If You Want Your Team to Win, Support Lower Taxes

Back in 2018, I shared some academic research on the relationship between state tax rates and the performance of professional football teams.

The main takeaway is that teams based in high-tax states did not win as many games, on average, as teams based in low-tax states.

So if you want your favorite team to win, support better tax policy.

Though there are no guarantees. A team from high-tax California just won the Super Bowl, so it goes without saying that taxes are not the only factor that determines team success.

But it presumably means that teams in states like California and New York have to overcome a built-in disadvantage.

Let’s take a look at some new research on this issue. Professor Erik Hembre of the University of Illinois at Chicago authored a study that’s been published by International Tax and Public Finance.

Here’s the question he wanted to answer.

Do higher state income taxes harm firms? …This paper examines the state income tax burden in a unique market, professional sports, where teams—the capital in question—are highly immobile and players—the labor—are highly mobile to test whether higher state income tax hinders team performance. Anecdotal evidence suggests higher state income taxes disadvantage professional sports teams. Across the four major US sports leagues, of the forty-nine franchises with long championship droughts, only four are from states that do not have an income tax, while twenty are from the highest taxed states.

Here’s his methodology, which takes advantage of the fact that free agency gave players new-found ability to play where they could keep more of their earnings.

To test the link between state income taxes and team performance, this paper analyzes team performance in the four major US professional sports leagues: the National Basketball Association (NBA), the National Football League (NFL), the National Hockey League (NHL), and Major League Baseball (MLB). To address concerns that the association between team performance and income tax rates may be coincidental, I examine how the tax rate effect changed with the adoption of free agency. Achieving free agency has been a milestone for players’ associations, paramount both for increasing player mobility across teams and for forcing teams to compete for player services without restrictions.

Since athletes respond to incentives (just like entrepreneurs, inventors, and scientists), we should not be surprised that Prof. Hembre found that teams in lower-tax states now enjoy more success.

I compare the link between tax rates and team winning percentage before and after the introduction of free agency in each league using within-team variation in top state marginal income tax rates. Prior to free agency, there was a small positive association between income tax rates and winning. After the introduction of free agency, changes in state income tax rates significantly influence team performance. Each percentage point increase in the top marginal income tax rate is associated with a 0.70 percentage point decrease in win percentage. The tax rate effect on team performance is robust to a variety of specifications, such as controlling for sales and property taxes or alternative tax rate measures. Changing the outcome measure to be championships or finals appearances also yields similar results. The estimated effect size is non-trivial. The main analysis effect size of − 0.70 means that a one standard deviation increase in tax rate will result in 2.05 fewer wins over an 82 game season. …Figure 3 presents the annual point estimates (훽2) and 95% confidence intervals of the income tax rate effects between 1980 and 2017. …in all 9 years prior to any league having free agency, there was a positive income tax effect estimate. This relationship changed shortly after the introduction of free agency and since 1990 the annual income tax effect has remained negative.

Here’s the aforementioned Figure 3 for my wonky readers.

As a fan of better tax policy, I like Prof. Hembre’s findings.

As a fan of the New York Yankees, I don’t like his findings

P.S. Here’s one final tidbit that will appeal to fans of the Raiders.

Considering an extreme case, the recent relocation of the Oakland Raiders from a high income tax state (California) to a no income tax state (Nevada) projects a winning percentage increase of 8.6 percentage points or about 1 game per NFL season

P.P.S. I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated that taxes may have played a role in LeBron James going from Cleveland to Miami many years ago. But he has since migrated to high-tax California. Though many pro athletes have moved away from the not-so-Golden States, so the general points is still accurate.

P.P.P.S. I feel sorry for Cam Newton, who paid a marginal tax rate of nearly 200 percent on his bonus for playing in the 2016 Super Bowl.

P.P.P.P.S. Taxes also impact choices on how often to box and where to box.

P.P.P.P.P.S. Needless to say, these principles also apply in other nations.

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Government and Baseball

You can actually learn a lot about sensible tax policy by looking at the behavior of professional athletes and sports franchises.

Simply stated, people respond to incentives.

That’s true in the United States. And it’s true overseas.

We can also learn about the pitfalls of cronyism by looking at sports.

And maybe we can also learn why socialism is a mistake.

Not just watered-down tax-and-spend socialism-lite. In this case, we’re talking unvarnished government-ownership-of-the-means-of-production socialism.

At least sort of. Matthew Walther wrote a satirical column (or was it semi-satirical?) for the New York Times about how politicians should take over baseball to save it.

It pays to be honest up front about what nationalizing baseball would entail. While I like to think the Biden administration could seize all 30 teams and dissolve the league by executive order, citing language buried somewhere in the text of the Patriot Act, it’s more realistic to assume that Congress should be involved. . The legislation would allow teams to be purchased at their current (and absurdly inflated) market value. Players, coaches and other staff would become federal employees. The general manager would be appointed by the governor of the state in which the team plays its home games; manager would be a statewide office that citizens vote for every six years. There would be no term limit. …Revenues, though reduced, would be more equitably distributed. I imagine gate receipts and merchandise sales are being given en bloc to local authorities in cities where teams play, bolstering the coffers of many struggling municipalities. Public funding of stadiums would continue, but instead of being a cynical grab of money by destitute owners, it would be a noble enterprise, accepted by indifferent citizens as one of those worthwhile cultural enterprises like the Smithsonian Institution that governments are obliged to support.

The lesson the rest of us should take from this column is that baseball may be declining in popularity…and a government takeover would be the surest way of completely killing the sport.

Matt Welch of Reason understands. He responded to Walther’s column with a serious point about the baleful impact of government-subsidized stadiums.

…both the essay and the spectacle of an ambivalent Opening Day are timely reminders that much of what plagues the sport is not solvable by government, it emanates from government. …Giving out subsidies and tax breaks for sports business owners is self-evidently terrible enough, as have concluded virtually every non-corrupted economist who has ever studied the issue. …Self-funders are also incentivized to stay put, rather than jilting the local fan base. “When governments become landlords,” I wrote last year, “sports businesses, no matter how deep their pockets, start acting like tenants: always eyeing the exits for a potentially better deal. If you build it, they will leave.” Baseball doesn’t need to be nationalized, it needs to be privatized—no more subsidies, no more finger-wagging congressional hearings, no more State of the Union address moralizing, no more unique-to-this-one-sport carve outs from federal law. It’s time for these welfare queens to pull themselves up by the bootstraps, and compete for audience share as if their bottom lines depended on that as much as it does on the ribbon-cutting innumeracy of dull-witted politicians.

Amen.

P.S. Back in 2012, I waxed poetic in a TV interview about politicians investigating steroid use.

P.P.S. I also opined that year about Olympic athletes being taxed by the IRS.

P.P.P.S. In 2016, Cam Newton of the Carolina Panthers learned a very painful lesson about marginal tax rates.

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Professional Athletes and Supply-Side Economics

My friends on the left hold two impossible-to-reconcile views about taxation.

• First, they say taxes don’t really have any effect on incentives to work, save and invest, and that governments can impose high tax rates and punitive double taxation without causing meaningful economic damage or loss of national competitiveness.
• Second, they say differences in taxes between jurisdictions will cause massive tax-avoidance behavior as jobs and investment migrate to places with lower taxes, and that national and international tax harmonization is required to prevent that ostensibly horrible outcome.

Huh?!? They’re basically asserting that taxes simultaneously have no effect on taxpayer behavior and lots of effect on taxpayer behavior.

Well, they’re half right.

Taxpayers do respond to incentives. And when tax rates are too high, both money and people will escape high-tax regimes.

In other words, people do “vote with their feet.”

And it seems pro athletes are not “dumb jocks” when contemplating the best places to sign contracts.

Looking at baseball, taxes presumably had an effect on Bryce Harper’s decision to play for the Phillies.

For Major League Baseball players, three teams are at the bottom of the standings on state taxes: the Los Angeles Dodgers, San Diego Padres and San Francisco Giants. That’s because California is in a league of its own on personal income taxes. We’ve got by far the highest state rate in the nation, topping out at 13.3%. By contrast, Pennsylvania has a low flat rate for every taxpayer regardless of income. It’s just 3.07%. That’s one reason why superstar slugger Bryce Harper signed an eye-popping 13-year, $330-million contract last week with the Philadelphia Phillies, spurning the Dodgers and Giants. …Harper will save tens of millions in taxes by signing with the Phillies instead of a California team. …“The Giants, Dodgers and Padres are in the worst state income tax jurisdiction in all of baseball,” Boras adds. “Players really get hit.” …To what extent do California’s sky-high taxes drive players away? “It’s a red light,” agent John Boggs says. “I’ve had players in the past say they don’t want to go to certain states because they’re going to get hammered by taxes. Obviously, that affects the bottom line.”

Another argument for states to join the flat tax club!

If we cross the Atlantic Ocean, we find lots of evidence that high tax rates in Europe create major headaches in the world of sports.

For example, I’ve previously written about how the absence of an income tax gives the Monaco team a significant advantage competing in the French soccer league.

And there are many other examples from Europe dealing with soccer and taxation.

According to a BBC report, we should highlight the impact on both players and management in Spain.

Ex-Manchester United boss José Mourinho has agreed a prison term in Spain for tax fraud but will not go to jail. A one-year prison sentence will instead be exchanged for a fine of €182,500 (£160,160). That will be added to a separate fine of €2m. …He was accused of owing €3.3m to Spanish tax authorities from his time managing Real Madrid in 2011-2012. Prosecutors said he had created offshore companies to manage his image rights and hide the earnings from tax officials. …In January, Cristiano Ronaldo accepted a fine of €18.8m and a suspended 23-month jail sentence, in a case which was also centred around tax owed on image rights. …Another former Real Madrid star, Xabi Alonso, is also facing charges over alleged tax fraud amounting to about €2m, though he denies any wrongdoing. Marcelo Vieira, who still plays for the club, accepted a four-month suspended jail sentence last September over his use of foreign firms to handle almost half a million euros in earnings. Barcelona’s Lionel Messi and Neymar have also found themselves embroiled in legal battles with the Spanish tax authorities.

Let’s cross the Atlantic again and look at the National Football League.

Consider Christian Wilkins, who was just drafted in the first round by the NFL’s Miami Dolphins. He’s very aware of how lucky he is to have been picked by a football team in a state with no income tax.

The Miami Dolphins picked Clemson defensive tackle Christian Wilkins with the 13th overall pick in Thursday night’s first round of the NFL draft. …He’ll be counted on to help usher in a new era of Miami football under first-year head coach Brian Flores. …Wilkins said he “knew they were interested” in him and is happy to be headed to Miami. He also joked that he’s happy he’ll be playing football in Florida, where there is no state income tax. “Pretty excited about them taxes,” he said. “A lot of guys who went before me, I might be making just a little bit more, but hey, it is what it is.”

As he noted, his contract may not be as big as some of the players drafted above him, but he may wind up with more take-home pay since Florida is a fiscally responsible state.

College players have no control over which team drafts them, so Wilkins truly is lucky.

Players in free agency, by contrast, can pick and choose their new team.

And if we travel up the Atlantic coast from Miami to Jacksonville, we can read about how the Jaguars – both players and management – understand how they’re net beneficiaries of being in a no-income tax state.

Hayden Hurst got excited after he received a phone call from someone he trusted who told him the Jaguars were targeting him with the No. 29 overall pick. …Though Hurst…was happy when the Baltimore Ravens took him four slots before the Jaguars, he also knew in advance of the financial consequences that most rookies don’t notice. Since Florida is one of four NFL states (Tennessee, Texas and Washington being the others) with no state income tax, Hurst, who played at South Carolina, understood he’d see a big chunk of his $6.1 million signing bonus disappear on the deduction line when he received his first bonus check. …“I thought about how much of my money was going to be impacted depending on which state I played in,” Hurst said. “I’m paying a pretty hefty percent up in Maryland. To see the amount get taken away right off the bat kind of hurt, it was pretty sickening.” With the NFL free agent market set to open Wednesday, Hurst’s situation illustrates a potential competitive advantage for the Jaguars of being in an income tax-free state when they court free agents.

Yes, the flat tax club is good, but the no-income-tax club is even better.

I’ll close with an observation. Way back in 2009, I speculated that high tax rates could actually hurt the performance of teams in high-tax states.

It turns out I was right, as you can see from academic research I cited in 2017 and 2018.

The bottom line is that teams in high-tax states can still sign big-name players, but they have to pay more to compensate for taxes. And this presumably means less money for other players, thus lowering overall quality (and also lowering average win totals).

P.S. I normally only cheer for NFL athletes who played for my beloved Georgia Bulldogs, but I now have a soft spot in my heart for Christian Wilkins (just like Evan Mathis).

P.P.S. I also have plenty of sympathy for Cam Newton, who paid a tax rate of almost 200 percent on the income he earned for playing in the 2016 Super Bowl.

P.P.P.S. Taxes also impact choices on how often to box and where to box.

P.P.P.P.S. And where to run track.

P.P.P.P.P.S. And where to play basketball.

P.P.P.P.P.P.S. While one can argue that there are no meaningful economic consequences if athletes avoid jurisdictions with bad tax law, can the same be said if we have evidence that high tax burdens deter superstar inventors and entrepreneurs?

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Is Investigating Steroid Use a Legitimate Function of the Federal Government?

I’m not a big fan of the federal government. It does some necessary and important things, such as national defense, but the vast majority of what goes on in Washington is for activities that either belong at the state level or in the private sector.

This is why I want to reform entitlements such as Social Security, Medicare, and Medicaid, and it’s why I want to shut down entire departments of the federal government, including Housing and Urban Development, Transportation, Education, and Agriculture,

Simply stated, I want to go back to the limited central government and constitutional republic envisioned by the Founding Fathers.

With this in mind, you can imagine how agitated I am that the clowns in Washington have decided that it’s their role to investigate possible steroid use in major league baseball. Expressing my scorn, I ranted and raved on Neil Cavuto’s show.

In addition to mocking the absurdity of the Roger Clemens situation, I tried to make an important point about the desirability of shrinking the public sector by about 75 percent, bringing the overall burden of government spending back to about 10 percent of GDP, which is where it was for much of our nation’s history.

Based on Rahn Curve research about the growth-maximizing size of government, this would lead to an economic boom.

But there’s another aspect of the Clemens situation that’s worth exploring.

My former Heritage Foundation colleague Brian McNicoll has some thoughts on the issue, explaining that leftists resent Clemens because of his success.

A related mystery is why the hearing devolved into such a bitter partisan bickering session. …But why? It’s not as if Clemens was known as some big-time conservative. …At least part of it, I think, has to do with how conservatives and liberals view people such as Clemens. Conservatives revere success. They admire self-sacrifice and discipline, and they don’t begrudge the man who parlays these into professional and financial success. They want to be like him and find ways for others to replicate his methods. Liberals believe the Roger Clemenses of the world benefit from a random and thus inherently unfair assignment of talent. They think he’s rich and famous solely because he’s big enough and strong enough to throw a baseball 95 miles per hour. Never mind that not everyone who throws 95 miles per hour has anywhere near the success of Clemens. Never mind lots of people are big enough and strong enough to throw that hard but don’t put in the work to learn the skills it takes to actually do so. Never mind the extraordinary inner strength that even Clemens’ worst detractors admit propelled him throughout his career. This explanation absolves them of all responsibility for the fact they are not Roger Clemens. It’s all luck. He’s just a guy who got wildly rich because of the random assignment of genes. Nobody can have all that ill-gotten gain and any character, so he must have done whatever they say he’s done. And since he did nothing to earn his money, we all deserve a share of it. And wouldn’t it be nice to knock a guy like that down a few pegs?

Brian’s analysis of the left-wing mind makes a lot of sense and certainly is consistent with the mentality that supports class-warfare tax policy.

P.S. Just because national defense is a legitimate function of the federal government, that doesn’t mean the Pentagon should get a blank check. Our Founders would want us to fight against wasteful military spending and needless foreign entanglements.

P.P.S. At the very end of the Cavuto segment, he thanked me for dropping what we originally planned to discuss so we could respond to the breaking news and he kindly said “that’s what makes Dan great.” If I was either braver or more immature (probably the latter), that would have been a perfect moment for me to show that I’m hip to popular culture by blurting out “that’s what she said.” Alas, forever a missed opportunity.

P.P.S. This is the second time Roger Clemens has been featured in this blog. He also made a cameo appearance in this post mocking Obama.

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Baseball, Hot Dogs, Apple Pie, and Chevrolet…and the IRS

As a Yankees fan, it was particularly exciting that Derek Jeter became only the second player to get his 3000th hit with a home run.

As a student of human nature, it was remarkable that the fan who caught the ball, Christian Lopez, returned it to Jeter instead of selling it for as much as $300,000.

As a libertarian, it is disgusting that the jackboots at the IRS have now gotten involved by threatening to tax Mr. Lopez because the Yankees repaid his generosity with luxury box seat s and signed memorabilia. Here are some of the details from NBC New York.

The tax man may be on the hunt for the super fan who caught Derek Jeter’s 3,000th hit. Christian Lopez, 23, recovered the prized ball his father fumbled after The Captain hammered it into their section of the stands in the third inning of the Yankees’ win over Tampa Bay on Saturday. The Verizon salesman from Highland Mills, N.Y., gave the ball back to Jeter, whom he called an “icon,” and the Yankees lavished a slew of prizes, including luxury box seats for every remaining home game this season and post-season and some signed memorabilia.  Now the IRS wants a piece. The prizes Lopez received are estimated to be worth more than $32,000 — and, like game show contestants, Lopez may have to pay taxes on the gifts and prizes because the IRS considers them income. Some estimate the IRS will put Lopez on the hook for anywhere between $5,000 and $13,000, reports the Daily News.

The only thing missing from this story is whether the thugs at the IRS also plan to tax Jeter for the value of the ball. Actually, I probably shouldn’t have mentioned that idea. But, then again, it’s highly unlikely that IRS bureaucrats are reading a blog dedicated to liberty.

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Using Gasoline to Douse a Fire? OECD Thinks Higher Tax Rates Will Help Iceland’s Faltering Economy.

Republicans made many big mistakes when they controlled Washington earlier this decade, so picking the most egregious error would be a challenge. But continued American involvement with the Organization for Economic Cooperation and Development would be high on the list. Instead of withdrawing from the OECD, Republicans actually increased the subsidy from American taxpayers to the Paris-based bureaucracy. So what do taxpayers get in return for shipping $100 million to the bureaucrats in Paris? Another international organization advocating for big government. The OECD, for example, is infamous for trying to undermine tax competition. It also has recommended higher taxes in America on countless occasions. And now it is suggesting that Iceland impose big tax increases – even though Iceland’s economy is in big trouble and the burden of government spending already is about 50 percent of GDP:

Weekly Political Humor

Got this in an email from a Republican pal. No comment is necessary, but I will briefly note that I am not a fan of Bush (I never voted for him, and I’m glad I didn’t). Nonetheless, this is clever.

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