Hidden Subsidy and Corporate Perks

One of the most interesting things about any tax allowances is that it does not necessarily eliminate that tax but most likely would transfer it to a separate payer. This fact has been aptly demonstrated in this NYT article by Richard Schmalbek and Jay Soled. The essence of their correct argument is that the decision to allow corporations to deduct the purchase price of baseball tickets from their taxes has not only altered the nature of the crowds attending sports events in the US, but has also driven the inexorable upward trend in ticket prices.

The complete argument goes that these firms are less sensitive to the prices of tickets because they can make total deductions of the prices from their overall tax liability. The unintended consequence is that best seats for sports events are purchased by these competing corporations, with the higher prices of seats conditioning sports franchises to create profits while reducing the sizes of the sports arenas. In spite of the soundness of the economic reasoning in the piece, I am less convinced that the reform of this distortion is necessary primarily to alter the composition of the individuals attending games. The best argument is that government ought not to redistribute taxes through firms that are trying to entertain their clients.

This case of applied economics shows how difficult it is to design tax breaks and how the resulting distortions  can have indefensible consequences.