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gattsuru comments on Buying Debt as Effective Altruism? - Less Wrong Discussion
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At least within the United States, forgiving debt counts as a taxable event, on the year that the event occurs. This Occupy group has largely sidestepped the issue, and the IRS is unlikely to audit the beneficiaries in this particular case, but the larger the system becomes and the longer-term the system becomes the more likely your patrons will be looked at.. If you're not very careful about how you build the forgiveness, this can even push people into higher tax brackets or out of welfare benefits that they need to live. See some criticism of the Bush-Income-Based-Repayment plan for details on this matter.
Debt collection companies are also likely to adjust the cost of debt around your purchasing power, if your charity persists for long, which may slightly decrease the rate of return. ((Contrawise, there are reasons to keep uncollectable debt on your own books, even if it's obviously uncollectable, due to current accounting practices.))
To expand on your point four, the debt is valued at less than its paper number because these people are the ones that are generally hardest to discuss matters with and/or get money from. This may not always be a matter of income, but a matter of the people not having reliable contact information or living in areas where the courts tend to be very suspicious of debt contracts. Garnishing someone's wages involves drastically different costs depending on your state.
You'd also need to get a fairly good rate of return for this to be the more efficient than typical investment strategies. If eliminating the debt it itself a value thing, that's less of an issue, but it'd be tricky to evaluate that. If you want too much of someone's future wages, they're likely to discount opportunities to increase their future wages (especially due to how marginal tax rates go around the poverty line to four-time the poverty line).
+1
Under the US tax law is someone forgives your $50,000 debt, that $50,000 is added to your income and you owe all taxes on it.
Yes, but having the forgiveness happen in a low-income year would result in less taxes. So perhaps the charity could forgive debt in a way that is conditional on later income being donated to effective causes.
In the United States, marginal tax rates at the poverty line can, due to welfare or tax deductible cutoffs, be pretty punishing or even negative. Worse, because this income does not go through conventional channels, it can cause someone's annual tax return to suddenly switch from a rebate to a payment -- a payment that is difficult to delay and near-impossible to escape through bankruptcy, and that can only be challenged in the IRS's very own home courts.
The rate is likely to go so blatantly negative in countries that lack phaseouts or means-tested welfare, but even those exceptions will still have that surprise tax bill.
It's not a fatal problem, and there may be ways to limit or negate it -- although any serious attempt will face serious and unfriendly tax scrutiny -- but it's a very significant problem.
Lots of U.S. government benefits for poor people are tied to income and wealth.