Wednesday, October 22, 2014

Boom and Bust: The Explanation of the Business Cycle



Ludwig von Mises' analysis of the business cycle may provide an insight to the Real Estate Crash from 2008. It also can provide insight into the prior Stock Market Crash in the late 1990s. Its an excellent write up by the late Murray Rothbard.



Mises’s Contribution to Understanding Business Cycles - Murray N. Rothbard - Mises Daily

Monday, October 13, 2014

Ep. 4 of 5 - Comparative Advantage and the Tragedy of Tasmania

A Critique of, "Sports Stadiums: Temples to Crony Capitalism"

Sports Stadiums: Temples to Crony Capitalism - Salmaan A. Khan - Mises Daily



I reviewed Mr. Khan's article regarding sports teams. While quite entertaining, and I agree with part of his premise, it still had some material worthy of deeper analysis. I will lay out the pros and cons of the article.

Pros: I agree with the writer's overall premise regarding sports stadiums. Sports stadiums, typically not in all cases, are financed with govt debt instruments: i.e Bonds. However, this is similar to how other "public goods" are financed. The tax incidences, for the construction of these structures, are shifted to the tax payers, the current ones, and to the tax payers in the future.  In this sense, the tax payers fund these structures, and many tax payers are not season ticket holders, or owners of the football franchises.

It is also note worthy to point out that the stadiums are leased to the football teams, as they pay rent towards its use each season. The Ticket sales, concessions, and etc cover this cost. As any economics major should know, that rent is simply the return of capital of the initial investment.. Many arenas are used for other purposes too, and those events pay the city for the arena's usage. Most football franchises do not "own" the arenas/stadiums.  Since this is true, the stadium's construction is not a subsidy to the team per se.

The issue with this sort of model is that the structures are not created from the out-spring of the "free market". The arena or stadium, like other public goods, is constructed by Government Fiat, and not from a true sense of actors "utility seeking".  This makes for market mis allocation of resources, or as economists call this "dead weight losses". The costs of construction skyrocket, scarcity of materials also cause the prices of inputs to construct the arena to increase, even onto those who will never attend an event or game! However, these individuals are still paying the bill for the stadium's construction via taxation.

Cons: The writer conflates the notion of the NFL being Non-profit as some sort of notion the league avoids taxes, and therefore, the entire NFL is subsidized. This is false. First of all, the NFL is a non-profit, as it is a 501 C 6. But, simply because it is a non profit, does not mean it does not pay taxes. The NFL is taxed on every dime, as  Jeremy Spector, NFL outside tax counsel, Partner, Covington & Burling LLP states here:

"Every dollar of income that is earned in the National Football League -- from game tickets, television rights fees, jersey sales and national sponsorship -- is subject to tax. None of this income is shielded in a tax-exempt entity. Instead, the NFL's 32 clubs pay tax on all of these revenues."(Spector, 2013)

The NFL home office is a non-profit, and it is able to keep its non-profit status simply because it does not engage in business activity, as Jeremy Spector states here:

"Claims that the NFL is using a tax exemption to avoid paying the tax due on these revenues are simply misinformed. The confusion arises from the fact that there is one small part of the NFL, unrelated to all this business activity, that is tax-exempt: the NFL League Office. The league office is the administrative and organizational arm of the NFL and does things like write the rules of the game, hire referees, run the college draft, negotiate the collective bargaining agreement with the players, conduct player safety research, and run youth football programs.

The league office acts as a trade association for the NFL clubs. It establishes rules and standard practices for its members, develops programs to help them run their operations more efficiently and profitably, and promotes the business in the broader community. Trade associations are nonprofit organizations. They don't engage in any business activity. As a result, they are exempt from being taxed under section 501©(6) of the federal tax code." (Spector 2013)

Secondly, the notion that the NFL league office is a 501 C 6 does not mean that other tax payers are "subsidizing" its existence. While one can attempt to make this argument with the construction of Sports Arenas, even though it will be incomplete also, the NFL is not being subsidized solely due to its non profit status.  Logically speaking ,this is tantamount to stating that if one utilizes a tax deduction, his/her neighbor is "subsidizing" the person using the deduction. This is risible. Moreover, it assumes that the property belongs, at first, to the Government. This is also nonsense.

In closing, his article, while entertaining, still needs more detail and clarity with this issue.  It has too many hyperbole style statements like, "The NFL is running one of its own games on the public, and as one of the most subsidized non-profit organizations in American history, the NFL excels at tackling the American taxpayer. It should be of no surprise that with its religious-like following, the NFL receives the same tax-exempt status as a church, exempted under the IRS 501 (c) 6 code from paying federal taxes. ", and less substance and factual analysis.  I do agree with the writer's analysis with regards to the construction of these stadiums and arenas. They are financial boondoggles, and the mis allocate resources, on the tax payer's dollar.

Additional Reading

Here is the entire analysis by Jeremy Spector from his interview:


"Every dollar of income that is earned in the National Football League -- from game tickets, television rights fees, jersey sales and national sponsorships -- is subject to tax. None of this income is shielded in a tax-exempt entity. Instead, the NFL's 32 clubs pay tax on all of these revenues.

Claims that the NFL is using a tax exemption to avoid paying the tax due on these revenues are simply misinformed. The confusion arises from the fact that there is one small part of the NFL, unrelated to all this business activity, that is tax-exempt: the NFL League Office. The league office is the administrative and organizational arm of the NFL and does things like write the rules of the game, hire referees, run the college draft, negotiate the collective bargaining agreement with the players, conduct player safety research, and run youth football programs.

The league office acts as a trade association for the NFL clubs. It establishes rules and standard practices for its members, develops programs to help them run their operations more efficiently and profitably, and promotes the business in the broader community. Trade associations are nonprofit organizations. They don't engage in any business activity. As a result, they are exempt from being taxed under section 501©(6) of the federal tax code.

Because the league office does not receive income from game tickets, television contracts and the like, its tax exemption does not apply to any of the profits earned in the NFL overall. All the money-making activity is conducted by the for-profit, taxable teams. The NFL has never contended that its business activity is a nonprofit endeavor. Similarly, and contrary to what some have asserted, the NFL's stadium financing program does not depend on the league office's tax-exempt status, and the bonds issued in connection with that program are not tax-exempt bonds.

Some have suggested that the league office's tax-exempt status is the result of a "loophole" in the tax code. This is incorrect. While section 501©(6) does mention professional football leagues as exempt organizations, the NFL League Office and other professional sports leagues were exempt from taxes long before this provision was enacted. This provision was inserted in the tax code when the NFL and the AFL merged, simply to ensure that professional football players could continue to receive their pensions from the newly merged league without jeopardizing its existing tax status.

The IRS first determined that the NFL League Office qualified as a tax-exempt trade association in 1942. And as recently as 2009, the IRS conducted an extensive audit of the league office and concluded that it was fully in compliance with the laws governing tax-exempt entities. If the federal agency responsible for raising tax revenues had instead thought that there was money being earned by the league office that should be subject to tax, or that the tax exemption was improperly protecting other NFL revenue from tax, or that the league office should not be tax-exempt at all, it would not have hesitated to reach any of those conclusions. However, the IRS gave the league office a clean bill of health.

Given the fundamental distinction between the for-profit, taxable teams and the nonprofit, tax-exempt league office, recent criticism of the NFL for trying to escape tax on its revenue is misleading because it ignores the crucial fact that all of this revenue is already subject to tax. None of the NFL's profits escape tax by virtue of the league office's tax exemption."



Reference:Coburn, T., & Spector, J. (2013). Should the NFL Have Nonprofit Status?. U.S. News Digital Weekly, 5(48), 14.