Jane the Actuary General Interest

What, actually, is a “fair tax”?

Not the Pritzker proposal for an Illinois tax hike, despite his and his supporters’ claims, actually.

After all, we intuitively know what’s fair and what’s not.  Rules which, in theory and in practice, treat everyone evenhandedly are fair.  Rules which are arbitrary, or penalize or advantage some people or groups over others, other than for appropriate reasons, are unfair, and all the more so when they are set by a minority without a democratic process (or subverting/manipulating a nominally-democratic process).

The pop tax?  Intuitively, it was clear that it was unfair.  One group of people (pop-drinkers) was asked to pay a disproportionate share of the county’s taxes, and within that group, some were burdened more than others — those without cars, without storage space, too far towards the center of the county, or otherwise less able to drive elsewhere to get their pop.  (Yes, at the time my husband worked in Lake County and until the tax was rescinded he bought the Family Pop Supply on his way home from work.  And, yes, if the tax was applied nationwide this specific complaint would be mitigated, but not that of the unfair targeting of pop-drinkers.)

Or consider the gas tax:  people are reasonably OK with it if it actually funds road repair.  But tell them that the gas tax is being used for entirely unrelated purposes that are nominally transportation-related (Cato reports that Kansas, Maryland, New Jersey, Minnesota, Connecticut, Texas, and Rhode Island each divert over 50% of these taxes in some fashion or another) and taxpayers are less happy.

So what of the Pritzker tax proposal?  (For a refresher on the particulars, see my prior article; the latest update on its status comes from today’s Tribune, which reports that the State Senate’s Executive Committee voted along party-lines to approve placing the tax-enabling amendment on the 2020 ballot.)  This proposal is being marketed as a “fair tax” to such a degree that the original language of the proposed amendment even used this phrasing.  It was cringeworthy:

There may be one tax on the income of individuals and corporations. This may be a fair tax where lower rates apply to lower income levels and higher rates apply to higher income levels.

(Thankfully, the proposal was amended to remove both the current constitution’s restriction on graduated income taxes and this new language about a “fair tax.”)

To begin with, there is nothing intrinsically fairer about a graduated income tax than a flat tax.

What’s more, specific elements in the tax as proposed tend to move it to the “unfair” category.  The lack of separate brackets for singles vs. married couples mean that a married couple at a certain income level will end up paying more in taxes than if they had not married.  The “millionaire’s tax” that applies for one’s entire income rather than at the margin means that anyone earning $1,000,001 will pay a patently unfair penalty for that last dollar in income.  (Comically, the original childish language about the “fair tax” would have prohibited this anyway.)  The very fact that the brackets are structured with a dramatic jump in rates, and with a nominal tax cut for moderate earners means that it is being promoted to voters not as the most appropriate way to solve Illinois’ perpetual finance woes, all things considered, but as a way to get something for nothing:  “you get all the state spending you want while we ensure that only a tiny minority of people will have to pay.”

I should add that I am increasingly having misgivings about the labelling of this sort of tax as “progressive” and the inevitable pairing with other types of taxes for which lower-income folk pay relatively more, as a share of their income, as “regressive,” because it is becoming clear that these are not descriptive, but are their own forms of value judgements.  And, while it might, generally speaking, for taxes to fall disproportionately on those who can better afford to bear their burden, tax terminology should be descriptive, not loaded.

On the other hand, strictly speaking, it might not even be accurate to call the Pritzker proposal a “graduated” tax at all.  There are functionally only two brackets, “somewhat less than 5%” and “somewhat less than 8%”, so that there isn’t anything gradual about it.  But, yes, that’s a nit-pick.

And practically speaking, I don’t know where the proposal is headed.  Certainly it’s not being rubber-stamped, or if it is headed toward such, the process is, at any rate, taking longer than for, say, the minimum wage hike, though it may be that this is just a matter of the lack of urgency (regardless of how quickly or slowly the bill passes, the election at which the amendment would be voted on would take place in 2020) rather than lack of votes.  Strategically, on the one hand, it seems a mistake to have a specific proposal rather than saying, “the Illinois constitution wrongly handicaps the state in making its determination of the best type of taxation at any given point in time.”  Yet the fact that our state government is so perpetually untrustworthy meant that, practically speaking, no voter in their right minds would accept a plea of “trust me.”

What’s the alternative?  Obviously, I’m in favor of a pension-related amendment, and pairing the two would have better enabled politicians to make the claim that these amendments are about long-term good governance rather than short-term coffer-filling.  The Tribune went a step further in an editorial today:

Today, a new world: Pritzker would “Let the people vote.”

So how about a package deal, Governor, of amendments or statutory changes: Let the people vote not just on taking more billions of dollars a year from wallets — an amount sure to grow and grow as tax rates rise and rise. Let the people also vote on rewriting the rigid pension clause of the constitution. Let the people vote on term limits. Let the people vote on creating a fair remap scheme.

The pension clause, manipulated by lawmakers eager to reward their cronies in public employee unions, has created much of the financial misery that confronts Pritzker. Lack of term limits has entrenched many of these same lawmakers. And the current remap scheme assures their re-election in perpetuity.

So we’re all agreed, Governor? Taxes, pension reform, term limits, a fair remap scheme. “Let the people vote.”

Sounds good to me!

 

Image: https://media.defense.gov/2019/Feb/12/2002088973/-1/-1/0/181206-A-UM169-0001.JPG; https://www.dover.af.mil/News/Article/1755127/what-you-should-know-about-filing-2018-taxes/ (public domain/US gov)

Jane the Actuary General Interest

Not every disparity is discrimination, car insurance edition

Here’s a Pew report from back in February that I recently came across:  “What? Women Pay More Than Men for Auto Insurance? (Yup.)”  Here are some of the key bits:

It’s a widespread belief that men pay more for automobile insurance than women. But that’s only true for young adults.

Several studies in 2018 and 2017 revealed that women over 25, particularly those between 40 and 60, often pay more than men — not less — for auto insurance, all other rating criteria being equal. . . .

In an interview, [former California Insurance Commissioner Dave] Jones said it’s fair for insurance companies to set premiums based on a driver’s accident history, number of speeding tickets and other factors that are under the driver’s control. But using gender is unfair because a person has no control over that, he said.

What’s going on?  The report indicates that there was no seeming consistency across insurers.  It cites a 2017 Consumer Federation of America study, in which, among 60 year olds, differentials ranged from a premiums 4% higher for men at Liberty Mutual to a 12% higher for women at Geico.  For 40 year olds, the differences among 6 insurers studied were -1%, 0%, 5%, 8% and 16% higher premiums for women.  And, oddly, for 20 year olds, premiums were higher for men, ranging from a 5% to a 16% difference, except at Geico, again, where women had 6% higher premiums.

Is this discrimination?  Are women being charged more than men, for no particular reason except that rate-setters want to give advantages to men because of the patriarchy?  The Pew article suggests, in the midst of a broader discussion around rate-setting processes, that there’s something nefarious going on:

But a professor at University of Minnesota Law School, Daniel Schwarcz, said if companies are not allowed to use “outdated stereotypes based on generalities” about men and women, the insurers will have to consider “more directly” such measures as the actual number of miles driven, the number of years customers have been driving and where they live.

Really?  A lawyer is asserting that actuaries develop rate models which add in some sort of factor based on the “women are bad drivers” stereotype their fathers or grandfathers might have believed, and that’s worth referencing in an article put forth by an organization as respected as Pew?

It should go without saying that actuaries price insurance premiums based on the totality of the data available to them.  Price a rate too high for a given rate class (age, sex, residence, driving history, etc.) and you lose a sale.  Price a rate too low and you lose money on that sale.  Especially now when customers are able to comparison-shop far more easily, insurance companies’ actuarial departments want to get this right.  At the same time, I suppose, if a company has identified a demographic which it believes to be particularly susceptible to marketing and less likely to comparison-shop, they might focus more on marketing to that group and worry less about the competitiveness of their prices.  (Heck, are women less likely to comparison-shop insurance and more likely to choose a brand that gives them warm fuzzies?)  And all of the above is true even with the disparities in pricing among various insurers, simply because each of them will have different pricing models, and will have different claims experience even for the same demographic group (and an objectively similar demographic group could differ if different insurance companies attract different types of customers) — complexities of business operations which these companies are under no obligation to disclose to the general public any more than KFC must provide its secret recipe.

But the 2017 Consumer Federation of America study the Pew study references takes its claims even further, writing

The inconsistent pricing decisions of these insurance companies illustrates CFA’s concern that tying auto insurance rates to factors that a customer cannot control and have nothing to do with their driving safety record – such as one’s biological sex – leads to unfair discrimination and indefensible claims of actuarial soundness. . . .

“Every state but New Hampshire requires drivers, regardless of their sex, to buy auto insurance, so regulators and lawmakers have a special obligation to make sure coverage is priced fairly,” said CFA insurance consultant Douglas Heller, who conducted the study . . . . “What we have found is that insurance companies punish female drivers with perfect records more often than men, and far more often than we expected. We also found that the insurance companies’ use of sex as a rating factor does not seem to reveal much in the way of a consistent risk assessment, and regulators should reconsider allowing companies to continue using it at all.”

But let’s back up:  should insurance rates be only about those characteristics which customers can “control” — in this case, driving history and maybe residence?  Based on this rationale, there shouldn’t be any differentiation by age, either, but no one suggests that 16 year olds and 36 year olds should have the same rates, because it is generally acknowledged that teens, as new drivers, are less skilled, even though these are both items that cannot be “controlled.”  (And, quite honestly, I find it believable that men, once they outgrow their impulsive years, might be more likely to be better drivers; in terms of external factors, women might be more likely to be distracted by kids they’re transporting somewhere, and, besides, it is not out of the question that men could have a better awareness of their environment, spatial awareness, following distance, reaction time, whatever, in the way that there are simply differences between men and women.)

What if a state mandated that, since it’s unfair to charge young adults more for insurance when they can’t “help it” that they’re inexperienced drivers, insurers couldn’t differentiate but had to wait until a driver got into an accident or got a ticket?  (Yes, I know, exactly the demographic with the most political power would be disadvantaging itself, so it’s purely hypothetical.)  Would it be fair to say that any subsidies young people receive would be evened out by paying relatively more than otherwise when they get older?  After all, they’ll earn more then, too, on average.

But intuitively we know this is not actually fair. It is true that all drivers are required to have basic levels of insurance, but there is discretion in terms of the deductible amount and whether, in addition to state minimums, one elects collision/comprehensive insurance.  Plus, of course, drivers purchase the cars they do in part knowing that insurance premiums vary among cars (due to the age and cost of the car plus relative repair expenses and risks of theft).  What happens if these optional coverages become subsidized for some groups?

Now, that being said, it would genuinely be interesting to see what’s driving the rate disparities (no pun intended).  But suggesting directly or indirectly that insurance companies are anti-woman isn’t helpful.

 

Image: https://pixabay.com/photos/traffic-highway-car-driving-road-966701/