The anatomy of a hidden tax

Once again last week I became a 'facebook fool' jumping into a genial conversation about this, that, and the other and delivering a full boxed series of Jerimiads to a group who couldn't care less.  Friends know that I am prone to this erratic behaviror.  As my mother explains: "Poor little bill always had lots of gas and that made him cranky.  I think he still has that gas."

But sometimes my gas induced 'belches'  seem to have substance when viewed in the light of a gasless dawn.  And believe you me, I am as surprised as anyone when this happens.  This seems to be the case with the Missouri law on traffic violations.

Missouri has traffic enforcement procedures that allow defendants to 'plea bargain', pay a substantial fine and avoid having 'points' put on their license.  In the vernacular it's called "fixing" a ticket.  The argument for the system goes something like this:  "What's the big deal?  The violator has a choice and is fined, wouldn't you rather the local government get the money than some out of state insurance company?".  Well, when you put it that way it all makes sense.

Only you can't put it that way.

Bear with me gentle reader while I play irritating University of Chicago Economist.  Imagine if you will a state with just two types of drivers:  Knuckleheads (Moi) who drive in a risky manner and the Knuckle-free who are safe, courteous drivers at all times.  Every year there are a certain number of 'at fault' collisions (aka wrecks) and all drivers are required to pay for liability insurance to cover their cost if they are at fault.  The knuckleheads pay far more that the knuckle-free because the insurance companies have found that they cause far more accidents.  Insurers use traffic citation records (aka 'points') to identify the knuckleheads and price their insurance high enough to cover that three car pileup that their brilliant driving skills are going to earn them.

For an insurance company to keep doing business in the state, they must charge premiums that exceed the total cost of all liability wrecks plus administration and then have enough left over to pay the capital holders for funding the insurance.   In economic terms the deal looks like this:

P^Knucklehead + P^Knucklesfree – O – C = Crash!

Where P= Total Annual Auto Liability and Collision Insurance Premiums paid by all drivers in the state. And where,

O= Total yearly cost of administering the auto insurance program

C= The carrying cost of the capital provided that is standing behind the insurance promises in force

Crash!:  The five year weighted average of total net paid claims on the insurance paid for by P

So what happens in a system where knuckleheads like me can drive through a red light (honest, the yellow only blinked, I swear) and not have that information reported to the insurance market?  How does this change the formula above?

First, my liability premia won't reflect my bad driving record so they'll be substantially lower.  But the number of wrecks won't change (I'm still a knucklehead whether the state says so or not).  So the total costs are the same.  Therefore the insurance company must charge Knuckle-free drivers more than their fair share of the premiums.  In other words, total premiums remain the same, they are just shifted from those who cause them to those who don't.


Second, I pay a lower premium than justified by my driving record but I end up paying that money to the local municipality in the form of fines.  Good news:  the knucklehead pays for his crimes.  But as we demonstrated above, the total premiums paid for insurance remain constant - the safe, knuckle-free driver is left holding the bag - paying premiums higher than they would have paid in a 'points' only system.

Now this is the clever bit:  The municipality claims that it is punishing me, the knucklehead, but they aren't because I'm paying the same amount either way.  What I am is an accomplice in a hidden tax:  I swan around town running lights and squealing tires and the municipality says:  "Bad, nasty driver, I shall give you a smack" causing the knuckle-free to feel superior and forget that in fact they are paying more than they should.

And thus, unless I've got it really wrong, the economic effect of the 'ticket fixing' system in Missouri is to levy a substantial hidden 'premium tax' on safe drivers.  Only.   The money comes from their pockets via inflated premiums that they are paying because the state (in exchange for cash payments from convicted offenders) has failed in its duty to its own law-abiding citizens to truthfully and fully inform insurance companies as to the true riskiness of drivers in the state.  And the tax revenues go (via the knuckleheads who remember are paying lower than fair insurance premiums) to the municipalities who levy the fines and the lawyers who charge fees (either directly or indirectly) to manage the process.

There are lots of other negative social effects of a legal regime with 'fixing' in its title, but I'll leave them alone for now.  I'm an economist, not a moral philosopher.