Taxes and the Competition for Star Athletes

January 9, 2006

When trying to lure soccer (football) talent in Europe, a team must bid against teams from across the entire world. And since income tax rates for players will differ across countries, this can put teams from one country at a significant advantage or disadvantage when competing over talent with teams from other countries. From Accounting Age:

The UK is losing out on a string of talented foreign footballers and millions of pound in tax revenue as a result of unfavourable tax rules.

Roy Saunders, of International Fiscal Services, the international tax consultancy, has said that a host of foreign stars could have come to play in the UK but are deterred by UK tax rules.

Constructing a ‘dream team’ of stars including Figo and Ronaldinho, Saunders estimated that the loss to the exchequer was nearly £20m. (Full Story)

In the United States, professional sports leagues have policies that many economists would consider monopsonistic with respect to the buying of labor services. A monopsony is where there is only one buyer, and sports leagues in North America like the NBA and NFL are essentially the only buyer of the labor services of their respective sports at the professional level. The only “competition” that exists for the product is within the league itself (i.e. between the teams), and this is often minimized by the existence of a salary cap, which is a rule stating that a team’s payroll cannot exceed a certain threshold.

In Europe on the other hand, where soccer (football) is king, there are many different professional leagues across the continent, such as the English Premier League and the Spanish League (La Liga). Therefore, a team in one league will not only compete against other teams in its own league to lure talented players from across the world to its team, it is also competing with teams from other leagues across the rest of the globe.

So when a high degree of cross-border mobility like this in Europe is possible, taxes begin to become a very important factor. Because a player is only concerned with his/her after-tax income, if Spain’s tax rate is lower than the UK’s, Real Madrid (Spain) can pay a lower price for a given player than Manchester United (UK), while that individual’s net pay can remain the same (assuming exchange rate changes do not come into play).

In the sports leagues that Americans are most familiar with (NFL, MLB, NBA, NHL), taxes can play an important factor as well, despite the fact that there is essentially only one professional league per sport and despite the collective agreements between teams like salary caps. For example, tax rates differ across Canada and the U.S., and this has historically put Canadian teams (specifically hockey) at a disadvantage when trying to recruit players, and this has been well documented in empirical economic literature.

Besides the Canada-U.S. tax gap, there are also the differing tax rates across states and provinces. If one state has a high income tax (like California), it can put its teams at a competitive disadvantage when trying to recruit players with a team from a state with no income tax (like Texas or Florida). The agents for these players, who are most often lawyers, will obviously take this into consideration during their negotiations on behalf of their client. So while a league may wish to impose a salary cap on its member teams in order to promote parity, an $80 million cap on gross pay in California will not be the same as an $80 million cap on gross pay in Texas.

The Tax Foundation has published extensively on many topics relevant to this issue. Check them out below:

Jock TaxesState TaxesInternational TaxesTax Law

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