Fraser Forum

If the Leafs and Raptors lose, you should blame… the government?

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It’s well known that high personal income tax rates discourage work, entrepreneurship, investment and other activities that contribute to economic growth.

It’s also well-established that high marginal income tax rates can make it harder for a jurisdiction to attract high-earners who are generally highly mobile and have skills that are in demand in many different places. It isn’t surprising that, all else equal, lower tax jurisdictions will be more attractive.

New research from the United States confirms this insight in a fun, accessible way by analyzing the relationship between state/local income tax levels and the performance of different sports teams.

Professional sports are a useful model for understanding the impact of personal income taxes on the ability of jurisdictions to attract top talent. It’s a field in which attracting superstars is of paramount importance, and in which those stars are extremely mobile—meaning that once they are free agents they can go pretty much wherever they want. The after-tax income they will enjoy in different cities will, of course, be an important consideration for most athletes and tax rates can have a big effect.

The findings of the study won’t surprise anyone familiar with the economic research surrounding personal income taxes. In short, since 1994, there’s a clear negative relationship between income taxes and team winning percentages. In fact, every 10 per cent increase in income taxes is associated with a 3 per cent decrease in winning percentage.

The effects differ from sport to sport, and are highest in basketball—perhaps because a hard salary cap limits salaries offered to top stars, making taxes all the more important in determining who can offer the highest after-tax salaries to players.

In fact, the study shows that in the NBA, teams in states without an income tax win, on average, 4.5 more games each year than teams in high-tax states.

The study was focused entirely on the United States, and so some caution should be used in understanding the implications for Toronto’s sports teams. Nevertheless, it’s important to note that Ontario’s 53.5 per cent top combined personal/provincial income tax is the highest of any jurisdiction in North America with a professional sports team. It would be a big overstatement to say this is the reason Toronto hasn’t won an MLB, NHL or NBA title since 1993—but the new research suggests that Ontario’s high taxes certainly haven’t helped.

To be clear, there are much more important factors to consider in setting tax policy than the city’s prospects for pro sports glory. Nevertheless, the new research provides a fun accessible way to help understand how high tax rates make it harder for some jurisdictions to attract top earners who have lots of choices—and that has real, important implications for the dynamism and growth prospects of any jurisdiction’s economy.


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