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Taxes and talent

The tax rate on income for soccer players varies substanitally in Europe. This should obviously have an important impact on the distribution of talent across countries. Sebastien Gay pointed this out to me when we met for a job interview in Boston, and lo, here is a story in today's Guardian discussing it. Since Britain's tax rate is high, the Premier League is at a disadvantage relative to France and Spain. The story begins with this:

English football clubs have missed out on a string of the world's best players, including Barcelona's Ronaldinho and Inter Milan's Luis Figo, because ministers refused to ease "draconian" tax rules, international tax specialists claimed yesterday.

Ronaldinho was destined for Manchester United and Figo was linked to Liverpool before Spanish and Italian clubs moved in with better offers.

Tax advisers at IFS said the continental clubs were able to offer improved deals because their governments allowed the wealthy to pay less tax. Also, more income can be held offshore, benefiting from cheaper tax rates in Jersey, Gibraltar or Liechtenstein. The firm said a player seeking net pay of £50,000 a week would need a £100,000-a-week gross salary in Britain compared with £66,000 in Spain.

Since players can now move freely across Europe, draconian taxes place their country's leagues at an obvious competitive disadvantage. This creates a political demand to reduce those taxes which did not exist when footballers were restricted to playing in their own countries.

This has a parallel in the "real" economy. The decline of barriers to the movement of labor and capital in Europe allows them to flow to counties with better institutions and tax systems. This puts serious competitive pressure on high tax countries in Europe to reduce tax rates and wasteful government expenditure, something that Dan Mitchell of Heritage has been pointing out for some time.

This offers hope for the future of old Europe, including Sebastien's home country of France. In the meantime, I'm looking forward to reading his working paper on taxes and talent in the post-Bosman football leagues of Europe.