Taxes and pro sports

Recently I was discussing our current budgetary fiasco disaster and the subject of increased taxes and revenue came up.  I tried to explain to the other parties that you simply cannot tax your way out of this.  there are many reasons for this, not the least of which is the problem is wholly one of spending.  Nobody ever goes into debt, either a person, a family, or a nation, by earning to little.  Debt is always a function of excessive spending.  But there’s another reason, and it’s Hauser’s Law.

Bottom line is that regardless the top marginal tax rates, the net revenues to the government theft will never exceed 19% of GDP.  The next question was obvious: why?

One need only consider basic economic principles (you know, those things that columnists at the NY Times so conveniently ignore!!) such as the law of diminishing marginal utility and the law of increasing opportunity cost.

Quite simply, the more someone works the greater the marginal cost.  In other words, each successive unit of work requires them to forgo more than the previous unit of work, be it an hour, a day, or whatever.  Also, the increased income suffers from diminishing marginal utility in that the increases in income are of less value than the previous amount of income.

Here’s how to look at it.  Someone earns $30,000 a year and has all his expenses covered with a little extra.  The first say, $25,000 is the most important, that which covers his bills.  A pay cut of say $1000 will not dramatically reduce his lifestyle, neither will another $1000 dramatically improve it (Keynesian charlatans take note).  So, earning $31,000 now, the increase of $1000 might be spent, perhaps even saved.  You save the money when the money has little use to you in the present.

Don’t confuse that with trade, as there the money holding has less utility than the item traded for.  In this case, there is nothing of greater utility than holding money.  This is a vital concept.

So, let’s say to earn the extra $1000, an individual would have to extend his working hours.  If that meant working on a weekend and missing some other activities, then the cost will have risen, while at the same time, the marginal utility of extra income will be less.  One might choose to work, but only would so as long as the cost was lower than the gain.

Should the individual simply receive a raise for being more productive or whatever, the same principle applies.  The extra $1000 in income would still have less utility than the previous $1000.  But this isn’t about a rudimentary example, it’s about sports.

Looking at the tax graph, I noticed that tax rates dropped dramatically beginning in the 1980’s.  Curious to note, that’s about the same time that pro sport athletes began to earn significantly higher salaries.  I recall, because I was a fan of his at the time, Pete Rose became baseball’s highest paid player

for the grand total of $800,000 a season.

Think about that for a moment.  Even as late as the 1970’s, there had never been a millionaire professional baseball player. Consider that today, the best players in the league earn $10-15 million a season, or more.  Hard to imagine today for sure.  But consider, the greatest the game has ever seen, Aaron, Mays, Mantle, Koufax, so many others, the greatest of the greatest, all hall of famers, and none ever was “rich”.  Sure, they were well off, and sure, they were famous.  But they were nowhere near the level of lifestyle that today’s mediocre ballplayers are.  After most left baseball, they ended up like the rest of us, working to put food on the table.  The only difference was that they had better stories.

But all that began to change, and I suspect it was due almost entirely to the decline in marginal tax rates.  Let’s go back to the concepts discussed earlier.  We noticed in the graph that as late as the 1960’s, the top marginal rate was 90%.  Who in their right mind would ever work for a 10% return on effort?  Consider it in terms of professional sports contracts.  If Pete Rose was paid $880,000 in 1968, he would have been taxed at the 90% bracket, and been able to “keep” all of $88,000.  As it was, he still was taxed at about 70% but $266,000 is remarkably better.

Now, that $880,000 in 1978 was such a high sum is mostly due to the high tax rates.  Look, if a pro athlete was to sign a contract for $500,000 in the 1960’s, they’d be bringing home $50,000. If the next lower tier was say 50% (I don’t know for sure, but let’s use it for the sake of argument) and they signed a contract for $100,000, they’d be bringing home the SAME amount, $50,000.  The sole difference would be how much the government stole.  The shock value sadly would have been at the nominal salary, not the theft.

Today, the top rate is 35% and I think it anything but a coincidence that as tax rates have fallen, professional salaries have skyrocketed.  Of course they would.

As salaries have risen in all pro sports, there has also been a corresponding increase in the level of competition and quality of all pro sports.  In fact, the influx of foreign players to the US has remarkably improved pro baseball.  And, oddly enough, so has it too in hockey.

It used to be that pro hockey in America was a thuggish sport, lacking grace, skill, and speed.  There were no European players.  However, hockey is huge in many European countries and the best players in the league today are mostly of foreign birth.  With the inclusion of these players into the league now, hockey is a much better game, faster, more athletic, and certainly more appealing to fans.  In fact, most of the league’s stars are foreign born, a fact of no importance or concern to hockey’s legions of fans.  They simply want the best product possible.  International trade works everywhere, all the time.  It’s a beautiful thing!!

So, why wouldn’t they have come to America before?  Yes, there was the Cold War thing, and many Eastern European players couldn’t escape.  But there was no such barrier to Latin American players.  The reason has to be, at least in part, the confiscatory marginal tax rates.  Why work so hard when most of it will be confiscated.  In economic terms, the marginal costs would have exceed the marginal revenues.

Yes, perhaps their lives would  have been better nonetheless, but it still begs the question.  Why didn’t they come earlier?  It must be that the tax rates before made it less profitable to come.  The athletes were thinking at the margin.

Basketball salaries have skyrocketed just the same.  In fact, basketball has imposed, as have all other sports, salary caps.  While price controls are destructive, at least within the sports themselves, there is no government intrusion.  Thus, though not the solution, at least the state was not involved, however I’ll wager the same economists were!!

Bastiat reminds us that we must look at the unseen as well.  Hazlitt reminds us that the good economist looks at the long term effects on all groups.  I don’t believe anyone cutting taxes three decades ago could have foreseen the dramatic rise in sports salaries and the commensurate increase in level of play.  But it did happen, and it happened because when athletes, just like anyone else, keep more of what they earn, they will do more, do better, and we all are the beneficiaries.

I’m hoping to see a special on ESPN about the effects of tax cuts and sports.  But that probably isn’t going to happen anytime soon.

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