The Homeless Buy Cadillacs for the Wealthy?
The title is meant to be shocking and attention-getting,
but the following is not a joke. Although there is nobody who
is is purposely making any homeless person pay for the luxuries
that the wealthy own, that seems to be the effect of some policies,
as you will see.
To understand how some homeless people are forced to help
buy expensive cars for some wealthy people, we have to understand
three important principles. The first is that all costs of a
good or service are ultimately paid by the final consumer. The
second is that big consequences can result from marginal or contributory
causes. The third is that money is fungible.
Let's start with the first principle. Suppose a man or company
makes and sells cookies. The flour, sugar, ovens, labor of the
employees and more must all be paid for. If this results in total
costs of forty cents per cookie, then the cookies must be sold
for at least forty-one cents each for the business to survive.
Furthermore, if the costs of sugar was to rise and add two cents
to the cost of each cookie, the price would have to be raised
by that much.
Quite obviously then, before the first penny of profit is
even made, the final consumer pays for all the costs of the cookie.
This is easy to see in a simple example. On the other hand, we
don't always notice this in all areas of economic life.
Consider a rental house, for example. How many people really
reflect on the fact that all the property taxes paid on it are
paid by the tenants? Suppose the house is worth $100,000 and
is in a high-tax state like Michigan, with tax rates at 2.4%
of the value of a property. The annual property tax bill is $2,400.
Rent might cost $800 per month, and fully one quarter of that,
or $200, is for property taxes. The check may be written by the
landlord, but ultimately the tax is paid by the renter.
This becomes very clear if we fill in the numbers and make
a small change. Let's assume the landlord is making about $100
in cash flow after all his expenses, and that's the minimum he
needs to be motivated to provide housing. Now lets say the property
taxes are doubled. Will the owner of the house sit back and lose
money every month, or just pass on that extra $200 in the form
of higher rent? He will naturally pass on the cost. So who really
pays property taxes? All costs are paid by the ultimate consumer
of a product or service, which in this case is the renter.
Let's suppose a renter and his wife have no kids and live
in that $800-per-month house. Now we get to the second principle,
which states that large consequences can result from marginal
or relatively small contributory causes. If our couple could
just barely pay all of their living expenses, and the rent was
to rise by $200 per month because of raised property taxes, they
might soon be homeless. In fact, if they are currently working
part time and can only afford $400 for rent, and nothing is available
for less than $600 because of the cost of property taxes, they
are already facing living on the streets.
What made this clear to me was a report I recently watched
on the evening news. A nearby city had just passed a law making
camping on public lands illegal, in order to get rid of the homeless
people living in tents on the edge of town. Listening to the
interviews of occupants of the tents it was clear that some were
employed, partially employed, or had been working when they lost
their homes. In other words, they made money but just didn't
make quite enough to stay under a roof.
Each case is perhaps a bit different, but it is a safe assumption
that if rent was a bit less expensive some people who are now
homeless would not be. In fact, of the hundreds of thousands
who are living outdoors right now, it is very likely that thousands
are only there for a matter of $50 or $100 per month. After all,
even if a person makes $30 less than their bills every month,
something has to be left unpaid at some point, and sometimes
that is rent.
Understanding that all costs are paid by the final consumer,
we see that renters pay property taxes, and that rent would be
lower if taxes were lower. Understanding that large consequences
can come from contributory causes including relatively small
changes at the margins, we see that some people who have lost
the ability to keep a roof over their heads have done so because
of relatively small additional expenses. In other words, high
property taxes play at least a contributory role in creating
Now, before we get to the third important principle, we need
to consider for a moment what those property taxes paid by renters
are used for. One of the primary purposes is to fund public education.
In fact, in most places the largest part of the taxes collected
goes for just that.
We may not like the implication in this, but it is just the
plain truth: some people would not be homeless if they were not
forced to pay for educating children who are not their own. We
can argue about other ways to arrange things, but as it stands
now, the schools are paid for largely through property taxes
which are paid by those who own or rent their homes. If those
who rent can't quite afford to pay that last $50 or $100 in rent
which results from property taxes, they end up in the street.
The third principle we need to understand is that money is
fungible, meaning interchangeable. Any hundred-dollar bill is
the same in function as any other. It is also the same as five
twenty-dollar bills, or a hundred dollars credited to a checking
account. More to the point, if a person can pay a hundred dollars
less for one thing, the savings can be used to help pay for anything
else, including a nice new Cadillac.
Suppose a doctor lives in the same town as our poor renter
who is soon to be homeless due to high rent. The doctor lives
in a home that is worth $250,000, along with his three children.
The children are all in school, being educated at a cost of $8,000
per year each, for a total of $24,000 annually. How much of that
is the doctor paying? He pays nothing directly if they are in
a public school, but he does pay property taxes, much of which
are used for the schools.
Based on his home's value and the 2.4% tax rate, he should
be paying $6,000 in property taxes. But in Michigan, like in
many places, those who own their homes are given special breaks,
so he pays just $4,800, or 1.9% of the property value. (Nobody
seems to notice that these special rules mean those who are poor
and therefore more likely to rent pay a higher tax rate, but
that's a subject for another time.) Obviously the doctor comes
nowhere close to paying the cost of educating his own children,
even though he presumably afford to do so.
Who makes up the difference? All who pay property taxes, including
those who are renting the worst efficiency apartment in town.
Maybe the doctor couldn't afford a new Cadillac if he had
to pay the $24,000 it costs to educate his children each year,
or maybe he still could afford it. But in any case, having others
forced to pay almost $20,000 of the cost frees up that much of
his income for whatever purposes he wishes. Money is fungible,
so making others pay for what he would otherwise have to pay
is functionally the same as forcing them to hand over $20,000
for him to spend how he likes, including to buy a new car.
We arrive at a striking conclusion then. It is that some people
who become homeless would still have a roof over their heads
if they were not effectively made to pay for a new car for a
wealthy family living in the same town.
Naturally there are arguments against this idea. For example,
it can be said that the wealthy doctor will pay these taxes long
after his kids are out of school, and so may more than cover
the cost in time. We don't know this though. He could retire
and downsize his home, or he could die just as his children graduate
high school. In any case the fact is that the cost is currently
being imposed on those with a lower income who may be facing
losing their home.
It can also be said that most who lose their apartment or
house because they are short on rent could cut expenses in other
areas and keep a roof over their heads. That is certainly true
in some cases. But that doesn't address the basic injustice of
the poor having to pay for the education of the children of the
wealthy, or indirectly paying for the nice Cadillac that the
wealthy man can buy with the income that is thus freed-up.
Some will point out that the poor benefit disproportionately
from the system, since they pay less in total taxes (lower-value
homes mean lower taxes), and often have more children. This may
be true, but it doesn't address the issue of a poor person or
couple who have no kids being forced to pay for educating other's
children, nor the fact that this sometimes results in losing
a home they cannot afford, and then living in the streets.
Finally, those who really like to argue for argument's sake
will notice that the proposition this essay starts with is plainly
wrong. Those who are homeless cannot pay for schools, Cadillacs
or anything else through their taxes, after all, since they pay
no taxes once they are on the streets. They only pay until they
become homeless, in other words.
Of course this about the larger issues of economic justice.
Fortunately, the statistics show that most homeless persons spend
just days without a decent place to live. They find family members
or friends to live with, and eventually cheaper apartments or
better jobs. The long-term homeless are another matter, having
little to do with rental rates and more to do with physical handicaps,
mental health issues and substance abuse problems.
The number of homeless who actually lose a place to live due
to property taxes is probably relatively small. But nonetheless
it does bring up the issue of who should be forced to pay for
what. The points made here then, might be used to argue against
public education. Or they could be seen as a indictment of the
way in which we pay for the public schools. Based on the ideas
here, one might even consider simply rebating a portion of the
property taxes paid by low-income renters, or at least charging
people in big homes the same tax rate (which seems more just
than giving them a break simply because they make enough to buy
a big home).
Wherever the ideas here are taken, though, it should make
all of us uncomfortable to think that the current system has
provided a way to make it easier for a wealthy doctor to buy
a Cadillac at the expense of those who may be facing homelessness
or at least poverty.