Tax and Financial Incentives for Businesses

1
Tax and Financial Incentives for Businesses

• By
• Marcus Miller

2
Bass Pro Incentives

• 18 Million of Lease Revenue Bonds issued by
  Oklahoma City for the building of Bass Pro Shop

3
Positive Effects of Incentives

• Enhance Local Economy
• Boost Employment
• Accelerate Infrastructure (Arguably the greatest
  effect for Bass Pro)

4
Possible Negative Effects

• Incentives take money away from producing public
  goods
• Money for the financing of Bass Pro came out of
  the Maps Project thereby, taking money away from
  education.
• Inefficiency (price distortion, free market
  disruption)

5
Economic Policies

• Prisoners Dilemma--Governments would be better
  off if no one competed for firms, but since
  everyone (governments) could be made better off
  by being the only one competing, everyone else
  competes also.
• Therefore, Oklahoma competes because Texas and
  other states compete. Each government has an
  incentive to do just a little more than their
  competing government to bring in businesses.
  However, with the greater the incentive given to
  corporations the less benefit realized by the
  locality.

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Prisoners Dilemma
Compete Dont Compete
Compete Dont Compete
100
5
75
7
Prisoners Dilemma Diagram Analysis

• If one locality chooses to compete while the
  other does not, then the locality competiting
  (shown by 100 in figure) has something to gain.
• Both localities receive less if they both
  decide to compete.
• Both localities are better off not competiting.

8
Solution to Prisoners Dilemma

• Federal InterventionThe Federal government
  should get involved and not allow competition
  among localities, or more likely, regulate it.
  No competition is the most beneficial theory to
  all localities.

9
Economic Policy 2

• Rent Seeking--occurs when payments are made to
  factors of production for their private benefit
  when those factors do not add anything to social
  output.
• Resources may be considered wasted because they
  could have been used for other purposes such as
  education. The money used to finance the
  building of the Bass Pro building could have been
  used to improve education for instance.

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Rent Seeking
A
Pm
MC
B
P
C
D
Qm
Q
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Analysis of Rent Seeking Graph

• Welfare loss from rent seekingArea of PmACP
• Rent seekers will use resources to rent seek
  equal to the rectangle PmABP
• Rent seeking will occur as long as returns are
  able to be made from the activity. The more
  firms that rent seek causes the above average
  returns to level out at which additional rent
  seeking is no longer beneficial.

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Solution to Rent Seeking

• Again, restrictions on what localities can
  legally do with regard to tax and financial
  incentives can eliminate, or more probable reduce
  rent seeking.
• However, what is considered wasted resources can
  be a judgment call.
• Varying preferences lead to varying uses of
  resources.

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Economic Policy 3

• Externalities--Some of the positive externalities
  included with the Bass Pro deal include
• 1) New jobs,
• 2) Tax revenue,
• 3) Greater return on investment relative to what
  the 17 million would have earned in the fund
  that it was in
• 4) Improved infrastructure to the Bricktown
  district

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Continued

• Negative Externalities
• Effect on competitors such as Academy Sporting
  Goods
• Academy is fighting against such incentives
  because it places them at an unfair disadvantage
  compared to Bass Pro.

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Cost of Externality
MSCMSBMEC

MPC
MEC
P
Pe
MWTP
Q
Quantity
Qe
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Graph Analysis

• The figure shows the effects of a negative
  externality such as the effects of such
  incentives on competitors such as Academy
  Sporting Goods.
• MSC MPC
• Money for Bass Pro can be seen as taking money
  out of education (larger society).

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Continued Analysis

• Q is less than Qe because of the external costs
  placed on society.
• For the Bass Pro issue, public opinion differs as
  to the efficiency of such policies.
  Economically, externalities are often taxed in
  order to equalize the effects. Here however,
  regulation may be the best policy, limiting such
  incentives.
• Triangle area (MEC) is the dead weight
  loss(1/2MECQe-Q)

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Conclusion

• As long as localities are competing and no new
  regulations are enacted, businesses are better
  off competing for business such as Bass Pro.
• The money used to finance the building of Bass
  Pro will provide a greater return than the money
  would just sitting in a bank earning very little
  interest.
• Also, eventually the building will be paid off,
  and the city will own the building to either
  continue to lease to Bass Pro or find other uses
  in the future.