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On the Incidence of an Ad Valorem Tax: The Adoption of VAT in the UK and Cost Pass Through by English Football Clubs

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Abstract

It is conventional in the sports economics literature to assume that professional sports teams are local monopolists and that stadium attendance below capacity has approximately zero marginal cost, implying that prices should optimally be set at the point of unit elasticity, regardless of whether teams are win maximisers or profit maximisers. The empirical literature has puzzled over the finding that prices appear to be set on the inelastic part of the demand curve. This paper approaches the problem in a different way. If the assumptions are true, then tax theory implies that an ad valorem tax such as VAT should be absorbed in full by the sellers. The paper uses company records that identify attendance and gate revenue for over 6000 English Football League games between 1971 and 1974, to examine the impact of the adoption of 10% VAT in the UK on April 1, 1973. The data suggests that pass through rates varied considerably, averaged around 25%, and were seldom zero.

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Notes

  1. This result applies equally to an ad valorem tax (such as VAT) and a specific tax (such as an excise tax) under the assumption of perfect competition. In imperfectly competitive markets the equivalence between ad valorem and excise taxes no longer holds, see e.g. Delipalla and Keen (1992).

  2. This is at least true for a linear demand curve. If the demand elasticity is constant and marginal cost is zero then a solution may not exist at all, since in the constant elasticity case the profit maximizing price is proportional to marginal cost. However, in the textbooks, the linear case is the example that is typically offered.

  3. So pervasive is the assumption of local monopoly that in many cases it goes unmentioned. For example, in their textbook Downward et al (Chapter 10, Box 10.3), illustrate the pricing problem of a monopolist without explaining that it is the monopoly problem.

  4. Referred to in Fort (2004).

  5. There are some degenerate functional forms for which it may not be possible to identify a price where demand is unit elastic, but such cases do not undermine the general argument. The case of constant elasticity demand curves is more problematic. Technically, for a constant elasticity demand curve, the profit maximizing price is infinite.

  6. An alternative explanation is advanced by Forrest et al (2002), who argue that the cost of attendance for fans includes travel cost, and that demand looks more elastic once these costs are included.

  7. A simple example in linear case is as follows: suppose Q = 1 – P and C = 0.85 – 0.65Q. In this case, if t = 0.1, P0 = 0.786 and PT = 0.9 and PT (1 − t) = 0.81 > P0. Hence the price has increased by more than the extent of the tax.

  8. Entertainment Duty was introduced by the UK government as tax of sports and cinema attendance in 1916. According to Fishwick (1989, p. 40) the tax accounted for as much as 40% of club revenues in 1945. Sports were finally exempted from the tax in 1957, and it was abolished altogether in 1960.

  9. See e.g. “Your guide to the VAT price changes”, The Times, March 13, 1973, p. 9.

  10. “Professional fees brought into tax net”, The Times, March 7, 1973, p. 7.

  11. Data taken from the Rothman’s Football Yearbook, 1973–1974 and 1974–1975.

  12. “Hereford to join league in place of Barrow”, The Times, June 3, 1972, p. 13.

  13. “Fear could spur clubs to accepting League’s proposals this time”, The Times, December 30, 1972.

  14. In the lead up to the election on 18th June, the incumbent Labour government had a lead in most of the opinion polls. However, England played West Germany the World Cup quarter final on June 14th, and despite leading at one point 2-0, they lost 3-2, a game they had expected to win as reigning Champions. This event may have turned the election for the Conservatives.

  15. “A Programme for Controlling Inflation: First Stage”, HMSO, November 1972, Cmnd 5125. “The Counter Inflation Programme: The Operation of Stage Two”, HMSO. March 1973, Cmnd 5267.

  16. “McIlmoyle may move back to Carlisle”, The Times, 5th July 1973, p10.

  17. When a club left the League it ceased reporting, but its replacement began submitting records.

  18. The ledgers were originally photographed by Professor Babatunde Buraimo of the University of Liverpool, and were then transcribed by a data agency.

  19. Two of the five games are missing because the gross revenue figure was not recorded and four are omitted because the gross revenue per non-season ticket holder is implausibly large. This can happen when the difference between total attendance and the number of season ticket holders is small. It appears that the season ticket figure was not based on attendance, but on season tickets issued, and therefore there is an implicit assumption that all season ticket holders attend every game. While this might seem questionable, it is a time-honoured tradition in English football for a season ticket holder to lend his/her ticket to a friend, if unable to attend in person. In each season the total number of games played was 2028, which was the case for every season from 1950 to 1987, apart from two—1961/1962 when Accrington Stanley was forced to resign from the League in midseason due to a financial crisis, and 1973/1974 when Exeter City failed to turn up for the last game of the season at Scunthorpe United because the team had only eight fit players.

  20. Torquay United (6.2p), Northampton Town (7.2p) and Huddersfield Town (7.3p).

  21. Barrow left the League at the end of the 1971/1972 and were replaced by Hereford United, so both these clubs are omitted. There are also two unpaired games for teams promoted or relegated between divisions 2 and 3, which have unequal numbers of clubs—these observations are also discarded.

  22. The game in question was against Tottenham Hotspur, their traditional rivals.

  23. If we assume inflation of 9.4% the cost pass through is 28.2%.

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Acknowledgements

I thank seminar participants at the Michigan Symposium and the Reading ROSES seminar, as well as Ryan Pinheiro and an anonymous referee for helpful comments.

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Correspondence to Stefan Szymanski.

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Appendix: Ledger Page for Scunthorpe United for the Season 1972/1973

Appendix: Ledger Page for Scunthorpe United for the Season 1972/1973

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Szymanski, S. On the Incidence of an Ad Valorem Tax: The Adoption of VAT in the UK and Cost Pass Through by English Football Clubs. De Economist 169, 37–61 (2021). https://doi.org/10.1007/s10645-020-09376-9

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