Refund Anticipation Loans

There has been interesting news in the tax preparation world this week. The Office of the Controller of the Currency (OCC) announced on Christmas Eve that it was directing HSBC Bank not to fund any refund anticipation loans for H & R Block in 2011. Accordingly HSBC cancelled their contract with HRB, leaving Block without a provider for the coming tax season.

Since the ability to provide refund anticipation loans (RAL) to tax clients was a major marketing tool for Block, this is considered a body blow to the company. Shares of HRB dropped almost 8% when the news was announced.

A RAL is a short term loan made at the time a tax return is filed. The size of the loan is usually the calculated amount of the refund, less tax preparation fees, interest, and charges. Basically, the tax client signs over their IRS refund to the bank making the loan. When the IRS sends the refund to the bank, the loan is repaid. With electronic filing, the time the loan is outstanding averages about 10 days.

H & R Block bent over backwards to prevent this from happening. The company even offered to cover any credit losses that HSBC would have had, making the loans essentially risk free. Since the OCC did not change their position, I have to conclude that protecting the integrity of the banking system was not driving the regulatory action. This looks like a politically driven decision, based on consumer protection arguments.

Consumer protection activists dislike RAL’s, because the loans have very high calculated interest rates. This is because the $29.95 charge to process the loan is added to the actual interest charges, then divided by the length of the loan to determine the APR. For an example, let’s suppose you borrow $2000 at a 24% interest rate for 10 days. The interest charge would be about $13. A high interest rate, but the overall bite of $13 bucks isn’t too bad.

Now, add in the $30 loan processing fee to the $13, and work the calculation backwards. That calculation is $43, divided by $2000, times 36. That comes out to just over a 77% annual percentage rate.

Your outrage over this depends a lot on how you look at the transaction:
Outlook I
“I’m going to loan you money and charge you 77% interest.” “That’s usury! You’re no better than a loan shark!”

Outlook II
“I’m going to loan you $2000 for one to two weeks, and it will cost you $43.” “That doesn’t sound so bad, and I’d like to get the money as soon as I could. I’ll take the deal.”

In point of fact, millions of tax clients took the deal every year. Now they will be “protected” from making this choice by the OCC.

Qualitative Easing Explained...Twice

There is a service that takes text and converts it to simple animated video. Here is one that has been making the rounds. It is quite critical of the Fed's move towards quantative easing (AKA pumping money into the economy). The deadpan delivery of the computer generated voices makes it hysterically funny.


The video above got enough play to cause somebody to generate a response in the same format:


It is not as funny as the first one, but probably a little more balanced. I still think the Fed is playing with fire by running the printing presses.

A Bad Deal All Around

Sometimes compromise means taking the best from both sides of an issue, creating a consensus that leads the way forward.

That’s not what happened with the recent tax deal put together between the White House and the Republican leadership, however. In that case, the worst of both sides was adopted. The deal panders to the short term interests of the principals, while creating the conditions that will lead to more long term pain further down the road.

The Republicans campaigned on the twin themes of rolling back ObamaCare and enforcing fiscal discipline. The White House wanted to raise taxes to combat the deficit spending they created. So, to compromise, let’s do neither of those things.

The White House agrees not to raise anyone’s taxes. In exchange, the Republicans will support extending unemployment benefits for another 13 months, along with two more years of not applying social security taxes to the first $6600 of earned income. Oh yes, we’re continuing heightened payouts on the earned income credit as well.

The net effect of this deal is that government spending will exceed revenues by almost a trillion dollars next year and the year after. We will continue to provide a reverse incentive to find work, allowing people over two years to stay on the dole. The long term sustainability of the social security program is made worse, because we are starving the program of revenues from a vast cross section of the employed.

This is the reverse of leadership. This is kicking the problem of fiscal deficits down the road two years, while entrenching an entitlement mentality ever more firmly into a large section of the populace.

In every game of musical chairs, eventually the music stops. In this game of political musical chairs, what scares me is that by the time the music stops, we’ll find that all of the chairs have been taken away, and we’ll all fall down.

'Tis the Season ...

This is my annual Christmas diatribe. I can’t keep up my reputation as a “Bah, humbug” kind of guy without one.

This is the time of year when we are encouraged to give more. Everywhere you turn, someone has their hand out, asking for a donation. Bell ringers at the grocery store. Angel trees at church. At work we are running a cash drive to raise money to buy Christmas presents for a number of families.

I think we should all just go out to eat instead. Take the twenty bucks we could give away to buy presents for somebody else’s child, and buy a steak dinner with it.

“Oh, that’s horrible.” “Have you no Christmas spirit?” No, not much. Still, even if I had the Christmas spirit, my method makes more economic sense.

First, consider multiplier effects. In economic terms, a multiplier is when you spend a dollar, and the business where you spend it pays their employees and their suppliers. Those suppliers, in turn, spend their share of that dollar on their suppliers, and so on. Economic activities with a high multiplier give you more bang for the buck. A low multiplier means that the impact of a dollar spent is damped out pretty quickly. So if you want to spread Christmas cheer as widely as possible, you should seek out ways of spending your money with higher multiplier factors.

Think of throwing a stone into a pond. The ripples spreading out from that event are a function of the multiplier. The higher the multiplier factor, the further the ripples spread before dying out.

Consider buying toys with your money. Almost all of the toys in the stores are imported from China. Even if the retail markup on those toys is 50%, the immediate impact on the American economy is less than a dollar. If the first stage of your calculation is .5, it is very difficult to see how your multiplier can get over 1.0. Instead of throwing a stone into a pond, imagine throwing a stone into mud.

Now consider dining out. When you buy that steak dinner, the employees of the restaurant get paid. But all of the purveyors to the restaurant also get paid. And those purveyors are sourcing Colorado beef, corn fed with Iowa grain. All of the money you spend stays on shore, and get respent by Americans. The multiplier effect is much higher than if you buy toys at Wal-Mart.

Also, if you’re feeling generous after your steak dinner, you can give a bigger tip to the server. After all, it’s Christmas time. That way, the server can go out and buy presents for her own kids, instead of having strangers buy for them. Maybe it is just me, but I’d rather support the working poor than the non-working poor. At least the working poor are in the game, trying to support themselves and their families. Between Section 8 subsidized housing, food stamps, and Medicaid, I feel like my tax dollars are providing enough charity. I want to use my uncompelled donations to give extra benefits for extra effort.

And finally, if you give cash to the annual Christmas drive, you don’t even get to see the results of your giving. When you eat out, you get to enjoy your meal, deriving a real and tangible benefit from your expenditure. All in all, it makes a lot more sense to dine out more than to give to charity this time of year.

Oh, who am I kidding? I put twenty bucks in the envelope along with everybody else.