Tuesday, December 18, 2012
New York Times DealBook: How Local Tax Rates Affect High-Income Professionals, by Victor Fleischer (Colorado):
How sensitive are high-income individuals to marginal tax rates? One challenge in the research is finding good data on the salaries and the behavioral responses of the rich. People tend to hold salary information close to the vest.
But there is one group of highly paid professionals whose salaries and relocation behavior are public: professional athletes. Two new papers in the Journal of Sports Economics use variation in state tax rates to test how sensitive these athletes’ salaries are to state and local taxes.
One paper [Baseball Salaries and Income Taxes: The ‘Home Field Advantage’ of Income Taxes on Free Agent Salaries], by the economists James Alm, Bill Kaempfer and Edward Batte Sennoga, investigates whether differences in state and local individual income taxes in major league baseball cities affects free-agent player salaries. It does. ... The authors’ basic specification finds that each percentage point of an income tax raises free-agent salaries by $21,000 to $24,000. This means that low-tax locales like Florida and Texas have a “home field advantage” in the free-agent market. ...
In the NBA, the luxury tax acts as a more effective constraint on player salaries than it does in Major League Baseball. The second paper [Tax Avoidance: How Income Tax Rates Affect the Labor Migration Decisions of NBA Free Agents], by Nolan Kopkin, a Ph.D. student at Cornell University, looks at the effect that variation in state and local income tax rates have on the labor migration decisions of NBA free agents. The study finds that an increase in the marginal income tax rate leads to a decrease in the average skill of the NBA free agents that migrate to that team. Unlike in baseball, basketball teams in high-tax jurisdictions actually end up with a worse free-agent talent pool, all else equal. ...
These papers do serve as a useful reminder that if the goal is to remedy income inequality, state and local taxes are a weak policy instrument. To the extent that tax policy is used to achieve redistribution, redistribution should take place at the federal level.