How Much Tax Are Athletes Willing to Pay?

The Laffer Curve is a unicorn-y concept that seeks to explain the rate of taxation at which revenues will fall because earners either move away or decide to earn less (or cheat more, I guess).

If I were a tax scholar interested in this concept, I would be taking a good, hard look at the current behavior of top-tier professional athletes. Boxing is particularly interesting because it allows a participant to choose where he performs. If you are a pro golfer or tennis player, you might be inclined to skip a particular event because of a tax situation, but you generally need to play where the event is happening. A top-ranked boxer, meanwhile, can fight where he gets the best deal.

Which is why it’s interesting to read that Manny Pacquiao will probably never fight in New York — primarily, says promoter Bob Arum, because of the taxes he’d have to pay. From the Wall Street Journal (gated):

Manny Pacquiao has won fights in California, Tennessee, Texas and Nevada, not to mention Japan and his native Philippines. But with Pacquiao in New York this week to promote his next fight — a November bout in Macau against Brandon Rios — Pacquiao’s team said Barclays Center and the Garden were two venues where he wouldn’t fight because he would have to pay the state’s tax rate in addition to federal taxes. “He’d have to be a lunatic,” said Bob Arum, Pacquiao’s promoter.

In an L.A. Times article, Arum says that Pacquiao may never fight anywhere in the U.S. again:

“By fighting outside the country, as he’s doing in this Rios fight, Manny doesn’t have to pay U.S. taxes anymore – at a rate of 40% for a foreign athlete.

“If this pay-per-view and other things take off like we think they may, I can’t imagine Pacquiao will ever again fight in the U.S.”

There are of course other factors at play besides taxes — gambling, for instance, which is one reason that Macau has become such a boxing center. But whatever you think of the Laffer Curve, it’s hard to ignore the variance in tax rates around the world, especially for athletes who might earn a lot of money in a short time.

In January, Phil Mickelson said he was “going to have to make some drastic changes” to deal with federal and California tax hikes (he lives in California). “If you add up all the Federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” Mickelson said.

His accounting was challenged and Mickelson, one of the most popular golfers ever, was widely spanked for publicly airing his tax dissent. So last month, when he won back-to-back tournaments in Scotland (the Scottish Open and the Open Championship), he kept quiet. But the media did the speaking for him. In Forbes, Kurt Badenhausen wrote a (very good) article about Mickelson’s British tax tab, estimating that he’d pay, in total, about 61 percent tax on his nearly $2.2 million in earnings. And Badenhausen identifies this interesting wrinkle:

But that’s not all. The U.K. will tax a portion of his endorsement income for the two weeks he was in Scotland. It will also tax any bonuses he receives for winning these tournaments as well as a portion of the ranking bonuses he will receive at the end of the year, all at 45%. … 

The U.K. is one of few countries that collects taxes on endorsement income for non-resident athletes that compete in Britain (the U.S. also does). The rule has kept track star Usain Bolt from competing in Great Britain since 2009, outside of the 2012 Summer Olympics when the tax was suspended as a condition for hosting the Games. Spain’s Rafael Nadal has also allowed UK tax policy to dictate his tennis playing schedule.

And let’s not forget that the greatest endurance athlete of our era, Mick Jagger, fled the U.K. years ago because of tax considerations (and, also, the police there kept arresting him and his mates).

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  1. scott says:

    Eric Lindros comes to mind. Lindros was the obvious first pick in the 1991 NHL draft, and the Quebec Nordiques had the fist pick overall. Lindros stated he would not play for the Nordiques because his earning potential in Quebec would be low, at least in part because of the high tax rates in the province of Quebec.

    Quebec ended up trading the first pick that year to Philadelphia.

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  2. Ross says:

    Don’t/can’t US sportspeople become corporations which you hire/buy the licensing rights for?

    Ie lots of tax minimization strategies so you pay capital gains instead of income?

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  3. mfw13 says:

    Hidden due to low comment rating. Click here to see.

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  4. Jen says:

    Bolt ran in the 2013 anniversary games in London too.
    Any idea if the tax rule applied? Just curious.

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    • chris C says:

      a special deal was made in advance in relation to tax to allow him to run, wish I could make a special relationship on my tax before I worked !

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  5. Blaine says:

    Something-d-o-o Economics? Anyone?

    Reading the Wikipedia link, I completely get how the shape of the Laffe Curve is unknown. But is it’s existence genuinely debated?

    Mathematically revenues would be $0 at 0%. Pragmatically, revenues would be approaching if not $0 at 100%. In between it’s higher. There’s a curve. Maybe it has one peak. Maybe 100 peaks.

    Or is this more of a ‘it is a shape we can never know, therefore it is of no use and may as well not exist’?

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  6. Robert says:

    Tax rates also get mentioned a lot when NBA players are considering their moves in free agency. The only high profile example in recent years was when Lebron James, Dwayne Wade, and Chris Bosh all took less than max contracts to play for the Miami Heat. Due to the lack of income tax in Florida, their take home pay actually worked out about the same as it would have if they had signed max contracts with any other non-Texas NBA teams.

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  7. RZ says:

    Reminds me of the reason why Rafael Nadal won’t play the Queen’s Club tennis tournament in London prior to Wimbledon. The U.K’s tax laws wanted to tax worldwide endorsements, so Nadal switches to playing a tennis tournament in Germany instead. There was talk of chaing the law, but I don’t know what happened.

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  8. RPM says:

    “Macao has become such a boxing center.” Not quite. They’re just getting into the fight game. They recently had two fights by Zou Shiming, a Chinese Olympic star. And the Pacquiao fight hasn’t happened yet.

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