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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 homelessness.

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.

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