Friday, January 7, 2011

Tax Rates and the Movement of Soccer Stars

Ronaldinho wants to go...where the taxes are low.

January is one of the two international transfer windows that allow the movement of players from club to club in FIFA sanctioned leagues.  There will be a lot of shifting around of players including a number of big stars from clubs in one European league to another.  Thus there will be some multimillionaires moving from on tax regime to another.  Henrik Kleven, Camille Landais and Emmanuel Saez examine the effect of differential marginal tax rates on player movement in a new paper (synopsis here).

They conclude:

Combining the evidence from tax reforms in all 14 countries in our sample, we find that the location decisions of players are very responsive to tax rates. But because labour demand by football clubs is relatively rigid—there can only be so many players in a club and only so many clubs in each National league –- we also find strong evidence of sorting effects. Top-quality players are much more responsive than lower-quality players. In fact, we find that tax cuts to foreigners in a given country attracts top-quality foreign players, but ends up crowding out lower-quality foreign players as well as displacing some domestic players.

How and why do these results matter for public policy? First, they matter for the football labour market. Here, our results clearly call for a reappraisal of the effectiveness of preferential tax schemes to highly paid foreigners. Implementing a favourable tax treatment of foreigners is able to attract top-quality players, which brings in new tax revenue and increases the quality of the League. However, because of sorting effects, part of this new revenue is lost as domestic players are displaced. This implies that preferential tax schemes to foreign players ultimately have limited power to raise revenue in a rigid labour market setting such as the football market. Moreover, these schemes create negative externalities on other countries as they lose their top players, highlighting the need for tax coordination among European countries. In the absence of coordination, as many more countries enact preferential tax treatments, the positive effects of having low tax rates tend to disappear in a pure race to the bottom, detrimental to all.

Second, our results matter for policies much more broadly in the sense that they demonstrate for the first time a clear effect of taxation on international migration and sorting of high-skilled labour. Since football players are likely to be a particularly mobile segment of the labour market, it is of obvious interest to broaden the analysis to other high-income workers. This will be an important topic for future research.

Here is the abstract for the more technical language that will be more pleasing to economists:

This paper analyzes the effects of top earnings tax rates on the international migration of top football players in Europe. We construct a panel data set of top earnings tax rates, football player careers, and club performances in the first leagues of 14 European countries since 1980. We identify the effects of top earnings tax rates on migration using a number of tax and institutional changes: (a) the 1995 Bosman ruling which liberalized the European football market, (b) top tax rate reforms within countries, and (c) special tax schemes offering preferential tax rates to immigrant football players. We start by presenting reduced-form graphical evidence showing large and compelling migration responses to country-specific tax reforms and labor market regulation. We then set out a theoretical model of taxation and migration, which is structurally estimated using all sources of tax variation simultaneously. Our results show that (i) the overall location elasticity with respect to the net-of-tax rate is positive and large, (ii) location elasticities are extremely large at the top of the ability distribution but negative at the bottom due to ability sorting effects, and (iii) cross-tax effects of foreign players on domestic players (and vice versa) are negative and quite strong due to displacement effects. Finally, we estimate tax revenue maximizing rates and draw policy conclusions.

In essence the responsiveness of top players to tax regimes is large. Which makes sense, we are talking about a lot of money. But it works both ways, lower paid players are actually less responsive than average due to sorting - can do better in higher tax regimes because the top talent is more scarce.

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