In Tax Debate, Lessons from Ronaldinho and Beckham
Economists study European soccer stars to understand how the wealthy respond to tax increases and what states should do as a result.
How high can you tax the rich before they decide to pack up and move somewhere cheaper? For states teetering on the edge of bankruptcy, this is no theoretical question. Set taxes too low, and you miss out on valuable revenue — set them too high, and your powerhouse workers might move away.
Now, by looking at the mobility of soccer stars in Europe, three economists say they are closer to understanding an ideal tax rate for the super-wealthy.
In "Taxation and the International Migration of Superstars," Camille Landais, Emmanuel Saez and Henrik Kleven shed light on the elusive habits of millionaires. The study, published by the National Bureau of Economic Research, examines the changing team affiliations of top-ranked soccer players in the European Union. The economists present the first empirical evidence that tax rates do indeed affect the decision of top-paid players on where to live.
A Tax Lab
Today's tax debates often hinge on unsatisfying anecdotes. In New York, one anti-tax group reported last month that a temporary state "millionaire's tax" had driven away thousands of high-earners. Critics of such reports, including Wall Street Journal reporter Robert Frank, dispute the numbers but not necessarily the underlying idea. "It is very possible rich people are leaving New York because of high taxes," writes Frank. "But there is little or no supporting evidence."
For economists like Kleven, Landais and Saez, tracing the location decisions of the wealthy is an empirical challenge. The three are no strangers to the riddles of tax policy — Emmanuel Saez won a 2010 MacArthur "genius grant" for his work on taxes and inequality. They are also part of a younger generation of economists who, like the pioneers at MIT's Poverty Action Lab, see economics not just as a theoretical exercise but as a social science to be pursued in the real world.
Two circumstances turned European soccer into a real-world laboratory for studying the international mobility of the rich. First, a 1995 ruling of the European Court of Justice removed restrictions on players who wanted to play on a team outside their home country. The ruling turned the EU into an open market for soccer players, forcing teams to compete internationally for top talent.
Second, beginning in the 1990s, certain EU countries implemented tax breaks for high-income foreign workers. The most famous of these, the so-called Beckham Law in Spain, is widely believed to have influenced the defection of star midfielder David Beckham from Britain's Manchester United to Spain's Real Madrid in 2003, although backers of the law argued it was aimed at scientists and businessmen.
Tax It Like Beckham
The evolution of the European soccer market allowed Kleven, Landais and Saez to trace the influence of national tax rates on players' team choices. They saw that when countries implemented special tax schemes like the Beckham Law, the percentage of top foreign players on their teams jumped dramatically.
For instance, after the Beckham Law the fraction of foreign players in the Spanish league increased by 50 percent, while the Italian league — comparable in funding, number of foreign players and team performance before 2004 — stayed the same. Similar tax breaks correlated with diverging percentages of foreigners on teams in Denmark and Sweden, and Greece and Portugal. It appeared that those who could take advantage of the breaks — soccer players who were talented enough to receive international offers — did.
The economists put together a database covering players in the top 14 European leagues since 1980. The hefty database allowed them to control for other variables, confirming a significant correlation between tax rates and the mobility of soccer stars. (And for football-phobic Americans, Landais penned a paper on "LeBronomics" that touched on income tax rates in specific U.S. states.)
Does this mean that governments should slash tax rates for top performers? Absolutely not, says Landais, who is exasperated that his team's findings have been touted by proponents of tax cuts for the rich.
"People want to see what they want to see," he said. "They want to say, 'Here is proof that all the fancy people will move away if we raise taxes.'"
Landais points out that just because a soccer player can chase the tax break, doesn't mean that everyone else will. Soccer players are young, their careers are short and the game can be played anywhere. All of these factors make them one of the most mobile sectors of the labor market. They can follow the money more easily than, say, a Connecticut hedge fund manager with an office, a mortgage and three kids in school.
If anything, the economists argue their findings point to the need for more coordination between states to prevent an all-out, tax-slashing race to the bottom. In other words, the ideal tax rate is not the one that saves Beckham the most money but the one that generates the most revenue for his host country.