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Public Finance

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Jones wants new stadium for Cowboys. Dallas County raises hotel tax to 18% Why hotel tax? ... Large Dallas-based cosmetics seller. Threatens to move annual convention ... – PowerPoint PPT presentation

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Title: Public Finance


1
Public Finance
  • Whats in it
  • for the cities?

2
What is point of Government?
  • Set and enforce rules of behavior
  • Macroeconomic stabilization
  • Deal with monopoly
  • Provide Public Goods
  • Deal with Externalities

3
What are Externalities?
  • Similar to Pubic Goods
  • What you do affects me
  • BUT You do not take impact on me into account
  • Can be negative
  • What you do hurts me
  • You dont compensate me
  • Examples?
  • Can be positive
  • What you do helps me
  • I dont compensate you
  • Examples?

4
Impact of Negative Externality
  • Brewery Pizza factory
  • Private Costs of brewer?
  • Supply Curve Sp
  • Optimal Price Pp
  • Optimal Quantity Qp
  • Are these all the costs?
  • What if beer fumes affect pizza makers?

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Sp
Pp
D
Q
Qs
QP
5
Impact of Negative Externality
  • Negative Externality
  • Private and Social Costs
  • Cost imposed on bystander
  • Supply curve actually Ss
  • Optimal Price Ps
  • Optimal Quantity Qs
  • Market fails
  • Overproduction
  • What can government do?

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Ss
Sp
Ps
Pp
D
Q
Qs
QP
6
Impact of Positive Externality
  • Spose fumes make pizza makers more productive
  • Private v. social benefits
  • Market fails again!
  • Underproduction
  • What can government do?

P
S
Ds
Dp
Q
QP
QS
7
Can a Stadium be a Profit Center for a City?
  • Revenues
  • Rental Payments
  • Share of Concessions, Parking, Luxury Boxes, etc.
  • Precise arrangements vary by facility
  • Costs
  • Standard operating costs (labor, utilities, etc)
  • Depreciation (facility will eventually be
    worthless)
  • Opportunity Cost Could have invested
  • Foregone tax revenue city cant pay itself
  • Average subsidy to team 7 Million/year

8
One Key Externalities
  • City not like firm
  • Firm weighs direct costs and benefits
  • City looks more broadly
  • Teams can have negative externalities
  • Crime, noise, congestion,
  • Teams can have positive externalities
  • Do they attract business?
  • No evidence that employment or pay rise as result

9
Public Good Aspects
  • Teams as Civic Totems
  • Sense of identity
  • And now, YOUR Boston Celtics
  • Especially true for mid-size cities
  • Propaganda value
  • Berlin, 1936
  • Moscow, 1980
  • Beijing, 2008

10
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11
What Do Sabres Bring to Buffalo?
  • 2003 estimates by NY State Comptroller
  • 31M in gate receipts
  • 8.6 M in concessions revenue
  • 4 M in advertising and broadcast revenue
  • Subtotal 43.6 million
  • Multiplies subtotal by conservative 1.5
  • Total Impact 65 million

12
Monetary Benefits Direct Financial Benefits
  • Where does 43.6M come from?
  • Get local residents to spend more
  • Net exports rise
  • Imports fall
  • Residents spend locally instead of elsewhere
  • Exports rise
  • Outsiders spend locally

13
Are Direct Benefits Overstated?
  • Imports also rise
  • Money in and money out for concessions
  • Expenditures on foreign inputs
  • Players who live elsewhere
  • Team as conduit, not magnet
  • Opportunity Cost
  • Is all 43.6M new spending?
  • Hollywood 1994 baseball strike

14
ConclusionDirect Benefits are Small
  • MLB revenues
  • A new course on underwear?
  • Single team worth less than sizable department
    store
  • Other sports worth even less
  • Chicago has 5 major league franchises
  • 1 of 2 cities with all 4 sports in city proper
  • Sports account for .08 of personal income

15
A Third Key Indirect Benefits
  • The Multiplier Effect
  • Intuition Pebble in a Lake
  • Has ripple effect
  • Initial expenditure pebble
  • Expenditure higher income
  • Higher income Spend more 1st ripple
  • Subsequent spending raises income spending

16
The Arithmetic of the Multiplier
  • DYXXMPC(XMPC)MPC
  • DYX(1MPCMPC2MPC3MPC4)
  • Numbers in () get smaller Why?
  • Let S()
  • Infinite sum how to solve?
  • Consider S-MPCS
  • Simple multiplier1/(1-MPC)
  • Income can rise far more than direct effect
  • MPC0.9 Multiplier10

17
What Determines Size of Multiplier?
  • MPC falls as income rises (Why?)
  • Much of income goes to few highly-paid athletes
  • Earning lifetime of athletes highly compressed
  • MPC falls if income leaks out of local area
  • More likely for small towns than large
  • Most athletes/executives live outside of town

18
How Big is the Multiplier?
  • Noll Zimbalist say 1/(1-MPCf)
  • f fraction of income spent inside community
  • MPC falls from 0.9 to 0.67
  • NZ think f 0.5
  • Multiplier falls from 10 to 1.5
  • Multiplier in Buffalo seems about right

19
Teams and Jobs
  • DT studied impact of AZ Diamondbacks
  • 340 full-time jobs
  • Cost to city 240 Million
  • 706,000 per job
  • Other studies smaller - but that much
  • Cost per job in Baltimore 127,000 - 331,000

20
Measures of Benefits Baade
  • Sets pattern for studies of teams facilities
  • Dyit-Dyit-1 b0 b1NTit b2NSit eit
  • LHS Growth in per capita income
  • Actually growth in difference from sample mean
  • Function of teams stadiums controls
  • Uses sample of 30 cities 1958-87
  • Neither coefficient statistically significant
  • Simulates impact for specific cities
  • Significant impact only for Indianapolis
  • Rosentraub study questions even this

21
Other Studies
  • Coates and Humphreys look smaller
  • Look within cities
  • Find difference in immediate neighborhood
  • Falls off rapidly
  • Rappoport looks at property values
  • Finds higher property values in cities with teams
  • How to explain when income and jobs not affected?

22
Special EventsSuper Bowls Olympics
  • Different situation 1-time event
  • Still how much does it add
  • Hotels in San Diego
  • How many would have been occupied anyway?
  • Study by Porter of Super Bowl
  • Looks at spending in counties with Super Bowls
  • Finds little or no impact

23
Problems with Stadium Funding
  • How to match benefits and costs?
  • Efficiency
  • Equity
  • Taxes seldom stay put
  • ExampleTax hotel stays
  • Try to export tax burden
  • Popular with residents
  • Does it work?

24
Jerry Jones v. Mary Kay
  • Jones wants new stadium for Cowboys
  • Dallas County raises hotel tax to 18
  • Why hotel tax?
  • Wants to export tax to foreigners
  • Mary Kay objects
  • Large Dallas-based cosmetics seller
  • Threatens to move annual convention
  • Similar problem in Philly
  • Tax on cab rides hotels bringing less than
    expected

25
Why the Fuss?
  • Tax Shifts Supply Curve
  • Say 10 higher
  • Does Price rise 10?
  • Price rises by less
  • At higher price QD
  • Pe rises by less than 10
  • Hotel revenues fall
  • Share tax with guests

P
S
D
10
Pe
S
Pe
Q
26
Burden of Tax
  • Before tax
  • Consumer Surplus

P
D
S
Q
27
Burden of Tax
  • Before tax
  • Consumer Surplus
  • Producer Surplus
  • Gain to societysum

P
D
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Q
28
Burden of Tax
  • Tax Shifts Supply Curve

P
D
S
S
Q
29
Burden of Tax
  • What is cost of tax to society?
  • Consumer Surplus falls

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D
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S
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30
Burden of Tax
  • What is cost of tax to society?
  • Consumer Surplus falls
  • Producer Surplus falls

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D
S
S
Q
31
Burden of Tax
  • What is cost of tax to society?
  • Consumer Surplus falls
  • Producer Surplus falls
  • Part of loss is transfer

P
D
S
S
Q
32
Burden of Tax
  • What is cost of tax to society?
  • Consumer Surplus falls
  • Producer Surplus falls
  • Part of loss is transfer
  • Part of loss disappears
  • Deadweight loss
  • How to minimize DWL?

P
D
S
S
Q
33
Lotteries in Baltimore
  • Voluntary tax What could be better?
  • Who pays?
  • Poor and ill-educated
  • Regressive
  • Wasteful tax
  • 2/3 goes to support bloated bureaucracy

34
Sales Tax in Milwaukee
  • Funded Miller Park with 5-county sales tax
  • Sales taxes regressive
  • Poor spend more of income than rich
  • Tax covers more than city
  • More closely matches benefits
  • Sales tax does poor job of matching costs and
    benefits

35
Seattle Fine Tunes Tax
  • Sales tax on restaurants bars in King County
  • Tax businesses that benefit
  • A bit too broad, though
  • Tax on admissions to stadium
  • Gets at direct beneficiaries
  • Would be even better if taxed luxury boxes more
  • Tax on rental cars
  • Problems outlined above

36
How about Debt?
  • Ricardo Equivalence Theorem
  • Must pay back debt by raising taxes eventually
  • Municipal bonds tax deductible
  • Pay low interest rate
  • Export tax to other states
  • Export burden to later generations
  • Okay if later generations also benefit
  • Not if paying for empty stadium

37
A Public Choice Perspective
  • James Buchanan won Nobel for originating
  • Politicians act economically
  • Pursue own self-interest
  • Linked to political fortunes
  • Interest groups press own agenda
  • Highly organized groups have advantage
  • Well-defined goals
  • Access to political power

38
Logrolling
  • Majority may not desire
  • If gains to some high - and harm to others low
  • May trade votes
  • 2 policies 3 voters
  • Policy A helps Nina hurts others
  • Policy B helps John hurts others
  • How can each get what s/he wants?
  • Both policies pass
  • Even though majority opposes each
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