National Politics Wed Feb 04 2009

David Cay Johnston on the Tax Code: It's Too Much Gherkins.

By Ramsin Canon

Well, that's not what he says, that's what I say; what he does say, though, is enough to make you want to man the barricades. David Cay Johnston isn't a doctor, but he's got a therapy for what ails us:

Stop Indenturing Students

Over the past 40 years, the cost of public colleges has doubled, and financing tuition is an $85 billion a year business for credit companies. Sallie Mae, the biggest of the private student loan companies, earns an average 48 percent annual return, three times the return of commercial banks. Students who sign up for loans with what appear to be low fixed rates may discover upon graduating that they face an 18 percent rate; if they make a single late payment, late fees will be tacked on every month until the debt is paid off. And the law makes no allowance for students who can't find a job in a bad economy, or can't work because of illness, or choose to serve their communities by, say, joining Teach for America. Albert Lord, Sallie Mae's chief executive, has become so rich from student lending that he built his own private golf course just outside the nation's capital.

Profiteering off students is not just an obscenity; it ultimately weakens the economy. The abuses at Sallie Mae and other student lenders deserve exposure via congressional hearings. Then perhaps lawmakers will find the spine to make the rules fairer. Indenturing the brightest young minds in an information society is the equivalent of eating your seed corn in an agrarian one. In the long run, you're doomed.

Damn. And that's not the least of it.

Cay Johnston is an expert on the tax regime in this country. I was fortunate enough to meet him once -- he has a beard. Also he is grumpy. But then again, I'd be grumpy, too, if I spent my time discovering things like this:

Defang the Loan Sharks

For hundreds of years, enlightened governments have regulated interest rates to rein in loan sharks. Now Diff'rent Strokes' Gary Coleman pitches loans at 99.25 percent interest. Some "tax anticipation" loans cost the equivalent of 700 percent annual interest.

How did this happen? Back in 1978 the Supreme Court, confronted with a discrepancy between federal and state laws, threw out federal interest regulations and called on Congress to pass new ones. Instead, lawmakers milked the ruling for hundreds of millions of dollars in campaign contributions from credit companies eager to charge any rate they wanted. Thanks to interest deregulation, blue chip investment houses like Lehman Brothers got into the business of subprime mortgages while Goldman Sachs, JPMorgan Chase, Bank of America, and Wells Fargo bought or financed payday lenders that prey on the poor. In the three decades since interest-rate deregulation, credit card and other revolving debt has risen from $128 billion to $968 billion (adjusted for inflation), a 7.5-fold increase. Interest on this debt, at an average rate of about 18 percent, acts like a tax, leaving people with less to spend on the necessities of life.

But the industry wasn't satisfied with this credit boom, and so, in 2005, it prevailed on Congress (with a special assist from then-Senator Joe Biden) to pass a bankruptcy law making it much harder to restructure debt, no matter how predatory, even in case of job loss or illness. And in a little-publicized move, the Bush administration, over the protests of all 50 state attorneys general, also invoked an obscure clause in the 126-year-old National Bank Act to effectively invalidate state predatory lending laws. Repealing these anti-consumer provisions would cost the government nothing, but provide a real benefit for the economy in curbing banks' irresponsible practices, just as consumers are expected to do with theirs.

I don't want to brush against fair use -- just go read the whole thing.