[The location response] to tax rates is especially pronounced for the most able and well-paid athletes.
A new NBER study of 14 European nations finds that football players tend to locate in countries that have comparatively low income tax rates. This response to tax rates is especially pronounced for the most able and well-paid athletes, and is actually negative for the least able and lowest paid among the professionals. Often, national tax breaks designed to lure top-notch foreign players displace the domestic players in a league.
In Taxation and International Migration of Superstars: Evidence from the European Football Market (NBER Working Paper No. 16545), authors Henrik Kleven, Camille Landais, and Emmanuel Saez construct two models of the labor market for football players in order to determine the top tax rates that nations can levy without driving them out of the country. On the whole, they find that all 14 European nations have rates below these maximizing-revenue tax rates. But the competition for top foreign talent is fierce. And four nations (the United Kingdom, Germany, Greece, and Switzerland) charge foreign players a higher tax rate than the revenue-maximizing rate generated by the model.
By studying football players, the authors hope to begin to address the broader question of how tax rates affect taxpayer behavior. "[F]ootball 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," the authors conclude. "Obtaining an upper bound is important to gauge the potential importance of this policy question."
In December 1995, the European Court of Justice handed down the so-called "Bosman ruling," which liberalized the market for European football players. Specifically, it eliminated rules that effectively limited the number of foreign players on any one team and practices that discouraged players from moving to another European team once their contract was up. The authors find that the share of foreign players went up dramatically after the Bosman ruling, and the share of domestic players went down in the top leagues of the 14 European nations they examine. Furthermore, in studying teams' performances from 1980 through 2009, they find that low-tax nations had better teams after Bosman. "This suggests that low-tax countries experienced an improvement of club performances by being better able to attract good foreign players and keep good domestic players at home," they write.
Their study also looks at the impact of tax reforms in specific countries. For example, in 2004 Spain introduced the so-called "Beckham Law" (named after British superstar David Beckham, who was one of the first footballers to take advantage of it). It allowed nonresidents to be taxed at a flat rate of 24 percent instead of the progressive rate for residents, whose top marginal rate by 2008 stood at 43 percent. After the law, Spain saw its share of foreign players increase while nearby Italy, which had a similar top league, saw its share of foreign talent shrink. Similarly, Denmark (in 1992) and Belgium (2002) introduced reforms that gave tax breaks to foreign players. Like Spain, their leagues experienced an increase in foreign players. In Greece, after the removal of a tax cap that effectively raised taxes on high earners starting in 1993, Greek players in their prime tended to migrate abroad more often than Greek players in their prime before the change - as well as those Greek players who reached their prime after the tax cap was reinstated (thus lowering taxes). "These observations provide ... compelling evidence of a tax-induced migration response," the authors write.
-- Laurent Belsie