Building a Comprehensive Asset Building Strategy at Tax Time and Year Round

Our friends over at the Half in Ten Campaign have a new piece up about the impact the Earned Income Tax Credit (EITC) has on families’ financial security. Desmond Brown chronicles the rising support for financial empowerment initiatives among antipoverty activists and makes a strong case for a comprehensive approach to helping low-income families utilize opportunities like receipt of the EITC to the fullest. Since the EITC can be the single largest income boost a family gets during the year, the asset building community has long recognized the potential for tax preparation and filing to serve as a direct path to greater financial stability for people with low-incomes. As Brown reports, CFED shows that one out of every four U.S. households is asset poor, meaning they do not have the resources off in the event of a drop in or loss of income. (Check out CFED’s scorecard for more state and national level statistics on asset poverty.)

Brown explains that while the EITC can be a significant financial moment for lower-income households, they are often ill-equipped to make the most of the refund for a variety of structural reasons. High-cost tax preparation, year-round marketing of high-interest loans, and a lack of access to mainstream financial services all threaten these families’ abilities to make the EITC work as a launching pad to greater economic security. As it currently stands, Brown writes, “high-cost tax preparation strips millions of dollars from families and communities each year.”

In our 2010 paper, Quick Credit: The Fringe Economy, the Great Recession, and the Welfare State, David Stoesz made this argument in greater depth for those interested in the historical underpinnings of these structural factors. That paper explored the ongoing tension between recognizing high-cost financial products as “an adaptive response to the credit needs of low- and moderate-income families or predatory exploitation of economically hard-pressed consumers.” Stoesz found that while the many products of the fringe economy may address the immediate credit needs and financial access barriers facing low-income communities, they have a detrimental impact on families’ long-term ability to move out of poverty.

Brown concludes his piece by highlighting a range of initiatives that are seeking to address different parts of this tension in a variety of ways: by educating families about their financial options, reducing the costs and risks associated with high-cost financial services, introducing products into the financial mainstream that work for lower-income consumers, designing policy to incentivize saving both at tax time and year round, and finding ways to help people weather income shocks through creative new mechanisms. It’s a good piece and worth reading as an overview of some foundational aspects of the asset building  perspective. Additionally, it serves to highlight how much common ground there is between asset building advocates and other advocates for low-income families.