The central problem now is how the Federal government can lend money to businesses that need it -- without a budget blowout. I proposed letting people borrow from the IRS which has a pretty good mechanism for getting repaid. Martin Lowy has a more detailed suggestion along these lines:
- Credit for any business that needs it, so long as the business’s history suggests that it will have the capacity to repay, given enough time.
- A simplified underwriting system based solely on filed tax returns. Bank-style underwriting is a cumbersome process that would impede the flow of credit and would tend to make it subjective and political—and therefore a subject of criticism all along the way.
- A repayment period of something like 36 months that begins a few months after the crisis has passed. A business cannot begin to repay until it has had some time to get back on its feet.
- Use of the income tax mechanism to enforce repayment so that no new bureaucracy is required and so that the system will be seen as fair, rather than based on subjective criteria.
- A mechanism to assure that recipients of these loans will continue to use them in part to continue to pay their employees.
The devil is always in the details. Just what rules are overstressed IRS employees supposed to implement to judge if a "business’s history suggests that it will have the capacity to repay, given enough time?" Just what is the final "mechanism?" Once again, that we have entered this crisis so unprepared means it is unlikely a measure like this can be rolled out in the needed days, let alone weeks or months. Still, it starts to flesh out a good idea -- or at least a better idea than enormous stimulus checks and bailouts all around.
Update: Lowy responds by email:
- Who may get credit? Loans would be extended to any business that filed an application, but limited in amount by the business’s historical sales and profits as reported to the IRS.
- In what amount? The size of advances would be a percentage of the revenue and taxable income of the applicant. The lesser of one twenty-fourth of gross sales or one-sixth of taxable income. No subjective criteria.
- Period for repayment. Depends on the length of the crisis. If the crisis/credit advances last 4 months or less, 36-months; longer crisis, longer period for repayment.
- Application process. Electronic only. Simple facts. Promise to repay. TIN. Account to send advances to. Amount requested per month. All based on last annual tax filing.
- Employee compensation certification. Certify that in each pay period after receiving a credit, applicant would pay every employee who was on the payroll on February 15, 2020 at least 75% of the average amount paid to that employee in the last four pay periods before that date.
- Interest rates. 5% per annum, except if the business was borrowing at a higher rate—then that higher rate.
- Collateral. None.
I (Lowry) welcome additional questions about the details.
