If the U.S. economy has a New Year's resolution, it should be to become more like LeBron James --that is, to seek stardom and not be content with runner-up status.
James, you might recall, jumped from the Cleveland Cavaliers, a team that chronically disappointed in a state with an adverse business climate and high taxes, to the Miami Heat, a team with one championship to its name located in a state with one of the hottest growth rates and low taxes.
Now a study of a sport other than basketball offers some insight into why and where athletes relocate. Henrik Kleven, Camille Landais and Emmanuel Saez looked at movements and performance of top soccer players in 14 countries over decades, tracking successive tax regimes and salary. Tax rates, they found, matter to players, motivating them to shift locales and affecting the record of their teams.
Teasing out the relative motivating power of the tax factor has always been difficult. Maybe James broke Cleveland's heart because Florida has no income tax and Ohio's taxes weigh so heavily. But maybe James left the Cavaliers for the Heat because he knew he needed to be with Dwyane Wade and Chris Bosh to become a champion. Maybe he preferred the Dade County winters.
The value in the Kleven-Landais-Saez work is that the authors take pains to isolate the tax variable. Their soccer experiment begins back in the early 1980s, when only one in 10 players played outside his home country. There were two reasons for the stay-at-home trend: a league rule limited the number of foreign players in a lineup to three, and teams had to pay a special fee to hire any out-of-contract player, making transfers prohibitively expensive.
Then in 1995 the European Court of Justice, in a finding now known as the Bosman Ruling, banned those restrictions. European soccer players became free agents. Most top players earn enough to be in the highest tax bracket of most European countries.
In 2002 Belgium introduced a preferential tax scheme to lure foreigners. In 2004 Spain introduced the so-called Beckham Law, after superstar David Beckham, one of the first to take advantage of it. The law applied only to those migrating to Spain after Jan. 1, 2004. That migrant class was eligible for a top tax rate of 24 percent, well below the 45 percent that then affected local citizens, for the five years following the move. Only those workers who hadn't been tax residents in Spain were eligible.
Beckham wasn't an isolated case. Cristiano Ronaldo of Portugal moved from Manchester United to Real Madrid in 2009, after the U.K.'s top tax rate rose to 50 percent from 40 percent.
Players who for one reason or another weren't eligible for tax breaks moved less, providing one form of control in the experiment. Italy, which didn't offer a parallel tax lure, failed to draw the same talent as Spain. Denmark changed its tax law several times, offering breaks but limiting the period of their effect to three years. Foreign players did indeed flock to Denmark, far more than to neighboring Sweden. The players tended to stay in Denmark for the three-year period when the breaks were in force.
What about the World Cup, which Spain captured for the first time in 2010? Since World Cup teams are made up of nationals, it's not clear whether Kleven-Landais-Saez is relevant. But a spill-over effect is possible: maybe the foreign competition motivated the Spaniards.
In any case, Landais says, the correlation between performance and tax regime proved significant. It's hard to know at what point we start calling correlation causality, but this study has moved us closer to that point.
All this matters because the power of tax rates so often is discounted. Recently, for example, the U.S. Census Bureau came out with preliminary figures showing that, as usual, Americans were migrating in droves to low-tax states like Texas and Florida from high-tax states like Michigan and, yes, Ohio. LeBron James's new home, Florida, ranks No. 5 among states on the Tax Foundation's business climate ranking, which emphasizes taxes, while population grew 20 percent.
Ohio, which ranks fourth from the bottom in the Tax Foundation survey, grew by less than 2 percent in the same period. These correlations suggest that taxes affect behavior of crowds far larger than the superstar athletes.
Yet the general tendency among policy makers is to downplay the findings. No sooner had the Census Bureau posted the numbers than the Brookings Institution countered with a memo positing that real estate and the housing bubble were the real news. These critics like to point to the exceptions: Nevada, low tax, lost people in 2009; Florida also lost population. Those points are accurate, but too much emphasis on them obscures the reality that over the long term, and most of the time, low-tax places grow faster.
The future of the Beckham Law is now in doubt because of Spain's financial straits. The evidence suggests the best move would be not to abolish such a rule but to broaden it so that the break benefits the locals. Then locals might start performing like stars. Stars can take a national economy to the next level, but only regular citizens can keep it there.
This article appears in full on CFR.org by permission of its original publisher. It was originally available here.