Monday, October 13, 2014

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.




Friday, September 26, 2014

Critique of "The NCAA Racket" by Andrew Syrios

The NCAA Racket - Andrew Syrios - Mises Daily



While Mr. Syrios provides some valid points, the overall article is filled with mis direction, missed points and mis understanding.



This is an incomplete analysis, as it accepts the false premise pushed forward by the main stream media. While I have no issue with the analysis with the corporate cronyism that takes place with the construction of Sports Arenas, Stadiums, or Convention Centers, it mixes in many notions that are not logical, and do not pass the economic sniff test.



First of all, lets address the notion of Mr. Shabazz(UCONN' Men's Basketball Star) "going to bed hungry",  Mr. Shabazz does starve at times not because the school choose not to feed him, but simply because he makes that choice. Think about it: How does one build a successful athlete, thus a successful athletic program by starving the athletes? Utilization of any logic, this point of "starving the athletes" makes no sense. Moreover, the NCAA allows for the student athletes to receive the same meal plans as the other students.   This comment of "going to bed hungry" does not imply that the NCAA or UCONN seeks to starve him. This is just as risible as saying, "I am a Economics Major at UCONN, and I sometimes go to bed hungry." Does this mean that the Econ dept is starving its students?



Secondly, athletes are paid. Their wages are simply paid with the barter of tuition, room, board(meal plan), books, etc in exchange for their athletic skills.  If the athlete thinks he/she is worth more money, he/she will go pro. Since most draft picks do not make the big money, the market wage of the aforementioned benefits is their true market wage. Let us take the example of UConn. If you take the out of state and the in state totals of $50k and $25k, the average tuition, fees, etc come to $38k per year. This is the trade off, thus the "wage" the student athlete receives.



Thirdly, most Universities are not "making a profit" from college athletics. As per the Knight Commission's study on College Athletic programs, only 7-10 College athletic programs actually break even or make a profit....without subsidies. With subsidies from student fees, and the like, that list grows to a whopping 12-15. Side note: All "profits" are ephemeral, as they are simply the rents on the initial investment into the program, net the natural rate of interest.


Lastly, the writer creates a false equivocation with stating the NCAA has the power to block out competition, as he compares the NCAA to the Government. Yes, it is a cartel, but it is a very specific sort of labor/management relationship...the writer fails to mention the monopsony relationship that exists. These athletes have a special labor skill, as they are speculating that the athletic program will help them improve their skills to "go pro". So, an athlete will choose a program that has the best coaching staff, best facilities, best academics(cough couch), excellent TV exposure, etc etc.  There is limited competition simply because there exists very few individuals who can perform these skills at the highest level.



In closing, When a high school prospect leaves school, there are no armed guards whisking them off to UCONN and starving them simply to play basketball. This entire polemic regarding the NCAA making money off the student athlete is a watered down Marx Labor theory of value, which has been debunked countless times. I do agree with the writer that the NCAA/Athletic programs should stand on their own merit, and not get tax payer subsidies for the construction of stadiums and arenas. I also propose that there should be a separation between academics and athletics, as these two should never be mixed. I am curious on why the Yankees do not perform research on the cure for brain cancer?

Friday, August 29, 2014

Life Insurance Myths Debunked: Whole Life

The common refrain from most mainstream financial experts is that Whole Life is too expensive, too costly, its a bad "investment", etc etc. Most of these reasons are false, as it demonstrates the lack of knowledge and understanding on how Life Insurance Contracts are engineered, constructed, and priced by Insurance Companies. This understanding does not fit into a pithy TV or Radio Soundbite, so it is understandable why there is so much confusion surrounding this topic.

I was reviewing an article titled, "5 Common Whole Life Myths, Debunked", and I also provided some replies to the posters of this article. NOTE: It is assumed that most of these posters are agents/or financial advisory types.

Here is some of the posts and my responses to those posts(The original posts are italicized):

ahardester- you have pay the salesman, the administrative costs to issue the policy and general overhead prefund reinsurance costs..


Robert Williams Jr
Ahardester's post is false. You must meet the IRS guidelines for the definition of the life insurance contract during the first several years of its existence. Placing 100% of the funds in a Whole Life Policy and pulling 100% of the funds out in less than 5 years acts as an Endowment. Most financial services reps know Endowments are illegal as per the IRS and TAMRA,DEFRA etc. The first several years covers that expense to ensure the insurance contract is just that...an insurance contract not an Endowment.

Prior to the 1980s, Endowments were used heavily, the various tax acts in the 1980s removed this product out of the marketplace. This notion holds true for all permanent life products, as the surrender charges are high upfront.

Think about it: How would the insurance company leverage its assets if these long term contracts were that highly liquid in the first 0-5 years of its existence? Each policy holder would simply place money in a contract, and then remove the cash. The Insurance Company would be unable to loan out money for commercial developments, purchase bonds, etc etc. They would be unable to expand their portfolio to pay future claims. It makes no sense. This is why the surrender charges exists, the insurance company must look at all the funds and all the insureds. Its not some zero sum game.

Keep the policy contract for longer than 10 years, report back. The results are staggering. I have of no client who complains after 10 years regarding their permanent life insurance contract. Focusing on the first several years is horrible analysis of a permanent life insurance contract.

However, if you need the cash right away(e.g less than 5 years), it makes no sense to purchase any permanent life insurance contract, annuity, 401(k) plan and the like. It is a long term proposition. If this is a concern, utilize a different financial vehicle, like your savings at a credit union or a brokerage account.

In short, that post is a fallacious critique of a permanent life insurance policy, as it is tantamount to saying that a Porsche 911 is a poor vehicle because it can not carry hay in the back seat. Buy a pick up truck.

wkb4447 
One of the biggest myths is that the cash value is "your money". It's not. It was never intended to be. It's there to support the death benefit and all the guarantees of the contract while also providing a profit to the company. Can you use it? Yes, but you should never borrow cash value that you can't pay back in a short time. The interest rates on loaned out cash value are hardly a bargain. And, if you don't pay the interest, it is added to the principal of the loan. Agents that don't fully understand and explain how a whole life policy works are doing the policyowner a great disservice and it results in questions like those that Hollywood poses. The author of the article owes Hollywood a proper response.


Robert Williams Jr
"The interest rates on loaned out cash value are hardly a bargain. And, if you don't pay the interest, it is added to the principal of the loan."

This too is slightly false. Most loans are done on a net or "wash" basis. With whole life policies, they are direct and indirect loans also. The loan interest rate is done with simple interest, as it does not reduce your compounding of the cash value. At death, the loan is taken off the death benefit.

"One of the biggest myths is that the cash value is "your money". It's not. It was never intended to be"

Ipso facto, this is correct. It is the beneficiaries' money. However, as the owner of the policy, one controls the cash value. Similar to someone who is a member/owner of a LLC. The Cash value is the over-payment of premiums in the earlier years, yet in the later years the corridor of insurance(The Net between the Cash Value and the Death Benefit) shrinks, making the actual amount for the insurance company to "pay out" at death smaller.

Since the cash value grows tax free and compounds, the IRS assists in this process of paying the insurance cost. In this case, one is actually "buying term and investing the difference", but the Insurance company and the IRS are sharing in the risk.


QualityTermLife 
Discussing whole life when writing an article on life insurance for the general public is one thing that has caused people to be so confused that life ownership is now at an all time low!.

The fact is that for 95% of people TERM life insurance is the least expensive and best answer. Term life is used to: insure dependents to replace income, provide financial security for dependents, pay-off a mortgage, fund college, or for final expenses.

The typical profile of a term life insurance owner is someone who is a family breadwinner and has minimal savings. It is critical protection and easy to understand and buy.

One thing you can do is visit an online life insurance site to learn more about life insurance, and the better ones offer free quotes, allowing you to get rate comparisons for most insurance products.


Robert Williams Jr
"The fact is that for 95% of people TERM life insurance is the least expensive and best answer. "

This is a false statement on so many levels. First of all, term life is cheaper, under this one condition: If the insured dies within the policy "term" period. Since Insurance is based on statistics, econometric models and probability, these factors along with risk are some of the factors in pricing insurance. If the policy is "cheaper", then the probability or risk is lower for the insured's death. For example, if a 30 year old purchases a 20 year term policy, of course it will be "cheaper" than a Whole life policy. The probability is lower for the 30 year old to die in the 20 year term, vs a policy contract that runs to age 120.

Secondly, this quote totally ignores the notion of suitability. How does one possibly know what is best for 95% of the people 100% of the time? Is this agent/adviser omniscient? Do they have God like tendencies to know each person's resources, goals, wants, desires, etc? The BEST life insurance contract is the one that functions as promised in the contract and what assists the client to achieve their individual goals and objectives.

A video explaining why Whole Life Insurance is an economic Work Horse: