Ghetto tax

A ghetto tax is the incidence of higher prices for goods and services paid by those with low incomes, particularly those living in poverty-stricken areas.

Economic principles

File:HK Kwun Tong 裕民坊 Yue Man Square 華義樓 Wah Yee Building 仁愛圍 Yan Oi Court 發祥押 Pawn Shop Interest rate.JPG

High interest rates at a pawnbroker in Hong Kong

A ghetto tax is not literally a tax. It is a situation in which people pay higher costs for equivalent goods or services simply because they are poor or live in a poor area. A paper by the Brookings Institution, titled From Poverty, Opportunity: Putting the Market to Work for Lower Income Families, is widely cited as a study into ghetto taxes, although the report itself does not use the term.

The problem of ghetto taxes is closely associated with mobility; one study in the USA showed that higher prices might be prevalent in some neighbourhoods, but people with access to a car would have more access to affordable goods and services elsewhere, whilst those without a car would bear the brunt of higher local prices.

Tackling the problem of ghetto taxes is difficult. For instance, high-interest-rate loans are more likely to be taken by people on lower incomes; however, a study has shown that capping interest rates results in reduced credit availability for those people who most need it. This may make the problem worse.

Examples

• Credit services: Lower income consumers are much more reliant on upon alternative financial services that are more expensive, such as check cashers and payday lenders, pawnshops, and auto-title lenders.
• Cigarettes: In some areas it is possible to buy (legally or illegally) single cigarettes. Purchasers are typically poor (and perhaps unable to afford a whole pack of cigarettes), but per-cigarette cost is higher, thus making smoking a more expensive habit for poorer people. This is in addition to the fact that (in many countries) the prevalence of smoking is already concentrated in lower socioeconomic groups.
• Household appliances: In the USA, lower-income households are more likely to spend more on a given household item. Also, rental of household electrical items is generally more expensive in the long term than purchasing them, but these rental services are mostly used by people unable to pay the whole cost of the item up-front.
• Groceries: Grocery stores in poor neighbourhoods are smaller than in large neighbourhoods; lacking economies of scale, they are more expensive as well. Low income households may find it difficult to access cheaper out-of-town supermarkets. Some poor households may not be able to afford large quantities, and hence lose out on bulk discounts.
• Utilities: Poor people are more likely to pay higher prices for long-distance phone calls.
• Financial Services: Customers that can maintain a minimum bank balance (usually $1000) can avoid debit transaction fees that can add up quickly. Those that have less than the $1000 minimum have to pay the per transaction fees; also there are far fewer bank machines in poor areas, and often those machines are third party cash machines that charge very high fees, especially when withdrawing small amounts. A $2.50 fee on withdrawing $20 is not uncommon.

See also

• Regressive tax
• Sin taxes are often regressive; that is, people on lower incomes often pay a greater share of taxes on alcohol or tobacco.