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Rolling Jubilee and the Pesky Tax Problem

12:04 pm in Taxation by masaccio

The Parable of the Workers in the Vineyard by Jacob de Wet

When I checked last, Rolling Jubilee had raised $456K, and hoped to use it to wipe out over $9.1 million of debt. Unfortunately, there is a risk that some debt forgiveness will be treated as income by the Internal Revenue Service. Yves Smith gives a detailed description of the problems, and urges Rolling Jubilee to spend the money it takes to hire a serious tax lawyer. I agree with her that the FAQ on the site isn’t satisfactory, and I hope the organizers will deal with the problem.

Even if they don’t, many of the beneficiaries will be OK. You only get the income problem to the extent that forgiveness of debt restores you to solvency. The IRS uses a complex rule about solvency which you can find here. Generally, the test is whether your liabilities exceed your assets. Your assets include all of your retirement accounts, even though they can’t be reached by creditors, and any equity you might have in property that is collateral for a debt. Then, you have income to the extent that after the debt forgiveness, you are made solvent.

For example, suppose you have a debt of 50K and total assets of 30K. If a creditor forgives 10K of debt, you are still insolvent, so no income. If the creditor forgives 20K, you are still not solvent, and again, no income. If the creditor forgives 25K, you have income of $5K. Obviously that isn’t a good thing.

Rolling Jubilee will not file the form the lender is supposed to file when it forgives debt. They may not be able to contact the debtor to say that they have forgiven the debt. In that case, the debtor might have income but not know it, and neither would the IRS. That defeats the point of forgiveness of debt, because the debtor is still worried about the debt. Still, it might solve the income problem unless the IRS forces Rolling Jubilee to file the forms. That is a major point raised by Yves Smith.

If Rolling Jubilee can find the debtor, there is another alternative. Suppose the debt is a deficiency balance from a bad mortgage loan. Forgiveness could easily be big enough to restore the debtor to solvency. The best solution in this case is for Rolling Jubilee to reach out to the debtor to find out how the mortgage came into existence, how the debtor was treated during while the mortgage was in default, and how the foreclosure was handled. It is highly likely that the debtor has valid defenses to the debt. It may have been a fraud from the outset, the debtor might have been abused by the servicer in the foreclosure process, and the foreclosure itself may have had serious defects. It is highly likely that the debtor has several potential defenses to the debt.

In this case, Rolling Jubilee and the debtor can enter into a settlement agreement in which both sides release each other from all claims. In that situation, there is no debt forgiveness. Instead, each side gives consideration to the other to avoid litigation and serious loss. The situation can be improved if the debtor provides a statement of assets and liabilities and a budget showing that collection of the amount owed is highly unlikely. It is further improved if the debtor pays something towards the debt. That money can be used by Rolling Jubilee to offset the expenses of reaching out and settling, or even to buy more debt.

The first purchases are of medical debt. In some cases that could be enough to restore a person to solvency. It too can be settled along the same lines. There may be defenses even to medical debt, because of the billing practices of the medical community or because the hospital screwed up on collecting from an insurance company. There are more novel defenses, such as duress, in that the person wound up getting treated while frightened by illness and unable to protect herself from predatory billing and overtreatment. Hospitals and doctors bill differently depending on a number of factors, so that may give rise to a defense.

Even if there are no valid defenses, there are delay and litigation possibilities and there are grave difficulties in collection. In this case, the financial information and a reasonable settlement amount will justify the settlement, producing no income. It has the added benefit of giving the debtor an opportunity to pay the debt relief forward, which is very important to many people.

Rolling Jubilee is a great idea and I hope it has legs. It could open the door to a discussion of the place of debt in a violently unequal society.

Rich Lend to Government Instead of Paying Taxes

2:11 pm in Uncategorized by masaccio

Drop the Debt, photo by Paul Miller at Flickr

The Tax Justice Network says that the richest people around the world have hidden between $21 and $30 trillion in tax havens, safe from the demands of their fellow citizens that they participate in funding the operations of governments by paying taxes. What do the rich do with that money? We know they play speculative games with the money, trying to profit from other rich people or pension plans, and money people are trying to save for retirement or for college expenses for their kids. But the main thing they do with money is lend it out. One of their favorite borrowers is the US government. It won’t default, and that interest check shows up when it’s due.

That’s our deal with the rich: they don’t have to pay taxes to fund the government, we just borrow from them, and pay them interest forever.

The figures for government debt growth are astounding. Thirty years ago, the world embarked on a massive tax-cutting program, led by the US. In that time, according to the Bank for International Settlements, governmental debt in 16 OECD economies (deflated by consumer prices) quadrupled. We are all paying interest on that to the people who own those sovereign obligations. If governments had raised that money by taxation, we wouldn’t be paying for the privilege of operating a government. Other non-financial sector debt has grown at similar rates.

As a side note, when trying to explain why this massive increase in debt loads, the Bank for International Settlements didn’t mention the massive tax-cutting regime in the developed nations.

The implications of this tax and borrow deal are infuriating. For one thing, billionaires like Peter Peterson can scold the government about its massive debt, while sucking out guaranteed interest payments, directly, and indirectly through their foundations and corporations. They can use their fellow travelers, like Bloomberg columnist Caroline Baum to persuade the gullible that we don’t have any money to fund Social Security and Medicare, because we have to pay the interest on that debt, and we can’t raise taxes because that would be useless, and reflective of an unattractive urge to hurt the rich for no good reason.

Since the Great Crash of 2008 we’ve been trying to muddle through and get back to some golden age of normal, like the 2000s, so the financial sector can continue its pillage. That isn’t going to work, and the ever alert Zero Hedge is, as usual, ahead of the curve. Last September, they posted a discussion of a study by Boston Consulting Group on the enormous fiscal problems facing the world. BCG isn’t impressed with the kick the can down the road approach that politicians in every nation have adopted. They think we need to restructure debt; hence the title of their paper, Back to Mesopotamia, a reference to a Debt Jubilee idea of that ancient ancestral society. An easy way to finance that restructuring is to tax existing assets. I didn’t realize polite people would say things like this in public:

Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations will be unable to meet their commitments.”

This tax isn’t some piddling thing, either. The US would need a one-time tax of 25% of wealth. The Boston Consulting Group admits the evident unfairness of this in the context of recommendations for solving the housing crisis in the US:

Such a course of action would pose a significant issue of moral hazard, benefiting those who were reckless and imposing a share of the burden on those who were careful [or lucky]. But the government could conclude that the total economic and social costs of a prolonged period of low growth and deleveraging are so huge that unconventional measures are justified. After all, inflation would have even worse side effects.

(Me in brackets). As they say, we can’t keep on with this pretend solution regime forever. Maybe we’ll inflate away the savings of millions of Americans until we have social disruption, or maybe we’ll try austerity until we have social disruption. The debt won’t get paid. The only realistic way out is to inflict that loss on the people who can bear it best, the richest among us. Thus spake Boston Consulting Group.