Hello and welcome back to MarketWatch’s Extra Credit column, a weekly look at the news through the lens of debt.
This week we tackle the economic forces driving borrowers into debt and how an age-old debt imposed on Haiti continues to affect the country today. But first, how the rich use borrowing to their advantage.
Debts can mean a tax break for some and a prison sentence for others
ProPublicas Billionaire Tax Returns Investigation more people are paying attention to the strategies rich Americans use to avoid taxes. It turns out that one of those tactics involves the beneficial use of debt. There’s even a tagline for it – Buy, Borrow, Die – that was the subject of a recent Wall Street Journal article.
In both the ProPublica and Wall Street Journal articles, I was struck by the way the rich chose to use debt as a strategy, while many borrowers I see in my reporting depend 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 learn more about it.
McCaffery said he first started thinking about the idea a few years into his career as a tax law teacher, when he noticed how certain tax law doctrines could benefit the wealthy. For example, the realization requirement, which means you don’t pay tax on an asset until it makes money.
This allows the rich to build up their wealth tax-free. For most of us, the problem with that method seems to be that “sooner or later you have to sell,” he said. But that’s 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 against 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 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. Upon their death, the assets pass to their descendants tax-free or with minimal tax treatment.
“If you need debt, you get screwed, you don’t need debt, you can use it as a tool to cheat the government and everyone else.”
When McCaffery first started talking about Buy, Borrow, Die 25 years ago, he said many were skeptical. First, there was no evidence that rich people exhibited this behavior. In addition, the approach is so against the way the 99% thinks about borrowing that it was hard to believe.
“They are trained from birth, they are trained in the womb, never a borrower or a lender. Debt is bad, debt will cripple you,” he said.
And indeed, middle-class borrowers are dealing with higher interest rates than what billionaires are being offered and they have bills to pay now; that means they have to tap into their wealth or earn money from work, which is taxed. For the poor, debt can often come in the form of loans that quickly fall prey to their need for money. “If you need debt, you get screwed, you don’t need debt, you can use it as a tool to cheat the government and everyone else,” McCaffery said.
For some, the consequences could be even more damaging than high interest rates. Just ask Charles Anderson, who spent 28 days in prison with over $2,500 in fines and unpaid court costs, AL.com reported this week. He was only released after his mother took $1,000 from her Social Security check and deposited it into his debt.
“In my opinion it’s a debtor prison because I owe money and you’re going to lock me up for it,” he told AL.com. “How is this the United States, where we’re supposed to have more freedoms than anywhere else in the world, and we lock people up because they don’t have money?”
Society’s focus on degrees is fueling student debt
The Wall Street Journal published an excellent article last week focused on the debt students take on for degrees offered by elite universities and the money those degrees bring in for the schools.
While the focus has been largely on film, acting, and other arts programs—which typically don’t require licensing—the story also reminded me of President Joe Biden’s recent executive order that would limit professional licensing requirements. Stay here with me.
Like many on Twitter be aware, the prestigious schools central to the WSJ piece use some of the same tactics and take advantage of the same economic forces as for-profit colleges that provide the certifications, training for licensure, and degrees students need — or at least think they do. they need – to get a job or increase income.
A major driver of this trend is the qualification of diplomas, or the idea that jobs require a higher level of education than in the past, even though employees perform the same tasks as in the past. In some cases, that may mean a license that used to be unnecessary to perform a job, in other cases, it means that a graduate degree is a ticket to getting noticed, as undergraduate degrees become more common.
In recent years, this phenomenon has led students to more schooling, research shows:. And higher education responds to that. Douglas Webber, an associate professor of economics at Temple University, said it’s not uncommon for schools to use buzzwords like “jumpstart your career” in marketing materials.
Those messages “try to reach people who, they have a job, but it may not be the job they envisioned,” he said. “You definitely see that, and not just from for-profit organizations or typically predatory institutions. You see that kind of marketing from pretty much everywhere, even audiences.”
Students see earning 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 been a trend over time of companies and industries trying to shift the cost of training to higher education and that’s vocational licensing and that includes graduate education,” he said.
Biden announced last week that he would ban cumbersome professional licensing as a way to… improve employees’ ability to change jobs, even if it has to cross state lines. That could make it easier for workers without the money to pay for school to get into those fields, said Kim Weeden, a sociology professor at Cornell University.
“If it costs you $400 to get a license and you have to enroll in very expensive continuing education courses every year, that’s a barrier to either acquiring the skills, or updating the skills. or apply the skills you already have,” she said.
There are some questions about how abolishing professional licensing, or at least addressing it, might affect inequality. Licensed professions generally have a wage premium, even on the low-paid side of the labor market. Other research indicates that women and racial minorities who have occupational licenses experience smaller pay gaps than those without the licenses.
The debt imposed on Haiti centuries ago
Debt is not only a factor 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 its independence from France in 1804 after a slave-led uprising stripped the colonial occupiers of power. But in 1825, supported by the threat of war, France decided 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 didn’t pay off until 1947.
That weight kept Haiti’s economy from taking off. The economist Thomas Piketty has said France must Haiti repay at least of $28 billion to cover the debt and its consequences.
“We are talking about 122 years when a young nation had to pay money for the only crime it committed: to fight and gain its independence to live a free life, a life of dignity,” said Jean Eddy Saint Paul, the founder. director of the Haitian Studies Institute at the City University of New York.
Debt to France was followed by decades of economic and political meddling in Haiti by the international community that laid the groundwork for the current turmoil, said Saint Paul, a professor at Brooklyn College. For example, the United States began a nearly 20-year occupation of Haiti in 1915, following the assassination of Haiti’s president, in part for fear that the money owed to France would tie Haiti too closely to the country. The US too moved Haiti’s financial reserves to the United States.
In more recent years, Haiti’s economy has been the victim of a neoliberal “on steroids” economic program that prompted the country to open up its economy to the world, allowing goods to pour in and destroying the agricultural sector, said Robert Fatton Jr., a 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 can’t understand Haitian politics without understanding the foreign entanglements in Haiti’s affairs — not just in terms of the politics of the place, but in terms of the economy.”