The Sales Tax of Credit.

Credit is by its’ nature a risky venture, and it has launched a regular industry built around managing that risk properly.

One of the big solutions the industry has come up with, is to increase the ‘price’ of credit as the risk increases – this means that for any given level of risk, you’re likely to make enough from those who pay you back, to make up for the money you lose from those who don’t.

This means, in essence, that anyone successfully paying off their debt, is also effectively paying off the debt of everyone at their risk level who did not pay off their debt.

It’s essentially a surcharge added to all of your credit transactions – a form of market-imposed sales tax.

But, as sales taxes go, the ‘tax’ on credit is rather unique: Because this surcharge increases as the risk of a credit transaction increases, this surcharge ultimately functions as a recessive sales tax.

This leads to two interesting conclusions:

-Point the First: In political arenas, welfare and other social support networks are often derided due to their costs. Yet, society already publicly bears the cost of the most expansive, market-provided support net (being credit). Moreover, the price of high-risk loans given out to people in dire need is paid by precisely those least fit to pay it: People taking out high-risk loans because they are in dire need. So it turns out we already kind of do have welfare – and it’s already very expensive and very ineffective, both by its’ very nature.

-Subpoint A: I would suspect that high fees and interest rates on loans would increase the default rate of a loan, leading the nominally precautionary measures by credit institutions to make a profit to ultimately function to decrease the rate of individuals successfully paying off their debt. Oops!

-Point the Second: When the government does this, it’s called “Private Profit and Public Risk” – I remember that from when I took my Bailout 101 class from the major media outlets. But apparently, when the market does the same thing, people neither notice nor care.


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