New York Times Op-Ed: The Economic Case for Taxing Star Athletes, by Peter Coy:
OK, it’s time for another round of “Are Star Athletes Overpaid?” I hope to bring some economic theory to bear on this well-worn question. …
The perennial question is why [star] athletes are being paid so much more than doctors, scientists and architects, let alone nurses, schoolteachers and firefighters. … Economists have a familiar explanation: supply and demand. The supply of star athletes is extremely limited, so they can demand a high price for their (nonessential) services. …
Often this is the point where the debate ends, with economists feeling they’ve won the argument and those who disagree with them remaining distinctly unsatisfied. So let’s take it a little further.
Star athletes work hard, but they’re also lucky. They are lucky to have been genetically gifted with strength, speed and coordination. And they’re lucky that those qualities are highly valued in modern society: Athletes with those gifts can win; fans like winners; and the expansion of televised sports has vastly increased the number of fans who pay, directly or indirectly, to watch them win.
The economists Sherwin Rosen and Allen Sanderson put it this way in a seminal article in 2001 in The Economic Journal: “A star player is worth only a few dollars more per spectator than an ordinary player. There are lots of spectators.”
This past weekend I interviewed the economist Stefan Szymanski of the University of Michigan, who told me that he commissioned the article by Rosen and Sanderson while serving as a guest editor of The Economic Journal. Rosen was an obvious choice, Szymanski said, because he had written a famous article in 1983, “The Economics of Superstars.” Its first sentence: “Who in recent years has not felt his gorge rise upon learning the staggeringly high salary of a shortstop, a movie star, an opera singer?” …
People who are appalled by athletes’ big paychecks aren’t any happier seeing the owners keep all the money. Is there no other choice?
Actually, there is, Szymanski told me. It goes back to the natural endowments that star athletes have. Think of those endowments like good agricultural soil. The person who is lucky enough to own the most fertile fields will earn much more money than someone who owns a less fertile field that is put into production as the demand for food increases. The owners of the richest fields, “like all other men, love to reap where they never sowed,” Smith wrote in “The Wealth of Nations.”
Star athletes, like the landlords of Smith’s day, are reaping where they never sowed. In modern economic terminology, they are earning “scarcity rents” for their physical attributes, Szymanski said. Economic theory says that taxing such rents is a good way to raise money because the taxes won’t distort behavior.
Taxes on wage income and capital income are distortionary because people try to avoid them. They reduce their work effort to avoid wage taxes, for example. But the ability to throw a perfect spiral or put a penalty kick past a goalkeeper is inherent in the athlete, so taxing it doesn’t make it go away. …
Szymanski’s concept is to allow athletes to earn their scarcity rents without limit, but then tax their resulting income at a high rate so that society as a whole shares in their good luck. And he wouldn’t limit the high tax rates just to athletes, since people in other careers also earn scarcity rents. He would like to see the federal government go back to the top marginal tax rates of the 1950s, which in some cases exceeded 90 percent. “I think rents in society are a problem,” he said.
https://taxprof.typepad.com/taxprof_blog/2023/08/ny-times-op-ed-the-economic-case-for-taxing-star-athletes-at-a-94-rate.html
