Do tax rates affect where people live? Ask a soccer star.
They compete a continent away, playing a game that has never caught on with the American public. But on one subject, Europe鈥檚 soccer stars have an important message for Americans:
Tax rates.
It turns out that highly paid soccer players are sensitive to taxes. They tend to move to those nations that give them a break. Why is Spain鈥檚 top league a sudden soccer powerhouse? One reason is tax policy. Why are Denmark and Belgium鈥檚 leagues stronger than in other similar countries? Ditto.
In perhaps the first study to provide compelling evidence of a link between tax rates and worker migration, three economists look at this highly paid, highly mobile workforce and make several surprising conclusions:
1) Top marginal tax rates matter to big earners.
2) If you鈥檙e going to cut taxes to lure such highly skilled workers, make it a big tax cut. Otherwise, it won鈥檛 have much effect.
3) Even though their top tax rates are relatively high, European nations would not get more revenue by cutting them overall. But in a few of those nations, dropping the rate specifically for high-skilled foreign workers could swell the tax coffers.
Admittedly, this isn鈥檛 the usual tax-cutting message of American conservatives.
鈥淭he country would be crazy to lower its top tax rate [for everyone] in the hope of attracting top foreigners to increase their tax revenue,鈥� says Emmanuel Saez of the University of California at Berkeley, who along with economists Henrik Kleven of the London School of Economics and Camille Landais of Stanford University wrote the study. But four of the 14 nations they studied could cut rates just for high-skilled foreign workers and come out ahead.
Foreign players began to become more prevalent in European soccer after the European Court of Justice effectively liberalized the movement of foreign soccer players across national borders. But Professor Saez and his colleagues found something striking: The leagues in low-tax nations attracted better players and had better teams.
The effect was also pronounced in individual nations that reformed their taxes. For example, Spain in 2004 introduced a new flat rate of 24 percent for foreign soccer players, nearly half the top marginal rate it charged its residents. After that law 鈥� called the 鈥淏eckham law鈥� because British star David Beckham took advantage of it 鈥� Spain saw its share of foreign players increase while the foreign talent in nearby Italy shrank. Tax cuts for foreign players in Denmark and Belgium had similar effects.
So tax cuts can be useful, but policymakers should be careful, warns Saez. While soccer stars are sensitive to taxes, they鈥檙e not supersensitive to them. That means that in order to attract the best, nations have to make big cuts in top tax rates so that they鈥檙e much lower than in competing nations. 鈥淚f we observe only a small variation, we wouldn't see a large response鈥� in player relocations, he says.
Also, soccer stars are among the world鈥檚 most mobile workers. Their skills are in high demand wherever they play. Language barriers are far less important than they would be for other highly paid professionals. So if soccer stars will only move because of big changes in tax rates, it鈥檚 likely that doctors or engineers, for example, would require even bigger incentives to move to a new nation, especially if they face other barriers to moving, such as having to be newly approved or licensed to practice their craft.
Finally, the practice of lowering tax rates, sometimes temporarily, for foreign soccer players has worked to improve the quality of play. But it鈥檚 a beggar-thy-neighbor program that is potentially detrimental from a global perspective, Saez adds. 鈥淚f countries don't coordinate their tax policy, there may be a race to the bottom.鈥�
So what does all this suggest for other nations? Tax cuts make a difference, but you have to be careful how and where you apply them.
