JONATHAN COHN NOVEMBER 28, 2010
It’s a safe bet to say that almost everyone who isn’t a Miami Heat fan thinks LeBron James is a jerk. After all, who goes on ESPN to announce that he is ripping out his depressed hometown’s heart to go to a different team that isn’t even offering more money? LeBron James, that’s who.
At the time, though, several commentators suggested James did have a powerful economic incentive to head South: taxes. His tax bill is complicated (see this Tax Foundation post for the specifics), but in short, had James stayed in Ohio, he would have lost about eight percent more of his income to state and local taxes. In Miami, he pays little beyond the federal income tax.
OK. But do James (and other mega-rich athletes) actually pay attention to tax law?
Thanks to some recent research, it appears that the answer is a resounding “you betcha.” According to a paper by Henrik Kleven, Camille Landais and recent-genius-grant-winner Emmanuel Saez, “the overall location elasticity with respect to the net-of-tax rate is positive and large.” In other words, athletes are likely to move around to cut their tax bills.
Kleven, Landais, and Saez studied about two decades of data on the movements of European soccer players. Several changes in national tax law and soccer rules (like 1995’s Bosman ruling, which greatly expanded soccer players’ international mobility) allowed them to assess the impact taxes had on where players chose to play. The researchers don’t present their results in a manner conducive to a simple explanation, but these two charts below demonstrate the gist of their findings. In the first chart, before players were free to play wherever they wanted, each country had a similar, low fraction of foreign players, regardless of tax rates. The second chart, which covers the years with free international migration, show a strong decline in the fraction of foreign players as tax rates rise.
And this high-tax-driven dropoff in foreign players came with a great cost to competitiveness—teams from countries with lower tax rates tended to perform more strongly in international competitions than teams from high-tax countries. The disparity didn’t really exist before the Bosman ruling.
The finding that people observe their tax rates and respond to them seems intuitively obvious. But to move to another country, with a different language and culture, is certainly a dramatic response. And generalizing from Kleven, Landais and Saez’s findings is difficult. Did LeBron James pick the Heat to avoid the burden of Ohio’s taxation? We can’t be sure, but James aspires to create a business empire, so it’s likely taxes were at least a small consideration. He’ll also earn millions more in endorsements on top of his salary, meaning tax rates are even more important. And the NBA, unlike European soccer leagues, has a salary cap, so I suspect the impact of taxes is even larger than it is in Europe. The cap prevents teams from offering higher salaries to compensate players for higher tax burdens.
What do Kleven, Landais and Saez’s findings tell us more broadly about the optimal taxation of the non-athletic ultra-wealthy? Not much. As the authors note, the soccer players they studied represent an extreme case. Soccer is soccer, whether it’s played in Sweden or Spain. So professionally speaking, athletes should be location agnostic and just chase the highest salary. This is not the case in other sectors. Manufacturing requires factories and workers able to operate the equipment, and location is crucial to running service businesses such as restaurants or dry-cleaners. Their owners can’t costlessly pack up and move to Canada if taxes go up in the United States. But athletes? They can, and according to Kleven, Landais and Saez, will if they find a better net salary elsewhere.
(Full disclosure: I once took a class from Kleven at LSE. Also, I am an Orlando Magic fan.)