Should Rich People Pay Higher Speeding Tickets?
Progressive fines for traffic violations may make economic sense.
I cross a busy intersection on one of my regular jogging routes. I have been nearly run over numerous times by the peace-loving Berkeley crowd running yellowish-red lights.
I’ve watched the light runners and I think I see a pattern: if it’s an expensive car, like a BMW 5-series or a Tesla, the chances are good the driver will gun it to try to make the light. The 15-year-old Toyota Corollas are much more likely to stop.
This has led me to think about traffic violations, wealth and equity. Apparently, I’m not the only one thinking about this – a recent New York Times op-ed advocates income-based traffic fines, and Finland and Switzerland have been charging wealthy speeders more for years. I believe the cold, hard logic of economics has a lot to add to the discussion of this emotionally charged, populist topic.
Let’s start with the basics. It does not take a PhD economist to note that for some (wealthy) BMW 5-series owners, the $500 ticket for running a red light may be less than they spend on their weekly personalized goat yoga sessions, while for some (less wealthy) Corolla drivers, it’s a week’s income. (I’m going to ignore the difference between wealth and income.) My observations are consistent with a general trend: wealthy people get more moving violation tickets and are more likely to behave unethically overall.
Is there anything wrong with that?
On one level, the answer from economic theory is, “No.” Using the framework of environmental economics, you can think of the traffic fine as a tax on a behavior that creates an externality, just like emitting CO2. Running a red light increases the chances that you cause a traffic accident involving another unsuspecting driver. That potential harm is the same whether you’re wealthy or poor. We want to discourage behavior that harms others, so we fine it.
Let’s imagine, for argument sake, that the ticket for running a red light is set at the correct level from an economic perspective. It doesn’t make sense to have zero red-light runners (say if we imposed a $100 million fine) because the harm to others (i.e., the chances that running the light leads to an accident and the harm from that accident) just isn’t that high. If at current fine levels, 10 rich people and 0 less rich people per month run my red light in Berkeley, this means that 10 is the right number of light-runners and they all happen to be well-off.
But, why should all of the light runners be rich? One answer might be – and bear with me, this is veering into obnoxious econ land, but I’ll step back – that the wealthy people have a higher value of time. You want the well-paid, ace surgeon rushing to the hospital to operate on your family member to run the red light, and you probably don’t care as much about whether the unemployed video-gamer gets to his or her destination on time. But, the value of someone’s time to society and wealth are not super highly correlated – the unemployed video-gamer might have inherited a lot of money.
So why do countries like Finland, which reportedly fined a businessman $58,000 for speeding, and Switzerland, which fined a wealthy diplomat driving a Ferrari $290,000 for speeding, use income-based fines? Are they violating economic efficiency?
Populists argue in favor of income-based fines as a form of “progressive punishment,” suggesting that the rich should feel the pain of traffic tickets to the same extent as the poor. In econ-land, progressive punishment sounds a lot like setting a higher price for the rich because they have a lower elasticity, meaning they’re not adjusting their light-running behavior to the fine at current prices.
And, if we think of traffic fines as not only pricing the externality, but a means to collect revenue for the government, then we want to charge the wealthy more. (This would be a form of Ramsey pricing, named for Frank P. Ramsey, an economist from the early 1900s.)
Yes, this does amount to using traffic fines as a form of taxation, which then raises the question of whether the taxation will distort other behavior. The Finnish businessman who had to pay $58,000 apparently ranted on Facebook that he was thinking of leaving the country, saying, “The way things are done here makes no sense.” I tend to doubt someone would execute on that threat. It isn’t really a tax on being wealthy, it’s a tax on being wealthy and deciding to break the law. Deciding not to break the law seems like an easier solution than moving to a different country.
As I teach my students in introductory microeconomics, many companies are ingenious at figuring out ways to charge rich people higher prices. We call it, “price discrimination.” Do you really think that it costs United Airlines $8,000 extra to give the business class flyers from San Francisco to London more space and slightly nicer wine than they’re serving in economy? No, but it works as a really good way to separate out the wealthy who are willing to pay $8,000 for a little extra space.
In order to price discriminate, a company has to be able to distinguish between different types of customers and prevent the customers from reselling to one another. Also, the customers must have limited access to competitive alternatives. All of these conditions are satisfied for a government assessing traffic fines. So, why not let the government use its monopoly position as traffic fine assessor and raise some extra revenue? It gets even better if that extra revenue helps the government lower other taxes, like taxes on income, that may be more distortionary.
But, you may be thinking, why stop with traffic fines? Can’t the same logic be used to argue that the rich should pay more for a lot of things? If traffic violations are analogous to taxing CO2, doesn’t this suggest wealthy countries should pay a lot more to emit a ton of CO2 than poor countries? Here’s what’s nice about traffic fines: if Bill Gates is slapped with a $1 million speeding ticket, he can’t just transfer the ticket to Catherine Wolfram and get it reduced to something reasonable. But, if we assess a high CO2 tax on US pollution, some polluting firms might move to Malawi to get lower taxes. Put differently, the leakage problem doesn’t exist for traffic fines.
I’m sure there are problems I’m not addressing, such as the likelihood that the rich person uses their wealth to challenge the ticket, which in turn imposes costs on the rest of us by using up court time. Also, I haven’t taken a stand on what measure of wealth/income we would actually use to assess the fines. But, it strikes me as an idea worth digging into further.
Catherine Wolfram View All
Catherine Wolfram is Associate Dean for Academic Affairs and the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.
Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.
She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.
You may need a Ph.D. economist after all, possibly one named Larry Goulder. First, we need to know more about municipal finance. Suppose salaries of judges, prosecuting attys, and other court costs are partly subsidized and largely financed by property taxes. Higher traffic fines on the rich induce more rich people to make use of their traffic-court attorney. In many states, a large fraction of fines collected by municipal courts are grabbed by the states so it is possible that higher fines actually increase net court costs. Now we have to worry about the excess burden of higher property taxes, including their exacerbation effects, and the increased “conflict costs,” which arguably don’t belong in a Weitzmanesque measure of welfare.
It is still possible that the leakiness of this particular transfer bucket is less than those which it could replace a small percentage of (labor taxes to finance welfare expenditures) and that net gains would turn out to be positive. But that would not be easy to show.
There are several problems with this entire article.
First, what about the ‘rule of law’ concept? What your ‘tax the wealth’ proposal suggests is that there should be different laws based on how hard your work or how well you manage your earnings and expenses. In other words, ‘taxing the wealth’ sets up a class distinction that not only undermines incentives for meritocratic and personal responsibility standards but justifies a move toward socialistic practices for many other lifestyle and behavioral practices. Why shouldn’t home loans, credit cards, health care, public education, food, clothing and every other commodity or service charge those with ‘wealth’ more than those ‘without wealth’? And by the way, who and what determines the standard for wealth?
Second, if the ‘laws’ were justified to promote safety and personal responsibility, why should some of the violators, based on a lack of wealth, be excused from that obligation? For an example, take two of my neighbors. The first one has a good job but spends all of his money and more on new fancy cars and expensive family vacations. He is in debt up to his eyeballs, has no savings, and definitely no wealth. My other neighbor, he has the same job but spends all of his money and more on health care issues related to a very sick child. Same situation – he’s in debt, has no savings and no wealth. So which one, if any, should he be excused from their traffic violations?
I don’t buy that criminal enforcement is the right vehicle for income redistribution. It is true rich people have more options, more resources and can stand to take larger risks. That is part and parcel of what we mean by being rich. Whenever the price of something is set, rich people feel less pain at paying the price. In perfect competition the price is set to clear the market. Rich people get a larger share–well, because they are rich.
The price for a traffic violation is reasonably set at the price at which the income from fines equals the net present value of damage done by the violations. Whether that is properly set is a different argument, but breaking that down by class is discriminatory. Would we charge more for food at a store because rich people can afford it? Suppose we find out that men or Muslims or Feinstein supporters go through stop signs more; should we charge those groups more? Do we take into account that rich people drive safer cars (newer, better brakes, collision prevention, semi-automation) than poor people? Should the old Toyota driver be charged more than the Tesla driver? To be ethical all such things need to be considered if we start going down that path and the result is likely to be absurd.
Whether the State values the time of rich people more than poor people is debatable, but the people themselves do. A rich person would rather pay for a VIP ticket to something than wait in a line, for example. A rich person values his leisure time with a higher dollar value. If we use the progressive punishment theory as a basis then we should support much longer prison sentences for poor people than for rich people. I am guessing people wouldn’t like that much, but it is the logically consistent flip side of income-based fines.
The economics costs of trying to make each income level behave the same would be substantial. It would take a lot of (on-going) effort to define the economic classes that should see the different rates. If the rates were high enough to have a significant impact then the rich would also consider alternatives such as fighting the ticket. That would eat up enormous amount of time in our courts for what amounts to a pretty small infraction from a public safety point of view. Right now rich pay the ticket more quickly and reliably than the poor. So from an economic efficiency standpoint the variable fine idea does not make sense.
Current Federal Administration notwithstanding, American jurisprudence is supposed to be blind to the individual. That sword cuts two ways but punishments should fit the crime not the criminal. Both the economics and the justice aspects of this proposal are poor. It may achieve some political objectives related to income distribution, but that is what the tax code not the vehicle (or criminal) code is for.
Interesting idea. But lets start with something we can achieve in UC Berkeley.
I have a C Parking permit. I find most parking spaces marked “compact” filled with obscenely obese SUVs. SUVs capitalize on a loop hole in the 1975 congressional legislation that attempted to set fuel economy standards (Sperling & Gordon, Two Billion Cars page 54). Ford is considering stopping the production of normal cars. Unless someone is handicapped or has some special problem an SUV merely uses more gas, more raw materials to male – and makes it difficult for normal vehicles to park.
UCB has a financial crisis. Lets charge SUV owners 50% more for SUV parking permits. If it hurts someone’s wallet it is actually doing them a service because sooner or later gas prices will rise again and then they will regret owning an unnecessarily large, very polluting vehicle.
Malcolm Potts, School of Public Health
I have also thought that a “time-based” fine would be effective as well, i.e. if you are caught speeding during times where the expected externality is higher should be penalized more heavily than at a time when the expected externality is lower. Thanks for an interesting post!
What came to my mind when I saw the title was actually the disproportionate pain that traffic tickets can have on low-income people; there have been several highly publicized cases lately showing how driving while poor can land you in jail when you can’t pay the fine or get to court, leading to job loss, and further spiral into poverty. The effective fine then becomes much higher than that for the non-credit-constrained. Another reason for reform and taking income into account.
Thanks for the blog. I didn’t even know goat yoga was a thing!
I’ve often pondered the same question about energy. There seems to be a correlation between income and energy use. I’ve read numerous reports indicating that households with less income generally use less energy. The paltry data available from the CPUC showed top energy using communities like Malibu, Rancho Palo Verdes, and Hidden Hills estates as home to some of the highest consuming residential end users – some pretty high income communities. Compton isn’t one of those high energy using communities. The high users result in greater costs for infrastructure and reliability that is paid by all in distribution and transmission charges so maybe another example of the less fortunate subsidizing the more fortunate?
It’s not simple to solve this but it seems worthwhile to think about whether these equity issues could be addressed with retail rates because it is a health and safety issue for those with less discretion in their budgets as well as a distortion in cost of service ratemaking.
Thanks for yet another great blog.
There’s a big difference between incentives related to absolute prohibitions, e.g., stopping at a red light (there are no matters of degree), and to relative consumption of a “good” which is what we consider energy. So long as we have a market-based economic system with decentralized individual decision making, and that we find that providing differentials in income reflects the incentives in productivity that we want (at least to imperfectly), then the pricing system without income adjustments if the best mechanism.
I remember asking myself this question for the first time when I was about 8 years old. I came to the conclusion that richer people should pay higher fines and higher bail compared to poor people for the same crimes/infractions.
But let’s go back to your question about wealth vs. income. In general I’m in favor of taxing wealth rather than income, with an exception of not counting one’s primary residence as part of their wealth. This was sort of what Proposition 13 was trying to do — decouple the inflation-distorted value of one’s home from the taxes one paid. Are there any countries that primarily tax wealth — especially liquid assets — rather than income?
I’ve been suggesting a net asset tax (that include homes and real estate). This would net our debt, so those with a larger mortgage (generally younger) would pay a lower tax on on their home. I calculated that we could replace the federal income tax with a net asset tax rate for 2%. About 95% of our wealth is held in registered instruments of either stock, bonds, real estate or vehicles.
Since this is a civil matter and the goal is to create the right behaviour it might make sense to make it proportional to net wealth. I use net wealth intentionally since the 0.1% really don’t have traditional income. A $500 ticket to someone making minimum wage is economically devastating , but to the 0.1% is totally noise.