The impact of top tax rates on the migration of superstars

Emmanuel Saez is leading a literature showing how sensitive migration decisions of superstars are to top marginal tax rates. Specifically, he and his co-authors studied Spain’s Beckham’s law.

Cristiano Ronaldo moved from Manchester United to Real Madrid in 2009 partly to avoid the announced 50% top marginal income tax in the UK to benefit from “Beckham Law” in Spain. Beckham’s Law was a preferential tax scheme of 24% on foreign residents in Spain. When David Beckham transferred to Real Madrid, the manager of Arsenal football club commented that the supremacy of British soccer was at risk unless the U.K.’s top marginal tax rate changed.

A number of EU member states offer substantially lower tax rates to immigrant football players, including Denmark (1991), Belgium (2002) and Spain (2004). Beckham’s law had a big impact in Spain:

…when Spain introduced the Beckham Law in 2004, the fraction of foreigners in the Spanish league immediately and sharply started to diverge from the fraction of foreigners in the comparable Italian league.

Moreover, exploiting the specific eligibility rules in the Beckham Law, we show that the extra influx of foreigners in Spain is driven entirely by players eligible for the scheme with no effect on ineligible players.

Suez also found evidence from tax reforms in all 14 countries that the location decisions of players are very responsive to tax rates. Suez in another paper with Thomas Piketty wants the top tax rate to be 80%. However, their work on taxation and the labour supply supports a much lower rate:

First, higher top tax rates may discourage work effort and business creation among the most talented – the so-called supply-side effect. In this scenario, lower top tax rates would lead to more economic activity by the rich and hence more economic growth. If all the correlation of top income shares and top tax rates documented on Figure 1 were due to such supply-side effects, the revenue-maximising top tax rate would be 57%.

Suez and Piketty then go on to argue that the pay of chief executives of public companies, a subset of the top 1% and top 0.1%, may not reflect their productivity but that is a much more complicated argument about agency costs and the separation of ownership and control which they make rather weakly.

Much of their other work on top incomes is about the emergence of a working rich whose top incomes are wages earned by holding superstar jobs in a global economy. It would be peculiar and perhaps overzealous to organise the entire taxation of high incomes around the correction of agency costs arising from the separation of ownership and control of some of the companies listed on the stock exchange.

Figure 1: Percentage of national income (including capital gains) received by top 1%, and each primary taxpayer occupation in top 1%, USA

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Source: Jon Bakija, Adam Cole and Bradley T. Heim “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality:  Evidence from U.S. Tax Return Data”.

There is a long history showing how the labour supply of sports stars is highly sensitive to top marginal income tax rates. For a very long time, boxing was the only really big-money sport for athletes:

The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theatres.

A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965).

Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.

Ufuk Akcigit, Salome Baslandze, and Stefanie Stantcheva found that the migration of superstar inventors is highly responsive to top marginal tax rates.

Ufuk Akcigit, Salome Baslandze, and Stefanie Stantcheva studied the international migration responses of superstar inventors to top income tax rates for the period 1977-2003 using data from the European and US Patent offices.

our results suggest that, given a ten percentage point decrease in top tax rates, the average country would be able to retain 1% more domestic superstar inventors and attract 38% more foreign superstar inventors.

Emmanuel Saez and co-authors also found that a preferential top tax scheme for high earning migrants in their first three years in Denmark was highly successful in attracting highly skilled labour to that country:

…the number of foreigners in Denmark paid above the eligibility threshold (that is the group affected by the tax scheme) doubles relative to the number of foreigners paid slightly below the threshold (those are comparison groups not affected by the tax scheme) after the scheme is introduced.

This effect builds up in the first five years of the scheme and remains stable afterwards. As a result, the fraction of foreigners in the top 0.5% of the earnings distribution is 7.5% in recent years compared to a 4% counterfactual absent the scheme.

This very large behavioural response implies that the resulting revenue-maximising tax rate for a scheme targeting highly paid foreigners is relatively small (about 35%). This corresponds roughly to the current tax rate on foreigners in Denmark under the scheme once we account for other relevant taxes (VAT and excises).

This blog post was motivated by a courageous tweet about Tony Atkinson saying that increases in the top tax rate have little effect on the supply of labour! Not so.

How much are the top speakers paid?

US income taxes are highly progressive

Milton Friedman on Equality, Family & Lottery

Why do these top 0.1 percenters get a pass from the Occupied Movement and Twitter Left?

The Value of Steve Jobs

Peter G. Klein's avatarOrganizations and Markets

| Peter Klein |

As you have likely heard, Steve Jobs is taking an indeterminate leave of absence from Apple to deal with his continuing health problems. How will this affect Apple? How important is one person — albeit the founder and CEO — to a diversified multinational company with tens of thousands of employees? Apple’s stock slipped slightly on the news of Jobs’ leave (down 2.3 percent today, the first trading day after the announcement), but Jobs’s health problems are well known and Apple’s stock price presumably already included a discount reflecting the possibility he’d step down. To estimate the value of a particular employee to the firm in this way, we need an unanticipated departure, one that isn’t a response to poor performance and isn’t expected in advance.

Sure, enough, there’s an app for that — I mean, there’s a literature on that. An influential 1985 paper by Bruce Johnson, Robert Magee, Nandu…

View original post 429 more words

Supplements to wages and salaries have grown dramatically, but labour compensation inequality has not

https://www.facebook.com/taxfoundation/photos/pb.19219803864.-2207520000.1434030135./10152970467213865/?type=3&src=https%3A%2F%2Ffbcdn-sphotos-b-a.akamaihd.net%2Fhphotos-ak-xtf1%2Fv%2Ft1.0-9%2F11102783_10152970467213865_6756945966977092418_n.png%3Foh%3Daec8ad59fc08d0e23c3931845ec89bf4%26oe%3D5630EAB6%26__gda__%3D1442243218_3b3fd51768ac8836221e27e048378f8d&size=850%2C645&fbid=10152970467213865

Gross Domestic Income (GDI) is a complete measure of all income earned in the United States. About half is wages, salaries, and benefits. A quarter goes to business-level taxes and the replacement of worn out machinery. Another quarter of gross domestic income is returned to owners of capital, including business owners and private homeowners.

The shares of income returned to workers and owners of capital remain constant over time once benefits, taxes, and depreciation are accounted for – two-thirds of net income goes to labour and one-third goes to capital.

Rather than focus on shares of GDP, a recent preoccupation of the Left over Left, we should focus on shares of labour compensation, that is, wages, salaries and fringe benefits. Both Piketty and his critics agree on that.

via A Walkthrough of Gross Domestic Income | Tax Foundation.

Why no (top 1% driven) middle class wage stagnation in (non-unionised) technologically progressive industries?

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Why did the top 1% only pick on men when they increased inequality over recent decades?

Some think that some members of the top 0.1% are underpaid

Who among the top 1% and top 0.1% increased their share of income most between 1979 and 2005?

The members of the top 1% whose income increased the most between 1979 and 2005 were real estate professionals followed by financial professionals – see figure 1.

Figure 1: increase in share of national income (including capital gains) received by top 1% for each primary taxpayer occupation in top 1% between 1979 and 2005

image

Source: Jon Bakija, Adam Cole and Bradley T. Heim “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality:  Evidence from U.S. Tax Return Data”.

Figure 2 shows that the fastest-growing shares among the top 1% as in figure 1 are not necessarily the largest occupational group are those income earners. Moreover, their fortunes seem largely unrelated to each other.

Figure 2: Percentage of national income (including capital gains) received by top 1%, and each primary taxpayer occupation in top 1%
image

Source: Jon Bakija, Adam Cole and Bradley T. Heim “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality:  Evidence from U.S. Tax Return Data”.

The next members of the top 1% in terms of income growth were rather respectable group:professionals and scientists and arts, media and sports. The latter,arts, media and sports get a complete pass on their membership of the top 1% despite their great success in increasing their incomes since 1979 at the expense apparently on the bottom 99% if the Twitter Left is to be believed.

Figure 3: increase in share of national income (including capital gains) received by top 0.1% for each primary taxpayer occupation in top 0.1%between 1979 and 2005

image

Source: Jon Bakija, Adam Cole and Bradley T. Heim “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality:  Evidence from U.S. Tax Return Data”.

Arts, media and sports superstars are one of the fastest-growing members of the top 0.1% – see figure 3. Again, the arts, media and sports superstars get a complete pass on their membership of the top 0.1% from the Twitter Left. Most of the other occupations in the top 0.1% don’t strike me as anything other than working rich – see figure 3 and figure 4.

As with the top 1%, the top 0.1% of income earners are a mixed bag of occupations – see figure 4. Their fortunes are unrelated to each other terms of the forces driving there are increased incomes.

Figure 4: Percentage of national income (including capital gains) received by top 0.1%, and each primary taxpayer occupation in top 0.1%
image

Source: Jon Bakija, Adam Cole and Bradley T. Heim “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality:  Evidence from U.S. Tax Return Data”.

How much of the top 0.1% are now working rich in the USA, 1916–2013, and Canada, 1946–2007

Piketty and Saez (2003) concluded that a substantial fraction of the rise in top incomes was due to surging top wage incomes. They concluded that top executives (the ‘working rich’) replaced top capital owners (the ‘rentiers’) at the top of the income hierarchy.

That conclusion still holds for both the USA and Canada. The largest portion of the top 0.1% in both countries have become those earning wages. The top 0.1% are top wage earners who work for their livings founding, building or directing businesses.

Figure 1: percentage of top 0.1% with wages, salaries, pensions or entrepreneurial incomes, USA, 1916 – 2013

image

Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database.

Figure 2: percentage of top 0.1% with incomes from interest, dividends and rents, USA, 1916 – 2013

image

Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database.

Figure 3: percentage of top 0.1% with wage salary and pension incomes, business incomes  and professional incomes,  Canada, 1946 – 2007

image

source : Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database.

Figure 4: percentage of top 0.1% with dividend, interest or investment incomes,  Canada, 1946 – 2007

image

Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database.

Does Inequality Reduce Economic Growth: A Sceptical View

Tim Taylor, the editor of the Journal of Economic Perspectives, has written a superb blog post on why we should be sceptical about a strong relationship between inequality and economic growth. Taylor was writing in response to the OECD’s recent report "In It Together: Why Less Inequality Benefits All,".

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Taylor’s basic point is economists have enough trouble working out what causes economic growth so trawling within that subset of causes to quantify the effects of rising or falling inequality inequality seems to be torturing the data to confess. The empirical literature is simply inconclusive as Taylor says:

A variety of studies have undertaken to prove a connection from inequality to slower growth, but a full reading of the available evidence is that the evidence on this connection is inconclusive.

Most discussions of the link between inequality and growth are notoriously poor of theories connecting two. There are three credible theories in all listed in the OECD’s report:

The report first points out (pp. 60-61 that as a matter of theory, one can think up arguments why greater inequality might be associated with less growth, or might be associated with more growth. For example, inequality could result less growth if:

1) People become upset about rising inequality and react by demanding regulations and redistributions that slow down the ability of an economy to produce growth;

2) A high degree of persistent inequality will limit the ability and incentives of those in the lower part of the income distribution to obtain more education and job experience; or

3) It may be that development and widespread adoption of new technologies requires demand from a broad middle class, and greater inequality could limit the extent of the middle class.

About the best theoretical link between inequality and economic growth is what Taylor calls the "frustrated people killing the goose that lays the golden eggs." Excessive inequality within a society results in predatory government reactions at the behest of left-wing or right-wing populists.

Taylor refers to killing the goose that laid the golden egg as dysfunctional societal and government responses to inequality. He is right but that is not how responses to inequality based on higher taxes and more regulation are sold. Thomas Piketty is quite open about he wants a top tax rate of 83% and a global wealth tax to put an end to high incomes:

When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much).

It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive…

The left-wing parties don’t say let’s put up taxes and redistribute so that is not something worse and more destructive down the road. Their argument is redistribution will increase growth or at least not harm it. That assumes the Left is addressing this issue of not killing the goose that lays the golden egg at all.

Once you discuss the relationship between inequality and growth in any sensible way you must remember your John Rawls. Incentives encourage people to work, save and invest and channels them into the occupations where they make the most of their talents. Taylor explains:

In the other side, inequality could in theory be associated with faster economic growth if: 1) Higher inequality provides greater incentives for people to get educated, work harder, and take risks, which could lead to innovations that boost growth; 2) Those with high incomes tend to save more, and so an unequal distribution of income will tend to have more high savers, which in turn spurs capital accumulation in the economy.

Taylor also points out that the OECD’s report is seriously incomplete by any standards because it fails to mention that inequality initially increases in any poor country undergoing economic development:

The report doesn’t mention a third hypothesis that seems relevant in a number of developing economies, which is that fast growth may first emerge in certain regions or industries, leading to greater inequality for a time, before the gains from that growth diffuse more widely across the economy.

At a point in its report, the OECD owns up to the inconclusive connection between economic growth and rising inequality as Taylor notes:

The large empirical literature attempting to summarize the direction in which inequality affects growth is summarised in the literature review in Cingano (2014, Annex II).

That survey highlights that there is no consensus on the sign and strength of the relationship; furthermore, few works seek to identify which of the possible theoretical effects is at work. This is partly tradeable to the multiple empirical challenges facing this literature. 

The OECD’s report responds to this inclusiveness by setting out an inventory of tools with which you can torture the data to confess to what you want as Taylor notes:

There’s an old saying that "absence of evidence is not evidence of absence," in other words, the fact that the existing evidence doesn’t firmly show a connection from greater inequality to slower growth is not proof that such a connection doesn’t exist.

But anyone who has looked at economic studies on the determinants of economic growth knows that the problem of finding out what influences growth is very difficult, and the solutions aren’t always obvious.

The chosen theory of the OECD about the connection between inequality and economic growth is inequality leads to less investment in human capital at the bottom part of the income distribution.

[Inequality] tends to drag down GDP growth, due to the rising distance of the lower 40% from the rest of society. Lower income people have been prevented from realising their human capital potential, which is bad for the economy as a whole

I found this choice of explanation curious. So did Taylor as the problem already seems to have been solved:

There are a few common patterns in economic growth. All high-income countries have near-universal K-12 public education to build up human capital, along with encouragement of higher education. All high-income countries have economies where most jobs are interrelated with private and public capital investment, thus leading to higher productivity and wages.

All high-income economies are relatively open to foreign trade. In addition, high-growth economies are societies that are willing to allow and even encourage a reasonable amount of disruption to existing patterns of jobs, consumption, and ownership. After all, economic growth means change.

In New Zealand, interest free student loans are available to invest in higher education as well as living allowances for those with parents on a low income. There are countries in Europe with low levels of investment in higher education but that’s because of high income taxes not because of inequality.

The OECD’s report is fundamentally flawed which is disappointing because most research from the OECD is to a good standard.

via CONVERSABLE ECONOMIST: Does Inequality Reduce Economic Growth: A Skeptical View.

The rise and rise of working billionaires

via Most of the world’s billionaires didn’t inherit their wealth — they earned it | Business Insider.

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Everyone is much better off than 40 years ago

https://www.facebook.com/americanprogress/photos/pb.6072343558.-2207520000.1430805698./10152655913018559/?type=3&src=https%3A%2F%2Ffbcdn-sphotos-e-a.akamaihd.net%2Fhphotos-ak-xpa1%2Fv%2Ft1.0-9%2F10701963_10152655913018559_7591123891212966387_n.jpg%3Foh%3D569ad2055ae0d935b91d99ebe69a42b0%26oe%3D55CC8635%26__gda__%3D1439419683_385e63a56895e20d473063e008b3889c&size=638%2C487&fbid=10152655913018559

 

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