Hello and welcome back to Extra Credit, a weekly look at the news through the lens of debt!
This week we take a look at the economic forces driving borrowers into debt and how Haiti’s centuries-old debt continues to affect the country today. But first, how the rich are using borrowing to their advantage.
Debt can mean a tax break for some and jail for others
ProPublica’s investigation into billionaires ‘tax returns has resulted in more people paying attention to rich Americans’ strategies for avoiding taxes. As it turns out, one of these tactics involves taking advantage of debt. There’s even a catchphrase for it – Buy, Borrow, Die – that was the subject of a recent article in the Wall Street Journal.
In both the ProPublica and Wall Street Journal articles, I was surprised at how the rich have chosen debt as a strategy, while many borrowers I encounter in my coverage rely on credit because they have to. I called Edward McCaffery, a professor in the University of Southern California’s Gould School of Law, who said he coined the term Buy, Borrow, Die decades ago to learn more about it.
McCaffery said he first pondered the idea a few years after teaching as a tax lawyer when he noticed how certain doctrines of tax law could benefit the rich. For example, the realization requirement, which means you don’t pay taxes on an asset until it produces cash.
This allows wealthy people to build up their wealth tax-free. For most of us, the problem with this approach seems to be that “sooner or later you have to sell,” he said. But that is actually not the case. As long as someone is rich enough to live on a percentage of their wealth, they never have to sell.
Instead, they can borrow on those assets at an interest rate much lower than the rate at which the assets will rise over time, McCaffery said, and use those funds as pocket money. But unlike the wages and salaries most people make a living on, borrowing isn’t taxed, so they face a relatively low tax burden. After her death, the assets pass to her descendants tax-free or with minimal tax treatment.
“Need debt, get screwed, don’t need debt, you can use it as a tool to fool the government and everyone else.”
When McCaffery started talking about Buy, Borrow, Die 25 years ago, he said many were skeptical. For one thing, there was no evidence that wealthy people exhibited this behavior. Furthermore, the approach contradicts the thinking of the 99% about borrowing that it was hard to believe.
“You were trained from birth, you were raised in the womb, neither borrower nor lender, debt is bad, debt will cripple you,” he said.
Indeed, middle class borrowers are facing higher interest rates than they are being offered to billionaires, and their bills are now due; that is, they have to tap into their wealth or work to earn money that is taxed. For the poor, debt can often come in the form of loans that quickly meet their cash needs. “You need debt, you get screwed, you don’t need debt, you can use it as a tool to fool the government and everyone else,” McCaffery said.
For some, the consequences can be worse than high interest rates. Just ask Charles Anderson, who spent 28 days in jail for over $ 2,500 in fines and unpaid court fees, AL.com reported this week. He was only released after his mother deducted $ 1,000 from her social security check and added it to his debt.
“I think it’s a debtors’ prison because I owe money and you’re going to lock me up for it,” he told AL.com. “How is it in the United States, where we’re supposed to have more freedom than anywhere else in the world, and we lock people up because they don’t have money?”
Society’s focus on testimonials drives student debt to student
The Wall Street Journal published an excellent article last week highlighting the debt students incur for graduate degrees offered by elite universities and the money those degrees generate for schools.
While the focus was primarily on film, drama, and other arts programs – which usually don’t require licenses – the story also brought me to mind of President Joe Biden’s recent ordinance that would limit the requirements for a license to practice. Stay here with me
As many pointed out on Twitter, the prestigious schools that were the focus of the WSJ article employ some of the same tactics and benefit from the same economic forces as for-profit colleges that offer the certifications, licensing and degrees that students need – or at least think they need – to get a job or increase their income.
A major driver of this trend is the notarization or perception that jobs require a higher level of education than before, even though workers are performing the same tasks as in the past. In some cases this may mean a license that was not previously required to perform an activity, in others it means that a college degree is a ticket to stand out as bachelor’s degrees are becoming more common.
In recent years, this phenomenon has led students to more school education, research shows. And the university industry benefits from it. Douglas Webber, associate professor of economics at Temple University, said it was not uncommon for schools to use buzz words like “jumpstart your career” in marketing materials.
These messages “are trying to reach people who have a job, but it may not be the job they wanted,” he said. “You definitely see this and not just from for-profit or typically predatory institutions, you see this type of marketing practically everywhere, even in public.”
Students see earning another degree as a way to improve their prospects, partly because employers at all levels of the job market require additional qualifications, Webber said.
“Over time there has been this trend in companies and industries that have tried to shift the cost of training to higher education, and that is professional licenses and higher education too,” he said.
Biden announced last week that it would ban annoying professional licenses to improve workers’ ability to change jobs, even if it requires moving across state lines. This could make it easier for workers without the school funding to get into these areas, said Kim Weeden, a sociology professor at Cornell University.
“When it takes $ 400 to get a license and you have to sign up for very expensive continuing education courses every year, that is a hurdle to either gaining the skills, or keeping the skills updated, or the skills apply that you already have, “she said.
There are some questions about how abolishing the license, or at least reducing it, could affect inequality. Licensed professions usually have a wage premium, even at the lower end of the labor market. Other research suggests that women and ethnic minorities who hold a professional license have less wage differentials than those without them.
The debts that were imposed on Haiti centuries ago
Debt is not only a force in individual life, it can destabilize an entire country. The recent riots in Haiti following the assassination of the country’s President Jovenel Moïse highlight the role of financial exploitation by the international community 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, asked Haiti to pay 150 million francs to recognize the country’s independence. To make the payments, Haiti had to borrow money from French banks – a debt it didn’t pay off until 1947.
That weight prevented Haiti’s economy from gaining momentum. Economist Thomas Piketty has said France should repay Haiti at least $ 28 billion to cover the debt and its aftermath.
“We are talking about 122 years that a young nation had to pay for the only crime it has committed: to fight and gain independence in order to lead a free life, a life in dignity,” said Jean Eddy Saint Paul, the founder director of the Haitian Studies Institute at the City University of New York.
The debt with France was followed by decades of economic and political interference from the international community in Haiti that laid the foundation for today’s unrest, said Saint Paul, a professor at Brooklyn College. For example, after the assassination of the Haitian President in 1915, the United States began an almost 20-year occupation of Haiti, partly out of fear that the money owed to France would tie Haiti too much to the country. The US also moved Haiti’s financial reserves to the United States.
In recent years, Haiti’s economy has been the victim of a neoliberal economic program “on steroids” that pushed the country to open its economy to the world, flooding and devastating goods in the agricultural sector, said Robert Fatton Jr., professor of Politics at the University of Virginia.
“We have a long history of overseas 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 just in terms of local politics, but also in terms of the economy.”