Thursday, 17 June 2010

Racing NSW case

The reaction to the judgment handed down in Betfair's case against Racing New South Wales is fascinating.

Some have pointed out that there are fairly technical reasons for Betfair's case being dismissed (the judge accepting that the turnover fee was discriminatory in favour of TabCorp and against Betfair, but dismissing the claim that it was protectionist), such that the eventual outcome may well change; others outline that it is not the victory for racing that it immediately appears; and others still, pointing to the Sportsbet victory the same day, show how the combined judgments will impact the future governance of racing.

Others close to racing, though, are hailing it as a 'great opportunity' for the sport.

I find racing's thinking, as exemplified on the final link, incredibly muddled. The dispute shouldn't be over the idea that racing should be able to charge. The question for me is what basis of charge is the best for the industry's future.

But consider the Racenet article referenced immediately above. In one line it says, "Racing in effect is now free to claim a percentage of every dollar wagered on its sport, no matter where in Australia it is wagered – a stunning opportunity to be sure" and a few paragraphs later it accepts that 'Huge amounts of money can churn around within the system with the same dollar going through a bookie then the tote as it’s laid off. A new turnover tax on that amounts to a double dipping."

So, which do you want it to be? A turnover tax is not a tax on punter drop, by definition. It's a tax on turnover, and turnover has nothing do with what the punter spends or what the operator makes. That's not my judgment alone: Justice Perram thought that turnover had no utility as a measure of the number of times race field information is used, and felt that as a proxy for numerical use, the fee was “hopeless”.

Aside from legal argument, though, the question has to be what is most effective in taking racing into the future, in a world with multiple product. In other words, what charge maximises take across the global marketplace, taking into account consumer behaviour, and a desire not to create something that then alters consumer behaviour in order to facilitate avoidance.

There is only one sort of tax which doesn't incentivise the person paying the tax to change their behaviour in order to reduce exposure to whatever it is that is being taxed, and that is a tax on profit. Taxing anything that has a variable need just encourages people to reduce the need for it (look at the old window tax), but reducing your profit to pay less tax is clearly cutting off your nose to spite your face. A tax on turnover clearly incentivises you to reduce your turnover, particularly given that you can do so without reducing your profitability. You just raise your margin. a 2% margin on turnover of £1000 clearly generates the identical profit to a 4% margin on £500.

So, a turnover tax, by definition, incentivises the operator to keep prices high, in order to keep turnover low. Keeping prices high means being less competitive; being less competitive means reducing innovation; reducing innovation means opening a gap between what punters want in their regulated market and what they are being offered; and opening up a gap creates demand for a black market.

The thing is, even people who argue what a 'great opportunity' this is, seem to recognise that. Take that Racenet article again. it says: "Turnover needs to be maximised, markets need to be competitive."

So, how do you maximise turnover by taxing it? And if you want racing to be competitive, why tax it in a way which encourages higher prices?


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