Laffer curves for footballers

High earners are internationally mobile, and so will emigrate if taxes are too high. Because of this, tax increases actually reduce revenue. So goes the standard rightist claim. However, a new paper (pdf) suggests it is plain wrong. Henrik Kleven, Emmanuel Saez and Camille Landais have studied the response of professional footballers in Europe to tax rates. And they’ve concluded that the revenue-maximizing tax rate upon them in England is over 80%.
Yes, there is a Laffer curve - it’s just that we are on the left of it.
This is not because top footballers don’t leg it when faced with higher taxes. They do. The authors estimate that a rise in the top tax rate of 10 percentage points reduces the probability of a foreign player joining that country’s league by four percentage points. As Arsene said, “With the new taxation system…the domination of the Premier League…will go. That is for sure.”
This mobility, though, is not sufficient to justify low taxes. The reason for this is simple. If a high-ability player leaves, he’ll be replaced by lower-ability one; when Cristiano Ronaldo flounced off to Spain, Manyoo did not field just 10 players. This displacement effect means the loss of tax revenue is far smaller than the loss of the top player would suggest. The upshot is that revenue-maximizing tax rates are high.
If this applies to high earners generally, it would imply that our 50p tax rate, far from threatening to reduce tax revenues, is in fact way too low . But does it apply?
Two things suggest yes. A footballer’s career is short. So he does not have the option, which other workers do, of postponing retirement in order to make up for a loss of post-tax income. For footballers, then, substitution effects dominate income effects in a way that is not true of other workers.
Secondly, footballers - especially from smaller countries - are accustomed to having to move country. So they are more mobile than other workers.
On the other hand, though, there’s a big difference arguing the other way. Football must be located in England. Fans expect Arsenal to be based in London, not in Basle. But the same is not true for the hedge fund industry. It could move overseas in its entirety. This argues for lower taxes.
However, as demand for £1 million houses has risen sharply in the last year, and prices of prime London property are rising, it’s not obvious that the new 50p tax rate is, so far, reducing the rich’s inclination to live in England.
What’s more - of course - revenue maximization is not the only criteria here. The authors find that higher taxes do reduce the quality of a country’s football league by driving out some of its top players. And there are, of course, also arguments that huge taxes reduce freedom.
Nevertheless, the fact is that complaints that higher taxes will backfire and produce less revenue are highly dubious. 

Comments

[Tony]

When Ronaldo left, United did replace him - but not with someone earning the same amount (football is somethig of a special case here as salaries are more tied to individuals than positions). So in that case it could reduce tax revenues.

The other issue is that while salaries are usually tied to positions, it's not impossible that those positions will go abroad if the people who *could* fill those positions go abroad.

[Business directory]

Football = business and this is sad

[Patrick]

Not so dubious given WPP and Shire, among others, decided to relocate to Ireland.

Is it not more the case the primary motivation triumphs - thus determining which side of the curve you perceive yourself, if at all, to be on.
Ronaldo wanted to fulfill an ambition to play for for Real Madrid - primary motivation to go. Rooney didn't really want to leave England - primary motivation to stay.
Very easy to understand the primary motivation for corporate relocation. Thus the concerns of relocation are well founded in the case of the much more important corporate sector tax base - WPP's claimed saving was £50m. Enough to equal nearly a squad full of Lampard, Terry, Rooney et all before the tax loss equates to this single company's decision to relocate.

[Jackart]

"If this applies to high earners generally" as you admit, that's a pretty heroic "if".

You then go on to cite whole industries which are to up sticks and move.

You neglect to mention the other reason the Laffer curve works: the disincentive to invest in and build businesses as entrepreneurs if you're just going to be taxed of all the proceeds. That means in the long run we're more likely to be on the right hand side of the curve than the left.

Finally, unless you really are a totalitarian, the revenue maximising rate is not the right rate. In what way is it reasonable to take 80% or even 50% of someone's marginal income? Only if you're motivated by envy and spite, which is what I think really motivates most leftists.

Someone has more than me. Want! Waaaaaaa!

[Leftoutside]

"In what way is it reasonable to take 80% or even 50% of someone's marginal income? Only if you're motivated by envy and spite, which is what I think really motivates most leftists."

Do you really Jackart? "Most" leftists are motivated by "spite" and "envy"?

What makes you assume leftists are bad not merely mad? Were you being hyperbolic?

There's a lot of reasons to assume people merely believe something close to what those they're born near, and who their born to, and what the centre ground of respectable opinion is.

You do make some good points though, the short term revenue maximising laffer curve is different to the long term revenue maximising laffer curve, asyou admit. Revenue maximising tax rates/structure = growth maximising tax rates/structure as time goes on.

[Mark Wadsworth]

Footballers are an irrelevance, being 0.000001% of GDP or tax revenues.

The best way of guesstimating the tax-revenue maximising rate is (and i pinched this idea off your blog or from a comment here) to work backwards from the price-elasticity of the supply of labour. If we assume 0.4 (for sake of argument), we do indeed get a tax-maximising income tax rate of 65% (it's lower if you assume a higher price-elasticity and vice versa).

Full explanation in Power Point here...

http://www.slideshare.net/MarkWadsworth/laffer-curve-gdp-and-the-rental-value-of-land-5952066

But that is to miss the point. If we accept 0.4 as a reasonable guess, the next question is "By how much is GDP depressed from what it would be if there were no taxes on output (VAT), labour (National Insurance) income and profits (income tax and corporation tax)?" The answer is "about a quarter".

So the next questions are...

a) what would happen to the rental value of land if we scrapped VAT, income tax etc (it would go up by the same amount that GDP rises, i.e. about £400 or £500 billion)

b) why don't we stop taxing output, labour, profits etc and start taxing land rental values instead? (that's not a rhetorical question BTW).

[Neil]

A footballer’s career may be short, but the lifetime of a league is long. When Ronaldo left for Spain, he was replaced by a player of slightly inferior quality and vastly inferior fame. This made the English Premier League, by a small but significant amount, a less marketable competition. Were Ronaldo to be followed by the likes of Drogba, Torres, Fabregas, etc., we would very quickly find that audiences (particularly in non-Anglophone countries) started switching to the Spanish league for their footballing entertainment. The long run loss to Britain would therefore be considerably more than just the taxes on the individual incomes of the players; the revenues of the entire domestic industry would decline, the likes of Abramovich and Sheikh Mansour would disinvest and move their capital back overseas, player wages would fall across the board prompting still more stars to leave, and we’d get locked into a vicious cycle of decline.

Football is of course a special case where the usual rules of economics don’t entirely apply. Footballers chase prestige at least as much as they chase money, and the best want to play against the best. So as long as England retains a large enough percentage of the world’s best players, our tax system is unlikely to deter others from moving here. But in less publicity-seeking industries, glamour is less of a consideration than money, so one would expect tax rates to have a more significant effect.

[Mark]

Neil, I'd be happy to see the decline in the premier league stars and their foreign billionaire owners.

Footballers' agents response to the 50% tax is to negotiate players' salaries net of tax, placing the risk of tax increase on the clubs and not the players.

[Jim]

Rooney will go anyway - the new contract is merely to allow Man U to get maximum value for him when he's sold. Just like they did with Ronaldo.

The 50% tax rate is already affecting the Premiership - it is no longer a buyer of the worlds best, it is now a seller. In some ways I'm quite happy with that, as it makes for a more even (and therefore exciting) league.

But we're not discussing ways to improve football, but whether higher taxes on high earners will raise more revenue.

And as others have pointed out above, its not only a question of what can be seen (people leaving the country, taking their tax revenue with them), but what cannot be seen (the people who do not relocate to the UK or those who do not expand their business, or businesses who do not move here).

The new 50% rate might raise a few hundred millions more, and that could be claimed as a victory. But you will never know how much extra tax revenue could have been achieved by keeping the rates as they are, or even lowering them.

[Privet]

Jim, well said regarding the last two paragraph's of your past post.

Economics along with social & political policies have a ripple of knock on effects, quantifying these is notoriously difficult, often you have to wait 20 or so years to see what the outcome is in 'practice' , I think the UK should be enpowering people on the low pay scale by removing tax up to 15-20k incomes, but increasing tax for high earners will lose the UK business & this is what employs working people, less business = higher unemployment & the working man will suffer most.
Socialist idealists beware the real world

[Sam]

"it would imply that our 50p tax rate, far from threatening to reduce tax revenues, is in fact way too low ."

No it wouldn't. The Laffer curve argument can argue that tax rates are too high (it's always wrong to be on the right hand side of the peak, unless you're some kind of vindictive penal-tax communist who values equality of outcome over everything else, in which case it's always right to grind the rich bastards into the ground whatever the effect on your national economy).

The Laffer curve argument doesn't argue that tax rates should be higher, merely that were rates to be set higher, government revenue would increase. It is far from obvious that revenue maximization is a proper function of government.

[Froot Loop]

Athletes supply positional goods. In order to extend the comparison, you need to demonstrate that this:

"If a high-ability player leaves, he’ll be replaced by lower-ability one; when Cristiano Ronaldo flounced off to Spain"

applies equally well to other high earners

In fact, you have to show that not only are other high earners providing positional goods, but that the positioning which counts is at the national level. The Premier league is a national league. Endeavors which are plausibly positional (at least in part) like cinema and finance are internationally positional if at all.

[Tom Addison]

"The 50% tax rate is already affecting the Premiership - it is no longer a buyer of the worlds best, it is now a seller."

No, Spain has overtaken England because of the excessive spending of Real "Funded By The Government" Madrid and FC "Massively In Debt And All Our Fault" Barcelona.

The Premiership "officially" fell behind La Liga when Real Madrid bought Ronaldo, Kaka and Benzema in a single transfer window. Yes, Ronaldo moved from England, but only because it was his boyhood dream to play for Real. Kaka moved from Italy and Benzema from France.

[Neil]

Mark: I agree on both points, but would add that getting the club to agree to your desired post-tax salary demands is going to be considerably easier in Spain, where foreign nationals pay only 25% for their first 4 years in the country, than it is in England paying 50%. The tendency will therefore be towards players moving to Spain.

Whether this is good or not for the English game is economically irrelevant; local industry revenues would certainly decline, and with them tax revenues. QED.

[CharlieMcMenamin]

"...the hedge fund industry... could move overseas in its entirety."

So there are benefits other than additional income to putting up taxes then?

[andrew]

You raise two issues – tax rates and substitutability of labour. When Ronaldo leaves its clearly pretty hard to replace him exactly. Perhaps even harder when you are being bled dry by ill-advised debt. But when a hedge fund manager departs to Geneva how hard is he (or she) to replace? The supply of bright financially literate executives must easily exceed the numbers who are currently making the millions. The barriers to entry should be low. The sources of capital – retail banks etc and investment opportunities remain in London – so you would expect new start-ups – even with a 50% tax rate. Excessive executive pay always revolves around the myth of shortage of supply of talent –and that’s a function of buyer conservatism and lack of imagination.

[Matthew]

"Footballers are an irrelevance, being 0.000001% of GDP or tax revenues."

Not sure how you get that calculation (maybe you just meant a small number?). Premiership wages are about £1.2bn, so about 1/1000th of GDP, which is 0.1%.