Tax Policy - President Obama vs. Joe the Plumber

In microeconomics we're just now going through the chapter on tax incidence. We're also taking a quick look at tax fairness which we'll return to later when we cover income distribution. As luck would have it, Greg Mankiw has just presented a paper on tax fairness and income distribution. It's a good read. It contains some useful background information (facts) on income distribution and how that has changed over time. It also covers the differing philosophies of utilitarianism and "just deserts."

Fabless is Fabulous

US apparel manufacturers long ago quit manufacturing apparel. They provide the design, marketing, wholesale and distribution services and actually get the garments manufactured by overseas contractors. The US athletic shoe market operates the same way.

Increasingly, that also appears to be the business model for IC's (integrated circuits.) With AMD spinning off their fabs, they are now the second largest fabless IC supplier in the world.

In late 1Q09, AMD became a fabless company by including its Dresden, Germany fabs as part of the GlobalFoundries spin-off. IC Insights has included all of AMD's sales for 2009 in the chart. As shown, AMD now ranks as the second largest fabless IC company in the world behind only Qualcomm...

As shown, 17 out of the top 25 fabless IC companies are headquartered in the U.S. Moreover, nine out of the top 10 fabless IC companies in 2009 are based in the U.S...

Given the big disparity in the 1999-2009 IC sales CAGRs between the fabless IC suppliers (15%) and the IDMs (2%), it comes as little surprise that fabless IC companies have been steadily increasing their share of the total IC market.

While most IC suppliers still run their own fabs, the trend toward focusing only on design, marketing, packaging and distribution seems pretty clear.

Expected Change in Demand - Register Early

I'm expecting full classes in the fall. I teach at Mesa Community College whose classes are a substitute for those at Arizona State University and the two other four year state schools. The state universities are planning on raising tuition:

The presidents of Arizona's three state universities are proposing steep increases in tuition this fall, saying they are necessary to make up for cuts in state funding and the uncertain economy.

The biggest increase would be at the University of Arizona, which is proposing a $2,130 jump in tuition and fees for undergraduate students, raising the cost by 31 percent, to $8,972 a year.

Meanwhile the Maricopa County Community Colleges, of which Mesa is a part, are not raising tuition.

Students at the 10 Maricopa County community colleges likely will not see a tuition increase next year, a decision driven by more money than anticipated from property taxes and belt-tightening in the budget...

Tuition for Maricopa County residents would remain at $71 per credit hour in 2010-11, or $2,130 for a student who takes a full-time load of 30 credits per year. That's the same rate as 2008-09 and the current school year.

Since the price of the substitute is increasing, I expect our demand to increase.

Note to students. Register early. We're going to have a full house in the fall so get your preferred classes locked in early.

Also note that if you take econ from me you are in a class with up to 32 students. If you take it at ASU, you can be in a room with 350 of your closest friends.

Value vs. Merit

I usually post on news, not commentary, but the following makes an important point.

From Reason Magazine, Shikha Dalmia notes that you get paid for value, not merit.

In a functioning market, Hayek insisted, financial compensation depends not on someone's innate gifts or moral character. Nor even on the originality or technological brilliance of their products. Nor, for that matter, on the effort that goes into producing them. The sole and only issue is a product's value to others.

Also

But markets don't just expand and democratize the concept of merit; they render it moot. No longer does it matter what great qualities reside in you. What matters is if you can make them work for others. The concept of merit is replaced by that of value. Merit is intrinsic, concentrated, and atomistic; value is relational, decentralized, and social.

To the extent that academia rewards merit rather than creating value, we're teaching our students the wrong things.

Resorting to Taxing Resorts

Arizona's Espresso Pundit has a short post on the irony of two stories in the Arizona Republic. One laments the low rates that local hotels and resorts are receiving while the other talks about a proposed increase in hotel taxes (bed tax) in Scottsdale.

From an educational standpoint the timing of these articles couldn't be better. In Microeconomics we're just starting into elasticity, and we'll follow it up with tax incidence - both of which are apparent in the articles.

First the basics. The demand for hotel rooms, especially at resorts is price elastic. It's perceived as a luxury with lots of available substitutes. Meanwhile, the supply is perfectly inelastic. Hotels and resorts have a fixed number of rooms to rent per night, and they really want to keep them full. Some revenue is almost always better than no revenue for a room.

What happens is hotels and resorts tend to adjust room rates to try to keep the place full. When demand decreases, as it has with the recession, they lower rates one way or another.

The all-suite resort is dangling some enticing peak-season rates to grab guests, however. One offer: $279 a night with $100 in resort spending money thrown in each night.

also

Jesse Thompson, director of sales and marketing for the Hotel Valley Ho, will remember last year as "the least profitable one to date." The 194-room boutique hotel reopened in late 2005, in time for the boom years of 2006 and 2007.

Thompson said the Valley Ho's occupancy wasn't horrible last year, but room rates were.

"That's what killed everybody," he said. "The rates were so impacted that the revenues just aren't there."

The average daily rate in metro Phoenix fell 15.4 percent, to $105.72 from $124.93. Scottsdale saw a steeper decline, at 18.2 percent.

The second piece you need to know is that the tax incidence (who really pays the tax) depends on the elasticities. Whoever is more inelastic bears most of the tax. In the case of resorts, where the supply is perfectly inelastic, the resort bears the entire cost of the tax. Look at it this way. If a hotel wants to fill up, it has to lower it's price. If a tax increases the price, the hotel just has to lower it's price even further. The consumer doesn't care if they are paying the hotel or the city. It's still a cost for the room for the night. If it is lower somewhere else, that's where they will go.

There is an assertion in the article that people only look at the room rate, not the total cost with taxes.

Michael Hughes, vice president of research for "Tradeshow Week" magazine, said that "most event organizers do not look at hotel tax rates when comparing cities. And most attendees do not factor in taxes when making a decision to attend an event."

Voters are less likely to oppose a bed tax increase because it's paid by visitors, he said.

Web developers tell us that this is not true. They note that people booking online go very deep, right up to the point of paying for the room, and then bounce out. What these consumers are doing is looking at the total cost, including taxes, and then looking elsewhere. (We've learned this from booking airline tickets online. Just think about the extra fees compared to the air fare.)

Might I also note that if I'm a corporate manager that employs an event planner that doesn't take room taxes into account, I'm going to fire that event planner.

In simple terms, what Scottsdale is proposing to do with its increased bed tax, is tax the resorts. When the resorts are hurting for business, and going out of business, this doesn't make a lot of sense.

Fighting Over Sports Subsidies

Spring Training is a big deal here in the valley. The Cactus League has played here for decades and it's seen as a boon to tourist industry. Most of the teams play in public facilities built (at taxpayer expense) specifically for them. Of course tax revenue must be raised to pay for them. The latest is what to do for the Chicago Cubs.

A bill to help keep the Chicago Cubs' spring-training operations in Mesa ran into strong headwinds Friday even before it was introduced in the Arizona Legislature.

Derrick Hall, president of the Arizona Diamondbacks, told The Arizona Republic that Cactus League teams are united in opposing the legislation, which would raise car-rental taxes and impose a surcharge on spring-training tickets to help pay for a new Cubs stadium and practice facility in Mesa.

A surcharge on tickets is just an excise tax on tickets to spring training games.

It's also interesting to look at the numbers.

The bill seeks to raise $59 million over 20 years to pay off bonds that would be issued by the Arizona Sports and Tourism Authority to build the Cubs complex.

The sports authority was created in 2000, when voters approved Proposition 302 to raise money for an Arizona Cardinals stadium and for Cactus League facilities, with West Valley cities getting the bulk of the funding so far. The sports authority levies a 1 percent bed tax and a 17.75 percent car-rental tax.

With the authority's initial funds now tapped, Mesa and the Cactus League say they need the legislation to keep the Cubs from bolting to Florida. The authority's $59 million would cover 70 percent of the public cost for the new facilities, which has been capped at $84 million. Mesa would contribute the remaining $25 million, Mesa Mayor Scott Smith said.

Investment by private parties, including the Cubs, would push the total cost of the baseball complex to about $119 million.

So taxpayers put up $59 million, Mesa taxpayers another $25 million and private parties put up $35 million.

Just as a point of reference, the Cubs 2009 player payroll (for active players) was $134 million. The local Arizona Diamondbacks were about half that - $73 million.

Offshoring the Stock Market

Offshoring the Stock Exchange

In today's wired world, financial markets are easy to move about. If costs are lower elsewhere, companies and consumers will leave higher priced venues for a better deal. Some agressive marketing also helps.

A small Canadian stock exchange that promises companies lower fees and fewer financial reporting requirements is courting Arizona businesses in search of capital...

The exchange charges companies less money to be listed and provides a more "streamlined" process for reporting financial results and other information to investors and brokers than large exchanges such as the New York Stock Exchange and Nasdaq, President Robert Cook said.

Will anyone lament the loss of jobs this causes on Wall Street?