We certainly weave a tangled web when we try to finance pro sports stadiums and universal medical care through public contributions — better known as taxes. In each case, in Minnesota, economists would be quick to critique proposals that seem to come more out of desperation than practical application.
Let’s start with the Vikings stadium. The latest tangle is a projected $32 million shortfall in the $34 million that electronic pulltab games were projected to raise.
That shortage is bringing back old ideas, prompting readers to ask about the economics of the once-mooted tax on “sports memorabilia,” such as team jackets, jerseys, pennants and so forth.
That tax is not a good idea, but it is a useful example for economists who want to explain basic concepts in public finance economics.
Start with two different approaches to taxation: “benefits received” versus “ability to pay.” The tax on gasoline is an example of one based on “benefits received:” The more you use the roads, the more gas you consume, the more tax you pay, the more you benefit from the road improvements your taxes pay for. And if you don’t use the roads, you don’t pay anything, at least not directly. The tiered personal income tax is an example of “ability to pay:” Higher income people pay more and lower income ones pay less.
So which of these would a sports memorabilia tax to help pay for the stadium fall under? The rationale for the tax is that people who are enthusiastic about sports derive greater benefit from having pro sports teams in town than other people.
Sports enthusiasts are more likely to buy team jerseys and other stuff; people not interested in sports less likely.Hence a memorabilia tax would hit those who tend to derive the greatest benefit from publicly-financed stadiums that keep teams from moving to Los Angeles or other distant places.
That argument seems pretty lame to some fans. They note that a hockey fan may not give a rip about football, but still will have to pay the tax on a Wild jersey because of the need to pay off the Vikings stadium. So the “benefits received” aspect of the tax is tenuous.
SKETCHY RELATIONSHIP
But neither is it related to “ability-to-pay.” Yes, poor people may not buy any memorabilia items and rich people may spend somewhat more on such things that those in the middle class. Other than that, the relationship between tax paid and income is pretty sketchy.
What about the “burden” of such a tax? When economists talk about a tax’s burden, they mean the total cost to society of the tax. This breaks down into three parts:
First, and simplest, is the amount actually paid to the government in tax.
The second part consists of the resources that the taxpayer has to put into computing and submitting to the tax.
For an individual head of household, this would be the supplies and time needed to complete an income tax return, or the fees paid to a tax service.
For a retailer, it would be the resources needed to keep track of sales of taxable and nontaxable goods, to prepare any forms and to send the tax in. The cost of burdens placed on employers, vendors, contractors, free-lancers, etc., can similarly be calculated.
The third part encompasses the economic inefficiencies that are motivated by people’s reaction to the tax. Consider our farm. I’m never going to farm it myself anymore and neither will my kids.
The land would be managed most productively if I sold it to the cousins who have been renting it for years. But in that case, I would owe at least $150,000 in income taxes on the capital gain since I got it 37 years ago.
If I bequeath it to my heirs, that taxable capital gain will be erased by the “step-up basis” provision of the tax code.
So I don’t sell it. But the extent that the land is managed less productively because the operator is not the owner is an efficiency loss attributable to this provision of the income tax.
Economists talk of the “excess burden” of a tax. That is the total “burden,” or cost, beyond the amount paid to the government.
For miscellaneous little taxes like a “sports memorabilia” tax, this excess burden is high.
It would be a bookkeeping headache for retailers, especially small ones, to keep track of items on which the tax is owed. Some will choose simply to not sell the items, resulting in less choice for buyers. Some buyers will forgo the purchase if the tax raises the price.
In sum, this tax would have a muddled basis for being levied and a high total cost to society relative to the revenue raised. It is certainly not ideal to an economist.
MEDICAL DEVICES
Switch from a specific tax to fund a stadium to another tax in Minnesota news: that on medical devices that was included in the Affordable Care Act. (While the Senate recently held a largely symbolic vote repealing it, it does remain in force.)
Here also, the basis for the tax is muddled. Advocates of the tax argued that it would come out of the hides of rich medical manufacturers, like Minnesota employers Medtronic or St Jude Medical. So it is said to be based on “ability to pay.”
This displays remarkable naivete about the “incidence” of the tax: the issue of who actually pays it rather than who writes out the check to the government.
The cost of excise taxes like this on products like gas, cigarettes and airplane tickets largely is borne by consumers, not producers of the good or service.
The degree to which this is true depends on how much the quantity purchased varies in response to price.
If such “elasticity” is low, where consumption does not vary much with price (think gasoline), the buyer pays most of the tax.
And it is very low for medical devices and drugs. For those patients lucky enough to have good insurance, the cost is spread over all insurance buyers.
BENEFITS RECEIVED
But little of the money ultimately comes from manufacturers.
So the tax really does not reflect ability to pay, but neither is it “benefits received,” since the money goes to support people who benefit from the Affordable Care Act, and not the individuals getting the devices.
And, as with the stadium issue, the “excess burden” probably is relatively high, since that is generally true of miscellaneous one-off excise taxes.
The administrative costs would not be large for major manufacturers like those mentioned, but it would be a headache for small startups.
In both cases, these are bad taxes, but they are proposed because the more economically efficient alternative, a slight increase in income tax rates, is politically impossible.