Jilted Basketball Fans Should Blame the Income Tax, not LeBron James

Supporters of the Cleveland Cavaliers, especially the owner of the team, are upset that basketball superstar LeBron James has decided to sign with the Miami Heat. The anger is especially intense because the Cavaliers offered $4 million more over the next five years. But their anger is misplaced, because more money in Cleveland, Ohio, actually translates into about $1 million less disposable income when the burden of state and local income taxes is added to the equation. Rather than condemn James for making a rational choice, local basketball fans should tar and feather Ohio politicians. This story from CNBC walks through the calculations.

...if you match up what James’ salary would be for the first five years in Cleveland and the five years in Miami, you find that the Cavaliers are only offering him $4 million more. That advantage gets erased — and actually gives the Heat the monetary edge over — when you consider the income tax difference. ...Playing in Cleveland, LeBron would face a state income tax of 5.925 percent, plus a Cleveland city tax of two percent. Over the first five years of a new contract with Cleveland, James would give back $3,953,060 combined to the state and city for the 41 games each season he’d play at home. But James would have to pay none of that for home games in Miami since Florida doesn’t have an income tax. Athletes have to pay income taxes to states that they play in on the road, so the games he’ll play away from home — whether he played for Cleveland or Miami — are essentially a wash. But there are, on average, 11 away games per season where James would have to pay Ohio and Cleveland taxes. Why? Because he has to pay when he plays in the six areas – Florida, Texas, Washington D.C., Illinois, Toronto and Tennessee – that have no jock taxes. That’s another $1,061,128 he’ll have to pay in taxes that he wouldn’t have to pay in Miami.

New York basketball fans also should be angry. With some of the highest taxes in the nation, many of which target highly productive people, New York is bad news for professional athletes. The New York Post, commenting on the probability that James would sign with the Miami Heat, identified the real villains.

...blame our dysfunctional lawmakers in Albany, who have saddled top-earning New Yorkers with the highest state and city income taxes in the nation, soon to be 12.85 percent on top of the IRS bite. There is no state income tax in Florida. On a five-year contract worth $96 million -- what he'd get from the Knicks or the Heat -- LeBron would pay $12.34 million in New York taxes. Quite a penalty for the privilege of working in Midtown.

Now let's look at the big picture. The calculations that LeBron James made when deciding to sign with the Miami Heat are the same calculations that companies make when deciding whether to build factories and create jobs. So when people wonder why high-tax states such as Ohio, California, and New York are losing jobs to zero-income tax states such as Florida and Texas, part of the answer should be obvious. And if we move to the global level, folks should not be too surprised that companies and investors, all other things equal, are likely to avoid the United States, with its punitive 35 percent corporate tax, and instead create jobs and build wealth in places such as Hong Kong, Ireland, and Switzerland.

Corporate Tax Rates Continue to Fall in Europe

Many people assume that Europe is the land of high-tax welfare states and America is an outpost of laissez-faire capitalism. We should be so lucky. The burden of government in America is still lower than it is in the average European nation, but the United States is a lot closer to France than it is to Hong Kong - and the trend is not comforting.

We recently endured the embarrassing spectacle of President Obama arguing with Europeans that they should increase the burden of government spending. Now we have a new report from the European Commission indicating that the average corporate tax rate in member nations of the European Union has plummeted to just 23.5 percent while the corporate tax rate in the U.S. has stagnated at 35 percent. In the past dozen years alone, as the chart illustrates, the average corporate tax rate in the European Union has dropped by nearly 12 percentage points. To make matters worse, the corporate tax rate in America actually is closer to 40 percent if state tax burdens are added to the mix.

This is not to say that European politicians are reading Hayek and Friedman (or watching Dan Mitchell videos on corporate taxation). Almost all of the positive reforms are because of tax competition. Thanks to globalization, it is increasingly easy for labor and (especially) capital to cross national borders to escape bad policy. As such, nations now have to compete for jobs and investment, and this liberalizing process is particularly powerful among nations that are neighbors.

Not surprisingly, European politicians despise tax competition and instead would prefer to impose a one-size-fits-all policy of tax harmonization. These efforts to create a tax cartel have a long history, beginning even before Reagan and Thatcher lowered tax rates and triggered the modern era of tax competition. The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there were an effort to require a minimum corporate tax rate of 30 percent.

Fortunately, the politicians did not succeed in any of these efforts. As such, tax competition remains alive and corporate tax rates continue to fall. What remains to be seen, however, is whether America will join the race to lower corporate tax rates - and more jobs and investment.

While Obama Fiddles, Ukraine and Taiwan Reduce Corporate Tax Burdens

The United States has the world's worst corporate tax system, with a job-killing tax rate of about 40 percent. In the European Union, the average rate is about 25 percent, but that's just one part of the world that is moving in the right direction. My Cato colleague recently did a blog post about Taiwan's politicians lowering that nation's corporate tax rate to 17 percent. Now Tax-news.com is reporting that Ukraine's government is doing something similar, reducing the corporate tax rate from 25 percent to 17 percent.

Ukraine’s new Prime Minister, Mykola Azarov has announced his government’s intention, in a revised tax code, to slash the country’s corporate income tax rate starting 2011, and then further on a transitional basis through 2014 to enhance the nation’s economic performance and fiscal attractiveness. According to the Prime Minister, the corporate income tax will be cut from 25% to 20% in 2011, and cut 1% annually from then on, until 2014 when the rate will stand at 17%. The Value Added Tax is to also to be reduced on a progressive basis over a similar timescale. Explaining the government’s methodology, Azarov was quoted by the national radio station NCRU as saying: “This innovative document is a real tax reform that will improve the investment climate in Ukraine and will improve the nation’s attractiveness for conducting business.”

It's worth noting that a low corporate tax rate is not a silver bullet for an economy with other bad policies. Ukraine has one of the world's most repressive economies, so reducing the corporate tax rate is just one of many reforms that is needed. But, all other things being equal, lower tax rates always are a good idea.

America Will Now Be the Unquestioned World Leader...But in the Wrong Way

The United States has a very anti-competitive corporate tax regime. The federal tax rates is 35 percent and the average of state corporate tax systems brings the rate to nearly 40 percent. In Europe, by contrast, the average corporate tax rate is about 25 percent. Depending on which measure is used, the United States and Japan have been rivals for the dubious prize of having the highest corporate tax rate in the developed world. But that's about to change. According to a story that I saw linked on the Tax Foundation blog, the new Japanese government intends to lower its corporate tax rate by 10 to 15 percentage points. This means America will have no rivals in the contest for having the most anti-growth business tax system in the world. This is something to keep in mind the next time you hear a politician complaining about jobs going to China and India.

Japan's new government plans to cut corporate tax closer to international norms as it tries to haul Asia's biggest economy out of a long slump, the economy minister said in a report Friday. The government is aiming to cut tax on company earnings by five percentage points next fiscal year, from an effective 40 percent now, the Nikkei business daily quoted Economy, Trade and Industry Minister Masayuki Naoshima as saying. "It's a fact that international corporate tax rates are 10 to 15 points lower than Japan's," said Naoshima, who is part of Prime Minister Naoto Kan's new cabinet sworn in this week. "Over the medium term, the government will aim to bring the rate down to around the global standard," he said. ..."It is now the time to decide (on cutting corporate tax) for the sake of future economic vitality, employment and securing increased tax revenues," the minister said. "Japan's economy has basically been in a slump for the past 20 years and people have been overwhelmed by a sense of stagnation."