Kip first tuned me in to the flawed logic of presuming that normal prices are “like taxes.” So, one of my missions is to point this sort of thing out when I see it.
The New York times is reporting the frightening popularity of the Ghetto Tax, the hidden “extras” that urbanites and poor people pay for any number of things, including car insurance and loan interest rates.
Drivers from low-income neighborhoods of New York, Hartford and Baltimore, insuring identical cars and with the same driving records as those from middle-class neighborhoods, paid $400 more on average for a year’s insurance….
Citing other examples of the ghetto tax, the report found that nationally, 4.5 million low-income customers, defined as families making less than $30,000 a year, paid an average of two percentage points more for car loans than did middle-class buyers. And the common use of storefront check-cashing services by poor people, it said, comes at a steep price that varies with local regulations; in 12 cities studied, the fee for cashing a $500 check ranged from $5 to $50.
Living very near to Detroit, I’m no stranger to the “Ghetto Tax.” For instance, if you live south of 9- or 10-Mile Road (Eminem’s movie was based on the very real “county line,” 8-Mile road, separating Wayne County – and Detroit – from the surrounding suburbs in Oakland and Macomb Counties), prepare to watch your car insurance double. At least. Homeowner’s insurance rates are also higher.
So yeah, among other inconveniences, guess what? It supersucks to live in the inner city because it costs alot more to insure yourself. The percentage of one’s income spent on non-value added incidentals in the poorer, urban areas will probably far exceed what people in the wealthier suburbs pay for “similar” products and servics. But I’ll still argue that calling it a “tax” is pure poppycock. Notice the use of quotations around the word “similar.” I say this, because car insurance in Detroit and Car insurance in Rochester are not homogeneous products. Insuring anything in the Dirty is far riskier than it is in the suburbs.
Loud and clear, PRICES ARE NOT TAXES!
You don’t like paying $5, $10, or more to cash your paycheck? Demonstrate some fiscal responsibility and open a checking account. There are usually no fees, even without a balance requirement these days. Unless you write a lot of bad checks, in which case, you’re clearly better off paying for the money orders. You might still get hit with the occasional “late fee,” but you’ll never overdraw a money order. It is clear then, that whatever this fee costs them annually is less than it would cost them to open a checking account at a local bank.
Interest rates are composed of several factors, one of which is the DRP, or “default risk premium.” It is the extra charge that investors require in order to lend you money, based on your creditworthiness, or lack thereof. I know it almost seems counterintuitive, that you would charge more for people who are less likely to pay it back – but think about it: They have already demonstrated their inability to repay loans at lower interest rates, the prudent thing to do is certainly not to throw more easy money at them. Car insurance, and homeowners insurance costs more in high-crime urban areas, (and they would cost more in high crime suburban areas, if such areas exist) because claims are more likely. It is not discrimination, it is sound actuarial science in practice.
All of the price differentials that the NYT attributes to the “ghetto tax” are quite simply, the market working as it ought to work – pricing the services according to their relative risk, and definitely not an involuntary tribute required to be paid under penalty of imprisonment.
