Chapter 8

Public Finance

• Public Finance– Tax principles

• Ability to pay• Benefits Received

– Types• Progressive

– Personal income tax• Regressive

– Social security (payroll)tax• Proportional

– Sales tax– Structure

• Federal – progressive• State and local – regressive• Overall – slightly progressive (proportional)

• Public Goods – goods provided by the Government and paid for with taxes

– Characteristics• Indivisible• Nonexcludable – no one can be excluded

– Free rider problem

• Nonrival – my use does not interfere with yours

– Collective Demand – add up what all the people are willing to pay

– Supply – marginal costs– Optimal quantity – intersection of Demand and supply– Cost – Benefit Analysis

• MSB = MSC

Urban Economics and Franchise location

• Factors Determining Franchise location– Population– Per Capita Disposable Income– TV Market

• Cities benefits from secondary effects– Hotels – Restaurants– Tax revenues– Rental fees

• City will benefit only if additional revenues would not normally come from the city

– Benefits must come from newcomers to the area who wouldn’t be there other wise

– Multiplier is 1.91

• Baseball restricts movement of teams– Population– Stadium size– TV market– Parking– Income

Public Finance and Sports

• Subsidies and Economic Impact– Sports Team Subsidies

• Types– Stadium construction

» New stadiums lead to increased attendance and winning percentages

– Infrastructure

» Streets and parking lots

» Electricity, sewer services, water services and lighting systems

– Operating

» Game day safety and crowd control

– Tax exempt status

• Arguments– External benefits received by the city and residents

» Spending in restaurants, hotels, retail stores and gift shops

» Additional Tax Revenue the city and State receive» TV and Radio Revenue» Togetherness of the residents, pride and commonality» If the stadium is so important to keep up with other teams

let the owner build it» Team signs a lease to stay for a given period of time

– Costs» Operation, Construction and maintenance costs» Tax Revenue loss» Opportunity Costs – What else could the money be used

for?

• How to pay for it?– General Taxes: affects all– Specific taxes: Hotels and Restaurants– Bond issue

• Why not make it a cash subsidy?– Give money to the rich– What if they don’t spend it all on the stadium– Others might want a cash subsidy– Doesn’t require a lease

• Cost Benefit Analysis – Economic Impact Analysis– Benefits

» Direct – occurs at the stadium

» Indirect – benefits to other business

» New economic activity – economic activity that did not exist before the subsidy

– Costs –

» Those mentioned above

» Depreciation

» Loss tax revenue

– Multipliers – money is respent so it flows throughout the area

– Is it “New” money

– Sum of the Benefits > Sum of the Costs» Benefits» TEA = Total Economic Activity =TDS*M» M = Regional Multiplier» TDS =Total Direct Spending = TVS + TAS» TAS = Total Administrative Spending to make the

event possible» TVS = Total Visitor Spending = V * S * D» V =Out of town visitors» S = Average spending per day» D = Visit in Days

• Taxes– Player roster is a depreciable asset for a

new owner for 5 years– This requires reorganization under tax laws

• Superbowls– New York has had none because it has no

domed stadium