Fair Fines

It seems Americans are obsessed by taxes, and New Yorkers are additionally obsessed by tickets.




I am amazed how often tax comes up in everyday conversation over here. In Europe, we don’t like tax, but generally we let it happen. I have a general saying that people who complain about tax, specifically income or wealth tax, have too much money. The more you have, the more you pay. So suck it up.



Here, it is different. There are many possible reasons why. Perhaps wealth here is something you brag about, and tax conversation is a good way to flaunt your wealth. Somehow, many taxes seem more in your face here. Sales tax is added on at the point of sale. To me, this is crazy. An item will be labelled at a cost of ten dollars, but at the checkout it rings at ten dollars eighty something. So it is much harder to budget your overall spending, and, if you pay in cash, you end up with pockets full of change (and loads of paper single dollars as well. Why?)



For me, this flaunts a basic principal of consumer rights. A price on an item should be its price. But Americans seem ready to accept it, and some even express a wish to know what the tax is. Some say that because tax varies between states, the retailer has to do it at the point of sale, but that strikes me as BS. Tax varying by state is another way tax assumes a higher profile and higher everyday concern.



The retailers lobby may be one reason this regime remains acceptable. But I also suspect the politics. It suits the right that tax is always top of the agenda. In some ways that is good, as in Europe it can be the opposite – there everyone wants everything from the state, and don’t think of the trade-off involved. Here it is the opposite. No one accepts tax, and they don’t link that to poor schools or infrastructure or elderly care. On neither continent is there much intelligent debate. And it also makes point-scoring very easy, suiting the side with the big advertising budget.



Last weekend in Atlanta there were referenda where the proposition was a sales tax for a limited time to be spent exclusively on improving the transport infrastructure. They all got voted down. It becomes very hard here to complete any project for the common good. No wonder the roads are all full of holes, and the bridges and tunnels feel unsafe. At least in New York City, there is a well-functioning system overall.



Anyway, as well as taxes, New Yorkers love to moan about tickets. So far, I haven’t got any, not least because I am not driving here yet. But the belief is that the police treat tickets as fair game to raise money, and give them out very loosely. And fail to pay, and you yet loaded with interest, and pretty soon a ban.



I may change my mind when I suffer a glut of tickets, but overall I am in favour of the approach. There are so many police on the streets here all the time, raising money is one way to make use of them. And rules are there for a reason, so we should not complain if we get fined for violating them.



How many times have I been delayed for an hour or so in London because some rich guy chose to park illegally and created a bottleneck? Fine him, say I, and at least we all get some compensation for our inconvenience. If the result is more fines, then presumably we can have good enough service, without higher taxes.



The London example raises the issue of differential fines. The reason the rich guy parks illegally is that the fine is peanuts to him. To get around that, the authorities in London started towing cars away, reasoning that this would hurt the rich guy more, since time matters more to him than money. Good move, except that the very rich guy then pays some contractor to retrieve his vehicle for him.



In Finland, I understand fines are proportional to the ability to pay. I remember this being introduced in Britain years ago, and then withdrawn again almost immediately. The elite managed to find a few old ladies who was fined thousands of pounds for a minor offence, and used them to turn public opinion.



Indeed it would be difficult to implement this system in practice, and well done to the Finns for persevering – no doubt the wonderful public IT systems there help. Without that, the debate about what income counts or wealth counts, foreign income, who owns the car and so on could make things very complicated. Unlike for the Tobin tax, this is a fair argument against a variable scheme. But hardly insurmountable, I would think. The Dutch have become smart at making fines variable depending on previous offences. Variable for some income/wealth coefficient should not be too hard to devise. That might deter the guy on Putney High Street – as long as he wasn’t a diplomat, which seems to be another insurmountable problem – hard for me to understand as insurmountable, and then I suspect some other elite conspiracy.



Joe Public is not the only one worrying about fines just now. The summer has seen many corporate fines, with more to follow. Barclays, HSBC, Google, Airlines, Glaxo and the rest are starting to pay dearly for their indiscretions. First, I often wonder where such fines go. They can be eye-watering amounts, and could help plug some debt holes just now.



Again, in principle I support these fines. In the Economist, Schumpeter argued recently that businesses will do whatever they can get away with, trading off risk against benefit. I am not quite so cynical, but I still favour harsh sanctions. If the regime is fair and consistent, it only creates a level playing field and protects the consumer.



Competition law fines started to become an issue at Shell a few years ago. A Dutch EU commissioner put a strong regime in place, including fines according to ability to pay and previous record. They also included the wonderful incentive of penalties imposed on individual managers not just their corporations. Ouch. Shell was heading into the hundreds of millions, and it had an impact. We all had lots of training, and legal scrutiny became stronger. Training beforehand had seemed half hearted, but not after the fines got nasty. Well done Nellie Kroes.



Businesses also have to worry about a secondary quasi-fine that arises from lawsuits, and a tertiary one in the form of reputation loss. Barclays and the other LIBOR miscreants seem very vulnerable to these now. I often thought Shell under-estimated this type of risk, perhaps as a European rather than a US company. I once did a study assessing the risks to a business of Shell offering services to other manufacturers, and I concluded that litigation and reputation was the biggest risk category. We could earn a few thousand dollars for some advice, but what if, either because the advice was flawed or the customer mis-applied it, the result was some catastrophe? For our own operations, we had to accept these risks, but why extend them outside the company boundary, for only a small reward? Like most of my advice, this was duly ignored – probably quite correctly.



I foresee an era when fines, litigation and reputation become even more important drivers to business success, as regulators and lawyers step up their game, supported by IT and rampant media. Rupert Murdoch may well agree. In general, I find this all to the good, with caveats.



One caveat is the risk that we all feed the lawyers even more than today. Regulation needs to be simple and transparent wherever possible. Another is that regulation becomes a weapon in trade wars between countries. Like so much else, this is a hidden benefit of the EU: Europe regulates as one nowadays.



But generally, just like individual taxes and tickets, if people cheat and are punished, the consumer benefits and money flows to the law-abiding. If you complain about tickets, try the alternative of following the rules. Most of them are there for good reasons. If taxes and tickets and fines reflect your ability to pay, celebrate that you have that ability in the first place.



But I am sure the New Yorkers would still find something else to moan about.