Looking at the behaviour of elite sportsmen is a favourite hobby of economists – aside from many economists being sports geeks (I’m not in a position to call names here…), there’s a wealth of publicly available data just waiting to be explored. Which means that apparently frivolous bits of research can actually say something serious about the social world.
So a nice recent NBER paper on taxing elite footballers (read: ‘soccer’) in Europe isn’t just a diversion from more serious subjects – it actually reveals how much individual workers are likely to move countries to minimise their tax burden, albeit in the extreme situation of superstar sportsmen.
Tax, inequality and migration
There has long been an argument about the sensitivity of talented workers to high tax rates, with those on the left tending to believe that few people are really prepared to uproot themselves over their tax burden. And if you’re like me, you might think it particularly unlikely that multi-millionaire sportsmen would care about the odd million here or there.
But just look at the case of Samuel Eto’o, one of the world’s best strikers and winner of the Champions League (the top trophy in football) three times. In a slightly surreal turn of events, he moved two weeks ago from one of the world’s top teams – in beautiful Milan – to Anzhi Makhachkala (‘AM’). It’s not hard to see the reason: while AM are in the lowly Russian league, and moreover are based in Dagestan where low-level terrorism is endemic, Eto’o has been offered the largest salary in world football on the back of AM’s billionaire oligarch owner’s ambitions. As his old chairman at Inter Milan put it,
“We’re talking about a fantastic striker who is 30 years old and who, in footballing terms, nobody wanted to see leave and who, in footballing terms, would have preferred to keep playing on the big stage, for the Champions League and the Ballon d’Or, but he realised he had been offered this crazy contract.”
Some research evidence
But all of this is anecdotal and about one single player – what of the more systematic evidence? The NBER paper in question is by Kleven, Landais and Saez, who constructed a database of the career histories of every player in the top flight of the 12 top European leagues for the past 30 years, and matched this to data on marginal tax rates, payroll taxes and VAT (using the wonderful International Guide to the Taxation of Sportsmen and Sportswomen). They then look at the effect of taxes in two ways.
Firstly, they show the correlations between tax rates and key outcomes across countries, dividing between two time periods: before and after the 1995 Bosman ruling from the European Court of Justice, which liberalised the football market in Europe [abolishing both the limit on the number of intra-EU foreign players in the elite European games, and allowing players to move on for free at the end of their contract].
What they found is that before liberalisation, tax rates had little effect – but afterwards it seemed to make a big difference. For example, the diagram below shows that there was no relationship between top earnings taxes and the share of foreign footballers in a domestic league before 1995, but a strong relationship afterwards.
Kleven et al find similar results for the share of domestic players who play in foreign leagues, and – more importantly if you’re a fan – that teams in countries with lower top earnings taxes were more successful in the high-status European competitions.
The second set of evidence is even more convincing. Amazingly (to me), several countries have instituted tax breaks to attract foreign sportsmen to their countries – none of which is more famous than Spain’s so-called ‘Beckham Law’, named after the world’s wealthiest footballer David Beckham who (before jetting off to LA) moved from Manchester to Madrid in 2008. Instead of the 43% marginal tax rate that most Spaniards paid on high earnings, Beckham could pay a flat rate of only 24%.
By comparing the Spanish league to the Italian league – which was similar when the tax break was introduced – Klever et al suggest that the this tax meant that the Spanish league saw a glut of foreign players arrive. Similar findings come from comparing different cohorts of Greek footballers as their tax rates change, and from comparing Denmark to Sweden, where the Danish League now has six times as many foreigners stemming from a 1992 tax change.
Implications – for sport, and for inequality
In sporting terms, this means we might want our own team to hire a good tax lawyer to try and attract the best players – and even to campaign for lower taxes to make our own country a more appealing destination. But there’s more to sport than elite players. I was very convinced by David Goldblatt in a talk at LSE that sports governance is a trade-off between glory for individual teams vs. a connection with fans and the communityand a truly competitive league, rather than wealth-fuelled oligarchies characteristic of the best leagues in England and Spain. So I’m not about to start campaigning for the 50% top tax rate in the UK to be reduced, despite the well-respected philosophical French manager of Arsenal declaring that the introduction of the tax would mean “the domination of the Premier League will go, that is for sure.”
More generally, Klever et al’s conclusion is just about spot-on: “Football players are likely to be a particularly mobile segment of the labor market, and our study therefore provides an upper bound on the migration response for the labor market as a whole… Obtaining an upper bound is important to gauge the potential importance of this policy question.” But it does provide pretty strong evidence that geographical mobility in response to tax rises can happen; the question is to demarcate when and where it will happen, rather than in arguing about it’s existence per se.
Intriguingly, Klever et al’s next study is a bit closer to home – they’re looking at the wider effects of the Danish tax break, which was actually known as the ‘Researchers’ tax scheme’…