My friends on the left hold two impossible-to-reconcile views about taxation.
- First, they say taxes don’t really have any effect on incentives to work, save and invest, and that governments can impose high tax rates and punitive double taxation without causing
meaningful economic damage or loss of national competitiveness. - Second, they say differences in taxes between jurisdictions will cause massive tax-avoidance behavior as jobs and investment migrate to places with lower taxes, and that national and international tax harmonization is required to prevent that ostensibly horrible outcome.
Huh?!? They’re basically asserting that taxes simultaneously have no effect on taxpayer behavior and lots of effect on taxpayer behavior.
Well, they’re half right.
Taxpayers do respond to incentives. And when tax rates are too high, both money and people will escape high-tax regimes.
In other words, people do “vote with their feet.”
And it seems pro athletes are not “dumb jocks” when contemplating the best places to sign contracts.
Looking at baseball, taxes presumably had an effect on Bryce Harper’s decision to play for the Phillies.
For Major League Baseball players, three teams are at the bottom of the standings on state taxes: the Los Angeles Dodgers, San Diego Padres and San Francisco Giants. That’s because California is in a league of its own on personal income taxes. We’ve got by far the highest state rate in the nation, topping out at 13.3%. By contrast, Pennsylvania has a low flat rate for every taxpayer regardless of income. It’s just 3.07%.
That’s one reason why superstar slugger Bryce Harper signed an eye-popping 13-year, $330-million contract last week with the Philadelphia Phillies, spurning the Dodgers and Giants. …Harper will save tens of millions in taxes by signing with the Phillies instead of a California team. …“The Giants, Dodgers and Padres are in the worst state income tax jurisdiction in all of baseball,” Boras adds. “Players really get hit.” …To what extent do California’s sky-high taxes drive players away? “It’s a red light,” agent John Boggs says. “I’ve had players in the past say they don’t want to go to certain states because they’re going to get hammered by taxes. Obviously, that affects the bottom line.”
Another argument for states to join the flat tax club!
If we cross the Atlantic Ocean, we find lots of evidence that high tax rates in Europe create major headaches in the world of sports.
For example, I’ve previously written about how the absence of an income tax gives the Monaco team a significant advantage competing in the French soccer league.
And there are many other examples from Europe dealing with soccer and taxation.
According to a BBC report, we should highlight the impact on both players and management in Spain.
Ex-Manchester United boss José Mourinho has agreed a prison term in Spain for tax fraud but will not go to jail. A one-year prison sentence will instead be exchanged for a fine of €182,500 (£160,160). That will be added to a separate fine of €2m. …He was accused of owing €3.3m to Spanish tax authorities
from his time managing Real Madrid in 2011-2012. Prosecutors said he had created offshore companies to manage his image rights and hide the earnings from tax officials. …In January, Cristiano Ronaldo accepted a fine of €18.8m and a suspended 23-month jail sentence, in a case which was also centred around tax owed on image rights. …Another former Real Madrid star, Xabi Alonso, is also facing charges over alleged tax fraud amounting to about €2m, though he denies any wrongdoing. Marcelo Vieira, who still plays for the club, accepted a four-month suspended jail sentence last September over his use of foreign firms to handle almost half a million euros in earnings. Barcelona’s Lionel Messi and Neymar have also found themselves embroiled in legal battles with the Spanish tax authorities.
Let’s cross the Atlantic again and look at the National Football League.
Consider Christian Wilkins, who was just drafted in the first round by the NFL’s Miami Dolphins. He’s very aware of how lucky he is to have been picked by a football team in a state with no income tax.
The Miami Dolphins picked Clemson defensive tackle Christian Wilkins with the 13th overall pick in Thursday night’s first round of the NFL draft. …He’ll be counted on to help usher in a new era of Miami football
under first-year head coach Brian Flores. …Wilkins said he “knew they were interested” in him and is happy to be headed to Miami. He also joked that he’s happy he’ll be playing football in Florida, where there is no state income tax. “Pretty excited about them taxes,” he said. “A lot of guys who went before me, I might be making just a little bit more, but hey, it is what it is.”
As he noted, his contract may not be as big as some of the players drafted above him, but he may wind up with more take-home pay
since Florida is a fiscally responsible state.
College players have no control over which team drafts them, so Wilkins truly is lucky.
Players in free agency, by contrast, can pick and choose their new team.
And if we travel up the Atlantic coast from Miami to Jacksonville, we can read about how the Jaguars – both players and management – understand how they’re net beneficiaries of being in a no-income tax state.
Hayden Hurst got excited after he received a phone call from someone he trusted who told him the Jaguars were targeting him with the No. 29 overall pick. …Though Hurst…was happy when the Baltimore Ravens took him four slots before the Jaguars, he also knew in advance of the financial consequences that most rookies don’t notice.
Since Florida is one of four NFL states (Tennessee, Texas and Washington being the others) with no state income tax, Hurst, who played at South Carolina, understood he’d see a big chunk of his $6.1 million signing bonus disappear on the deduction line when he received his first bonus check. …“I thought about how much of my money was going to be impacted depending on which state I played in,” Hurst said. “I’m paying a pretty hefty percent up in Maryland. To see the amount get taken away right off the bat kind of hurt, it was pretty sickening.” With the NFL free agent market set to open Wednesday, Hurst’s situation illustrates a potential competitive advantage for the Jaguars of being in an income tax-free state when they court free agents.
Yes, the flat tax club is good, but the no-income-tax club is even better.
I’ll close with an observation. Way back in 2009, I speculated that high tax rates could actually hurt the performance of teams in high-tax states.
It turns out I was right, as you can see from academic research I cited in 2017 and 2018.
The bottom line is that teams in high-tax states can still sign big-name players, but they have to pay more to compensate for taxes. And this presumably means less money for other players, thus lowering overall quality (and also lowering average win totals).
P.S. Taxes also impact choices on how often to box and where to box.
P.P.S. And where to run track.
P.P.P.S. And where to play basketball.
P.P.P.P.S. While one can argue that there are no meaningful economic consequences if athletes avoid jurisdictions with bad tax law, can the same be said if we have evidence that high tax burdens deter superstar inventors and entrepreneurs?
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Image credit: Lorie Shaull | CC BY-SA 2.0.
