assets, they never have to sell.
Instead, they can borrow against those assets at an interest rate well below the rate at which the assets will appreciate over time, McCaffery said, and use those funds as spending money. But unlike the wages and salaries that most people use to pay for their living expenses, the loan is not taxed, so they face a relatively low tax bill. Once deceased, assets pass to their descendants tax-free or with minimal tax treatment.
“You need debt, you get screwed, you don’t need debt, you can use it as a tool to screw up the government and everybody.” ”
When McCaffery started talking about Buy, Borrow, Dying 25 years ago, he said many were skeptical. For one thing, there was no evidence that rich people engaged in this behavior. Plus, the approach goes so against the way the 99% think about borrowing that it was hard to believe.
“They were formed from birth, they were formed in the womb, never a borrower or a lender, the debt is bad, the debt will cripple you,” he said.
And indeed, middle class borrowers face higher interest rates than billionaires and they have bills coming up now; it means that they have to operate their assets or earn money by working, which is taxed. For the poor, debt can often take the form of loans that quickly deplete their need for funds. “You need debt, you get screwed, you don’t need debt, you can use it as a tool to fuck up the government and everybody,” McCaffery said.
For some, the consequences can be even more pernicious than high interest rates. Just ask Charles Anderson, who spent 28 days in jail over $ 2,500 in fines and unpaid court costs, AL.com reported this week. He was not released until his mother took $ 1,000 from his Social Security check and used it to cover his debt.
“In my opinion, it’s a debtors prison because I owe money and you’re going to lock me up for it,” he told AL.com. “How’s it going in the United States, where we’re supposed to have more freedoms than anywhere else in the world, and we jail people for no money?” “
Society’s focus on degrees fuels student debt
The Wall Street Journal published an excellent article last week highlighting the debt incurred by students for graduate degrees offered by elite universities and the money those degrees make for schools.
While much of the focus has been on film, theater, and other arts programs – which typically don’t require a license – the story also reminded me of President Joe Biden‘s recent executive order that would reduce professional license requirements. Stay with me here.
As much on Twitter highlighted, the prestigious schools that were the focus of the WSJ article use some of the same tactics and benefit from the same economic strengths as the for-profit colleges offering the certifications, education for licensure, and degrees which students need – or at least think they need – to find a job or increase their income.
One of the main drivers of this trend is accreditation, or the idea that jobs require higher levels of education than before, even if workers perform the same tasks as in the past. In some cases this may mean a bachelor’s degree that was not required to do a job, in others it means a graduate degree is a ticket to stand out as bachelor’s degrees are becoming more common. .
In recent years, this phenomenon has pushed students towards more schooling, the research indicates. And the higher education industry is benefiting. Douglas Webber, associate professor of economics at Temple University, said it was not uncommon for schools to use buzzwords like “start your career” in marketing materials.
These messages “are trying to reach people who, they have a job, but it may not be the job they envisioned,” he said. “You certainly see that, and not just for-profit or generally predatory institutions, you see this type of marketing almost everywhere, even from the public. ”
Students see getting another degree as a way to improve their prospects in part because employers demand additional degrees at all levels of the job market, Webber said.
“There has just been this trend over time of companies and industries that have tried to shift the cost of training to higher education and it’s the professional license and it’s also higher education,” did he declare.
Biden announced last week that he would ban heavy work licenses, in order to improve the ability of workers to change jobs, even when it requires crossing state borders. This could make it easier for workers who do not have the funds to pay for their studies in these fields, said Kim Weeden, professor of sociology at Cornell University.
“If you need $ 400 to get a license and you have to enroll in very expensive continuing education courses every year, that’s a barrier to accessing skills training, updating skills or applying skills that you have already done, ”she said.
Some questions arise as to how the abolition of professional licenses, or at least their abolition, might have an impact on inequalities. Licensed occupations generally have a wage advantage, even at the lowest paid level of the labor market. Other research indicates that women and racial minorities who have professional licenses experience smaller pay gaps than those without.
The debt imposed on Haiti centuries ago
Debt is not only a force in the lives of individuals, it can also destabilize an entire country. The recent unrest in Haiti following the assassination of the country’s President, Jovenel Moïse, highlights the role that financial exploitation by the international community has played in Haiti’s political and economic challenges.
Haiti declared independence from France in 1804, after a slave-led rebellion wrested power from the colonial occupiers. But in 1825, France, supported by the threat of war, ordered Haiti to pay 150 million francs in exchange for the recognition of the country’s independence. To make the payments, Haiti had to borrow money from French banks – a debt it did not repay until 1947.
This weight has kept Haiti’s economy from taking off. Economist Thomas Piketty said France should repay Haiti a minimum of $ 28 billion to cover the debt and its consequences.
“We are talking about 122 years that a young nation had to pay money for the only crime it committed: to fight and gain independence in order to lead a free life, a life of dignity,” said Jean Eddy Saint Paul, the founder director of the Institute of Haitian Studies at the City University of New York.
The debt to France was followed by decades of economic and political interference in Haiti by the international community which laid the groundwork for today’s unrest, said Saint Paul, a professor at Brooklyn College. For example, the United States began occupying Haiti for nearly 20 years in 1915, following the assassination of the Haitian president, in part out of fear that money owed to France would tie Haiti too much to the country. The United States also transferred Haiti’s financial reserves to the United States.
In recent years, the Haitian economy has been the victim, among other things, of a neoliberal economic program “on steroids” which has pushed the country to open its economy to the world, allowing goods to flow in and devastate the agricultural sector. said Robert Fatton. Jr., professor of politics at the University of Virginia.
“We have a long history of foreign involvement in Haiti,” said Fatton, who has written several books on the country. “You cannot understand Haitian politics without understanding the foreign entanglements in Haiti’s affairs – not only in terms of local politics, but also in terms of economics. ”