Several times now I have heard the argument that taxing either supermodels or massive income sports stars would be efficient because it wouldn’t change their behaviour. The analogy is then extended to support other more realistic ‘super profits’ taxes.
The way I understand the super profits arguments is something like this. David Beckham earns millions a year playing football, when in fact, everything above the first million is superfluous. One reason it’s superfluous is that he has a low opportunity cost for is time since his alternative, given his intellect and education, is probably about $30 000 a year digging ditches for the local council. We feel comfortable that we can draw a line at a million without discouraging others to get where he is and be certain that he will continue to play football. Everything over a million we can tax at some ridiculously high rate (given the rate is probably already around 50% its presumably gonna be pretty high so let’s assume 100% for fun).
As far as a moral vacuum of a stationary bandit tax economist is concerned, his job is done. He has his efficient tax because he can bleed Beck’s as much as he likes, but Beck’s won’t go anywhere because his next best option isn’t nearly as inviting as a million bucks a year for playing soccer.
But for a real economist, his job is to ask “and then what?”
To me it seems wrong on at least both important counts.
1) (at least in this particular case) it’s not true that Beck’s can’t change his behaviour; and
2) (more generally) even if he couldn’t change his behaviour, the argument is still wrong because others can and that will lead to costs being passed down the chain.
The most obvious way he could change his behaviour is that he could work less by retiring earlier. I am happy to completely disregard this since I wouldn’t be surprise if at that level the income effect dominates – higher income means I consume more leisure and vice versa when the stationary bandit hits me for 29 million a year. I will also disregard the possibility that he could flee the country to a better taxing environment.
What I would suggest is that most of the marginal dollars that a sports person earns are advertising dollars. They appear on adds, link themselves to sports brands and fashion magazines, and prostitute themselves in cars they wouldn’t normally be seen dead in. Would he really keep doing this stuff if he didn’t get paid for it?
All the intuition I need for the second point is that the money he earns comes from using his scarce resources to produce something of value for someone else.
If everything after the first million is pointless, who gets David Beckham? Manchester, Madrid, LA Galaxy or a no-body-cares team in 4th division who can still afford a million dollars for a superstar? Perhaps he will end up coaching some under eights team because some billionaire farther want’s his kid to learn from the best and a million bucks for a real life superstar babysitter to keep his kid happy seems like a bargain.
Why did Beckham go to Galaxy? Because they offered a lot of money. They did that because they believed he could enhance the value of their sporting product to the US soccer fans. Madrid is a glorious football side willing to pay lots for him. How does Galaxy communicate that he would produce more value for others in the US? They do that by paying 300 million pounds for him to move to a footballing backwater with a huge potential market that is starved for talent. That price signal gets lost when the consumers of Beckham can’t compete on price.
Same logic applies for advertising, if he still bothers to do it, which brand can make the most use of him. Which target audience most wants to wear the same underpants as David Beckham? Values are communicated through prices. Dull the price signal and resources go to suboptimal uses. Remove price signals and you end up with health and education.
Of course, there would still be competition for the footballer’s services. The duller the monetary price signal, the more Beckham will want other types of payment harder for the stationary bandit to get at. More luxurious travel arrangements and club facilities, softer training regimes (this one could easily belong above with “work less”), clubs could offer post match parties restricted to just the players and ‘carefully vetted’ women. Clubs and players would just be encouraged to trade in a less efficient currency.
In short, I just think it simply isn’t true that there is a free tax lunch. If you haven’t found how people will change their behaviour, look harder. If you are taxed on ‘super profits’, at the very least, the incentive to innovate, (ie to take risks to benefit consumers expand profits further) will be diminished and that is not trivial in the long run.
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