A Natural Experiment in Tax Incidence

Congress has provided us with a natural experiment in tax incidence. They adjourned for the weekend without renewing the FAA's authority to tax airline tickets. That means the taxes won't get collected until they pass the law. In the meantime, the tax rate on tickets goes down. However, that doesn't mean that the total price of a ticket will change.

That gave airlines a choice: They could do nothing — and pass the savings to customers — or they could grab some of the money themselves.

"We adjusted prices so the bottom-line price of a ticket remains the same as it was before ... expiration of federal excise taxes," said American spokesman Tim Smith. US Airways spokesman John McDonald said much the same thing — passengers will pay the same amount for a ticket as they did before the taxes expired.

Tax incidence depends on elasticities. Since the demand is more elastic than supply in the short run, airlines pay most of the tax out of their producer surplus. With the tax unexpectedly going away, the airlines will raise fares and pocket the tax revenue.

Said another way, the short run supply curve is almost perfectly inelastic. There are a given number of seats flying to a destination, no more, no less. Airlines adjust prices to fill the seats. The price the consumer sees is the price with taxes and fees. Since the taxes and fees decreased, the airlines can raise fares and still keep the seats full.

The Transportation Department says it will lose $200 million a week. J.P. Morgan analyst Jamie Baker said airlines could take in an extra $25 million a day by raising fares during the tax holiday.

That's an increase in producer surplus.

Which Pocket is the Money Coming From?

The City of Phoenix now has an agreement with APS that streamlines the process of selling solar generated electricity to the utility. Apparently this has helped to spur along more solar projects. These are touted as investments with positive effects on the city's taxpayers.

"We're breaking new ground," Bristo said. "We're being innovative and creative. The bottom line is we're saving money and energy for the taxpayer and user. And we're generating jobs."

Solar costs a fair bit more than conventional power, so where did the money come from?

A $25 million grant from the U.S. Department of Energy's Better Buildings program and the American Recovery and Reinvestment Act is funding much of the work.

These would appear to be negative effects on federal taxpayers. Since the city's taxpayers are also the federal taxpayers, I'm not sure how the city's residents come out ahead.

Throwing a Wet Blanket on the Economy

It's earnings season and CEO's and their staffs are holding conference calls with the investment bankers on how the quarter turned out. During these calls, the analysts also ask questions about the future intentions of the company. Stephen Wynn headlined the conference call for his namesake company. About halfway through he responds to a question about investing in Las Vegas.

But I'm afraid to do anything in the current political environment in the United States...

And I'm saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime. And I can prove it and I could spend the next 3 hours giving you examples of all of us in this market place that are frightened to death about all the new regulations, our healthcare costs escalate, regulations coming from left and right. A President that seems -- that keeps using that word redistribution. Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they are frightened of this administration. And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America. You bet. And until we change the tempo and the conversation from Washington, it's not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the President.

As I have pointed out before, business won't invest when they are uncertain about costs (Obamacare) taxes and regulations. Remove the uncertainty and they will invest - and create jobs and grow the economy...

BTW - The entire call is a good read if you are interested in business, international business, exports, hotels and/or the hospitality industry. They discuss their target market, pricing, difficulties exporting resort stays in the US, developing a business in China and a bunch of other stuff.

Via Instapundit and Tom Blumer

And of course thanks to Seeking Alpha for making the transcript available.

How Can Washington Jumpstart Job Creation?

This is just silly. The Atlantic along with the management consulting company McKinsey have asked a bunch of people to come up with proposals to fix the long term unemployment problem. Specifically, the question they are asked to answer is "What is the single best thing Washington can do to jumpstart job creation?" Initially I thought this might be useful, and then I looked at who the participants were. They have writers and thinkers and politicians and academics and non-profit executives, none of whom have ever created a new private sector job in their life. They also have a couple of business executives that have actually created jobs.

So what are they suggesting. As expected, the public sector folks want more money spent on their stuff. A couple of writers want to inflate our way out of the problem. Others want to spend more on education or make it easier for highly skilled immigrants to come to and stay in the US. All of this may or may not be wonderful, but none of it will fix the problem anytime soon.

One of the business leaders hints at what the real problem is.

Companies like Siemens are now trying to gauge how lasting the U.S. government's commitment to the R&E credit will be. Since the credit was introduced in 1981, it has always come with an expiration date, requiring Congress to renew it 14 separate times. Washington has failed to renew the R&E credit on eight separate occasions. In 2010, Congress had to pass a retroactive extension after it failed to renew the credit on time.

Think about that for a minute. Over the last 30 years Washington has had to renew a policy, which only works in the long run, about every two years. Talk about uncertainty.

Uncertainty stifles investment, and for the last three years Washington has done nothing but add to business uncertainty. Remove the uncertainty and investment and jobs will come streaming back into the economy.

They didn't ask me, but my answer is fairly simple. Remove the uncertainty and provide stability. Make the Bush tax cuts permanent so that we have a stable tax regime. Repeal Obamacare and stop the thousands of regulations that have yet to be written dead in their tracks. Again, this provides stability. Repeal Dodd-Frank and stop the thousands of regulations that have yet to be written dead in their tracks. Again, this provides stability. Rein in the EPA and the other regulatory agencies. This may involve repealing many of their newer regulations. Again, this provides stability.

Music at a Lower Opportunity Cost than Piracy

I saw a couple of articles over the weekend on a new music service called Spotify. It's big in Europe and starting into beta here in the US. Go read about the business structure.

A couple of interesting quotes. First on opportunity costs:

Ek likes to say that to succeed, any music service needs to be more convenient than piracy. Spotify is. You open an account. You download a program. And you can listen to any one of 15 million tracks, the result of two years of negotiations with the world’s music conglomerates...

Second on ownership versus renting:

In Stockholm, no one brings a laptop or a hard drive to a party anymore. They just log in to Spotify. Americans own their music; Swedes rent it. For 100 years, the recording industry has traded one durable good for another, and the need to store it all has defined habits, courting, and home design. In Sweden, this era is slipping away.

Which is better, owning a lot of tracks, or renting 15 million. I'm not sure that the out of pocket cost is very different.

HT: Marginal Revolution

The Marijuana Lottery

This morning I read a piece in the Arizona Republic about the County Attorney joining the state's request for a declaratory judgment on medical marijuana. I then made the mistake of reading some of the reader's comments. It is amazing to me that many of these people would put their total lack of critical thinking skills out there for all to see.

One of the complaints is that this only appears to be a problem for Arizona and not for other states. For these commenters this is a clear indication that politicians in the state are illegally impeding the will of the people. After all, a state referendum passed making medical marijuana legal in state law. It appears to be lost on these folks that in Arizona we are still subject to federal law.

The controversy occurs because the US Attorney for the state of Arizona (not California, not New Mexico, not Montana, but for Arizona) has sent more than one letter to state officials noting that although they don't anticipate prosecuting anyone for using medical marijuana, they (meaning the US Attorney General's Office) reserve the right to prosecute under federal law. (The federal law is the Controlled Substances Act also referred to as the CSA.)

The New Times has an article that describes the problem fairly succinctly:

Go ahead, the feds say, invest your hundreds of thousands of dollars in a medical weed-related business. Maybe you'll be a millionaire, or maybe you'll end up serving a few years behind bars. But whether you'll get the prize or prison will be based on a whim. Your operation may be too "large," while someone else's may be just right.

One of the great things about the New Times article is that it also provides a copy of the actual letter sent to the Director of the Arizona Department of Health Services. Go read it for yourself, don't depend on what others say about it.

Attorneys seem to think that one of their responsibilities is to keep their clients from running afoul of the law - local, state and federal. Given that the prosecutor of Federal law in Arizona has said in writing more than once that he might prosecute anyone helping set up and run a medical marijuana dispensary, I can understand why the attorney for both the state and the county would ask for some clarification from the court. I also understand why they wouldn't want anyone they represent to do anything in the meantime.

There is an economic principle involved here. As economists we know that uncertainty about costs and revenues stifles business investment. Jail is a rather large potential cost as is forfeiture of assets and other types of civil penalties. (See US Attorney for Arizona, Dennis Burke's letter.)

So, we're going to get less investment and less economic activity until the uncertainty goes away.

California Ships Shipping Business to Arizona

On July 1st, California's new internet tax law went into effect. For Arizona, the net effect is more distribution center jobs.

A new California law that forces out-of-state retailers to collect sales taxes on Internet purchases could have the unintended consequence of chasing businesses and jobs away from that state - and into Arizona.

Real-estate brokers say a number of Internet retailers have bought or leased real estate in the Phoenix area for order-fulfillment and distribution centers, and that California's so-called "Amazon tax" likely would accelerate that activity.

Whether you think it is "fair" or not to avoid collecting state and local sales taxes, consider the online retailer's problem.

Jonathan Johnson, president of Salt Lake City-based Overstock .com, said it made sense not to make remote sellers collect sales taxes and distribute them to states and municipalities because there are about 1,000 or more taxing jurisdictions in the U.S., and they all have their own rules or tax holidays. The whole situation is too complicated for even computer programs to keep track of, he said.

Imagine the staff you would need to keep up with the tax changes in each locality let alone what you have to do just to determine which taxing jurisdiction you are shipping to.

All Star Exports

The MLB All Star game was played here in Phoenix at Chase Field over the weekend. It's another example of an Arizona export - something that is paid for by someone from somewhere else.

This particular export was helpful to the local economy coming as it did during the middle of the summer. We don't usually get many visitors during the summer months and hosting an event that fills up the local hotels is significant.

Although it is a recurring event, it took a decade to get it here and probably won't be back for another decade at least. Hence there is essentially no ongoing economic impact.