Do Instant Tax Refunds Exploit Low Income Earners

BusinessWeek’s recent cover story about how corporate America is milking the poor, The Poverty Business, touched a nerve. I’ve long been disgusted by such scams as payday loans and check cashing “services” which prey on the working poor. The article points out that:

“In recent years, a range of businesses have made financing more readily available to even the riskiest of borrowers. Greater access to credit has put cars, computers, credit cards, and even homes within reach for many more of the working poor. But this remaking of the marketplace for low-income consumers has a dark side: Innovative and zealous firms have lured unsophisticated shoppers by the hundreds of thousands into a thicket of debt from which many never emerge.”

My outrage at this unconscionable exploitation carries with it the shock of recognition. For the past two tax seasons, I’ve been employed by a local branch of a national tax preparation company. (Not that one, the other one.) It’s a temporary job, only during the “peak” season. That’s the time near the end of January through early February when those who expect a large refund get their W-2s.

Many of those people are among the working poor. They use their Federal withholding as a savings account, and are so eager to get their hands on their refund, they are willing to forgo a large percentage in order to get it right away.

Let’s set aside the fact that the U.S. government holds their money throughout the year on an interest free basis. These folks generally do not have bank accounts. If they did not pad their withholding, they’d end up owing the IRS and have no way of paying their tax bill.

During the “peak” tax season, the working poor show up at the tax preparation office with their W-2s and pay through the nose – not to get their returns completed, which is a standard fee based on the complexity of the return but they pay huge amounts of interest in order to get their money ASAP. They could use any number of free tax preparation services available for low income people, but are either unaware such places exist, or, more likely, far too eager to get their refunds.

Time after time, I would go through the options with such clients, pointing out that by filing electronically and paying just the preparation fee, they could expect to get all of their refund in as little as a week. That option was at the far left of the screen. As we traversed the options to the right, I would point out that while they could get their refund sooner (in a couple of days, by the next day, or even “instantly”), the bank would take more and more of their refund away from them.

I was astounded that the overwhelming majority of people wanted their refund immediately, whatever the cost.

I wanted to shout at them: “You have no money. You are literally throwing away hundreds of dollars that you really need. Are you crazy?”

But I said nothing. First, it was their choice, and since I invariably recommended the lowest cost option, I rationalized that I was off the hook, conscience-wise. Secondly, the very reason they had come into our office was the fact that they could get that refund right away. They wanted and needed the money right now.

So, we’re offering our customers a service, right?

I’m not so sure anymore.