Chapter 8 Public Finance Public Finance Tax principles

Chapter 8 Public Finance

• Public Finance – Tax principles • • – Ability to pay Benefits Received Types • Progressive – • Regressive – • Social security (payroll)tax Proportional – – Personal income tax 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 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