At a recent meeting, a big city mayor angrily confronted an executive of H&R Block: “Why do you charge poor people $130 to do tax returns. At our VITA sites, we do them for free!” At a meeting in Chicago, the leader of a large volunteer tax site refused to shake the hand of a Block executive. In a meeting in Washington, a senior banking regulator railed about the Block “ripping off consumers.”
Again and again, this story plays out. H&R Block, the nation’s largest tax preparation firm, serves over 19 million filers each year, of which 57% have annual household incomes below $30,000. While much of the financial service world has moved away from serving low income consumers, Block has embraced its low income clientele and it processes taxes that deliver over $35 billion of refunds to its customers. Block customers are fairly happy with their experience with the firm, as witnessed by satisfaction scores in the high 80s (out of 100) and 70 percent customer retention. Yet, Block is open to substantial criticism, primarily around a product that consumers demand, but activists and regulators abhor: the refund anticipation loan (RAL). This product gives consumers near immediate access to their federal income tax refunds, albeit in a costly manner.
In the banking literature, “relationship banking” is portrayed as being valuable to both banks and their client firms (Ramakrishnan and Thakor, 1984; Fama, 1985; Sharpe, 1990; Diamond, 1991). A bank provides the firm with loans and diverse financial services on the basis of a continuing relationship. It acquires information continuously about the firm and can thus intervene quickly and informally. Since the continuity of relationships allows the bank to have a competitive advantage in collecting information and monitoring the borrowing firm, it reduces informational asymmetries and the costs of financial distress for the client firm.
Business cycle accounting (BCA) is a method to investigate the important sources of business cycles. The procedure has two parts. The first part involves measuring distortions using a prototype model with time-varying wedges-which resemble aggregate productivity, labor and investment taxes, and government consumption-such that the prototype model exactly accounts for the observed data. The second part investigates the importance of each wedge in business cycles through counterfactual simulations. BCA has become a popular method of business cycle analysis and has been applied to many countries.
