The Laffer Curve Bends at an 80% Rate of Income Tax

[Toro]

That is the conclusion made by three economists who looked at a highly-mobile group of top earners - professional soccer players - who earn a high amount in a short period of time and thus should be highly sensitive to income tax rates.

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. ...

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, [Manchester United] 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. ...

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.

Stumbling and Mumbling: Laffer curves for footballers

 

[Revere]

Well, it's 80% or lower.

 

[boedicca]

The study is of professional soccer players. They are hardly representative of the general economy.

The paper consists of three main parts. The first part presents reduced-form graphical
evidence showing clear effects of taxation on migration. We start by considering cross-country
correlations between (a) the tax rate on foreign players and the fraction of foreigners in the
national league, (b) the tax rate on domestic players and the fraction of native players playing
in their home league, and (c) the tax rate on local players and the performance of first-league
teams in the country (in a Europe-wide ranking of teams).

And it appears that you are misrepresenting the study:

To provide conclusive evidence, we turn to quasi-experimental evidence from (a) preferential
tax schemes to foreigners in Belgium, Denmark, and Spain, (b) a cohort-based tax reform
in Greece. In each case, we show compelling graphical evidence that international mobility
responds to taxation.

 

[Revere]

And it only has one data point, an 80% effective tax rate. Not a 70% rate. Or a 60% rate.

 

[Toro]

The study is of professional soccer players. They are hardly representative of the general economy.

They are representative of high earners. High earners are never representative of the general economy.

Not only are they representative of high earners, they are generally more mobile than high earners in most professions, and are more motivated because they only earn that money in a short period of time.

 

[Toro]

And it only has one data point, an 80% effective tax rate. Not a 70% rate. Or a 60% rate.

Because the Laffer Curve only bends at one rate.

 

[Revere]

And it only has one data point, an 80% effective tax rate. Not a 70% rate. Or a 60% rate.

Because the Laffer Curve only bends at one rate.

But since the tax in the UK is 80%, nobody knows whether they'd move if it were 50% or 60% or 70%.

 

[boedicca]

The study is of professional soccer players. They are hardly representative of the general economy.

They are representative of high earners. High earners are never representative of the general economy.

Not only are they representative of high earners, they are generally more mobile than high earners in most professions, and are more motivated because they only earn that money in a short period of time.

Soccer players may move among established, cross border leagues. They accept such mobility as a career choice.

Not all careers have such a marketplace for their skills.

A more valid study would be among small businesses - i.e., the people who create jobs for other people, or not if they don't believe they will receive a proper return for their risk taking.

 

[boedicca]

And it only has one data point, an 80% effective tax rate. Not a 70% rate. Or a 60% rate.

Because the Laffer Curve only bends at one rate.

B'loney.

This study does not empirically prove that.

 

[Toro]

And it only has one data point, an 80% effective tax rate. Not a 70% rate. Or a 60% rate.

Because the Laffer Curve only bends at one rate.

But since the tax in the UK is 80%, nobody knows whether they'd move if it were 50% or 60% or 70%.

No, the tax rate is not 80% in Britain. It is an econometric model.

 

[Toro]

And it only has one data point, an 80% effective tax rate. Not a 70% rate. Or a 60% rate.

Because the Laffer Curve only bends at one rate.

B'loney.

This study does not empirically prove that.

So, in other words, what you are saying is that it bends down at one rate, then at a higher rate it bends back up again, then bends down at an even higher rate?



And, yes, this is an empirical paper. If you think the modeling is incorrect, please point out how. Sometimes academics get these things wrong.

 

[Revere]

Because the Laffer Curve only bends at one rate.

B'loney.

This study does not empirically prove that.

So, in other words, what you are saying is that it bends down at one rate, then at a higher rate it bends back up again, then bends down at an even higher rate?



And, yes, this is an empirical paper. If you think the modeling is incorrect, please point out how. Sometimes academics get these things wrong.

It's junk science. It uses disparate rates from disparate countries.

 

[boedicca]

The study is of professional soccer players. They are hardly representative of the general economy.

They are representative of high earners. High earners are never representative of the general economy.

Not only are they representative of high earners, they are generally more mobile than high earners in most professions, and are more motivated because they only earn that money in a short period of time.

They are not representative of high earners.

They are representative of professional athletes.

 

[william the wie]

Of greater importance is whether this data is replicated in cricket, tennis, pool and other high stakes sports. Or to take another example if I wanted to treat my wife to live theater the indifference curve would have me thinking of Vegas rather than Toronto or NYC much less London. Ancillary costs make the big sites prohibitive. More than just income taxes have to be considered.

 

[Greenbeard]

They are not representative of high earners.

They are representative of professional athletes.

Hmm.

New York and New Jersey (as well as CA) have all lost millionaire status taxpayers due to their "millionaire taxes".

Just ask Cleveland how it feels about losing Lebron to a state income tax free zone.

 

[Toro]

B'loney.

This study does not empirically prove that.

So, in other words, what you are saying is that it bends down at one rate, then at a higher rate it bends back up again, then bends down at an even higher rate?



And, yes, this is an empirical paper. If you think the modeling is incorrect, please point out how. Sometimes academics get these things wrong.

It's junk science. It uses disparate rates from disparate countries.

Explain why it is "junk science."

You should understand that using comparative income tax rates in different countries is critical in the analysis.

 

[Revere]

So, in other words, what you are saying is that it bends down at one rate, then at a higher rate it bends back up again, then bends down at an even higher rate?



And, yes, this is an empirical paper. If you think the modeling is incorrect, please point out how. Sometimes academics get these things wrong.

It's junk science. It uses disparate rates from disparate countries.

Explain why it is "junk science."

You should understand that using comparative income tax rates in different countries is critical in the analysis.

It renders it bogus, since there are other variations in those countries that can't be controlled.

 

[California Girl]

And it only has one data point, an 80% effective tax rate. Not a 70% rate. Or a 60% rate.

Because the Laffer Curve only bends at one rate.

But since the tax in the UK is 80%, nobody knows whether they'd move if it were 50% or 60% or 70%.

The income tax rate isn't 80% in the UK.

 

[Trajan]

so do I pull a Barro & Co. article now or just say screw it? hummmm...

 

[California Girl]

The study is of professional soccer players. They are hardly representative of the general economy.

They are representative of high earners. High earners are never representative of the general economy.

Not only are they representative of high earners, they are generally more mobile than high earners in most professions, and are more motivated because they only earn that money in a short period of time.

They are not representative of high earners.

They are representative of professional athletes.

They are both. They earn substantial income in a relatively short time frame.