Unexpectedly Intriguing!
February 7, 2011

How might a government go about increasing the amount of money it takes from its population without raising their taxes or visibly generating widespread inflation in the nation's economy?

Student Loan Publication Cover - Source: studentaid.ed.gov

The answer to that question could well be a corrupt politician's dream, because if they could get away with it, they could be seen as "holding the line" on both taxes and inflation while still fully funding and feeding their parasitic appetite for power.

In considering the explosive growth of the federal direct student loan program in the last two years, it occurred to us that these kinds of loans would be an ideal vehicle for corrupt politicians to extract more wealth from Americans than they ever could directly through income and payroll taxes alone.

Here's why. People seeking college educations have three characteristics that would make them desirable as willing marks for this kind of corrupt political strategy. First, they are more likely to earn a lot more money than less educated individuals will over their lifetimes. This factor provides the motivation for both individuals to pursue higher education and for the government to support their doing so, because at a minimum, people who are likely to earn higher incomes will also be likely to pay higher taxes.

Estimated Average Lifetime Earnings by Education Level (in current dollars) - Source: Georgetown University

Second, they tend to be much less susceptible to becoming unemployed in economic downturns, at least if we go by unemployment rates. This relative employment stability then would be very attractive because it would translate into a more stable source of funding to support government spending programs.

Unemployment Rate by Education Level, for Age 25+, Seasonally-Adjusted, 1992-2010

Third, because debt is an inferior good, or rather, something that as incomes rise, the demand for it falls. Here, people seeking student loans to pursue higher educations predominantly fall in the lower and middle range of the income spectrum for the United States.

Median Ratio of Debt Payments to Family Income by Income Percentile, 1998, 2001, 2004, 2007

This is important when you consider how income is collectively distributed within the nation - the aggregate amount of income earned by individuals in these income ranges utterly dwarfs the collective incomes earned by the highest income earners. This characteristic would then makes these individuals highly attractive to corrupt politicians and bureaucrats for their money extraction efforts because, in words that famous bank robber Willie Sutton is alleged to have said, "that's where the money is".

2005 Approximate Aggregate Household Income vs Household Adjusted Gross Income

By themselves, these first two characteristics would explain the government's desire to have a role in the financing of higher education. But it's the third characteristic that would provide the main motivation for the government to become a direct lender to students, and if possible, the only lender, thanks to how income taxes have evolved over time.

Percent of Tax Filers by Income Range with No Federal Income Tax Liability - Source: Carpe Diem

In the United States, approximately 47% of all income earning households pay no federal income taxes as a result of the combination of increasing tax deductions and tax credits that politicians have established over the years as part of their efforts to secure their elected positions, where in providing these breaks to the very numerous population of low-to-middle income earners, they appear to benefit these Americans at the expense of high income earning Americans.

But in doing that, they have prevented themselves from being able to directly raise taxes on this part of the electorate, because of the marginal effect that raising tax rates would have.

For instance, if the marginal income tax rates set to expire at the end of 2010 had not been extended, a lot of people at the lowest end of the income spectrum would have seen their income tax rates rise from 10% to 15% of their incomes.

What-If Tax Collections vs Household Adjusted Gross Income, Using 2005 U.S. Income Distribution, $0-$10,000

That may not seem like a big change, but the amount of taxes many of these individuals would have had to pay to the government would have risen by 50%. As an example, for a taxable income of $10,000, the amount of taxes levied against that income would have risen from $1,000 to $1,500, a 50% increase in the amount of taxes owed to the government, as it would take away an additional 5% of a very low income from the individual who earned it.

That kind of move would be enough to put an elected politician's hold on their seat of power at risk, which is the primary unspoken reason why these income tax rates were extended in the lame duck session of the 111th U.S. Congress.

Unfortunately for these low-to-middle income earning individuals, that's also where the bulk of untaxed money is to be found in the United States. To get at that money, corrupt politicians are pushing hard into the direct student loan business in a very big way to get around the obstacle of raising taxes directly on this portion of the population. Even to the point of seriously jacking up the national debt to do it.

Net Borrowing to Support Federal Direct Student Loan Program, FY1997 - FY2010

Their involvement, of course, extends far beyond just getting into the business of directly issuing student loans. The federal government has also:

U.S. Inflation, 1979-2010 by Category - Source: The Economist

Collectively, these actions avoid generating widespread inflation in the economy by tightly concentrating it within the market for higher education in the United States.

But those actions then make it necessary for an increasing number of individuals from low-to-middle income earning households to take out student loans in ever-increasing amounts to cover all or part of their cost of obtaining a college education. And also increasingly, from the one entity against whom they can never escape by defaulting on their loan payments, who also has the means to collect money owed to it from student loan recipients directly by taking their income tax refunds, garnishing their paychecks or even taking federal benefits such as Social Security away from the individual.

Thus are student loans transformed into taxes. In just about all but name.

Previously on Political Calculations

Your Student Loan

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