THE INCOME TAX RESPONSIVENESS OF THE RICH: EVIDENCE FROM FREE AGENT MAJOR LEAGUE BASEBALL ALL‐STARS

1. INTRODUCTION Policy revolving around the taxation of the rich is frequently a topic of both positive and normative debate. On the normative side, the issues of tax code progressiveness and tax burden equity typically dominate the discussion of the appropriate income tax rate(s) that the affluent should face. The role of economics has been to provide positive analysis with both theoretical understanding and empirical evidence to the outcomes of policies that have resulted from these debates. (1) While there is a robust literature researching the effects of income taxes in general, the area that has received much less attention has been the ability of individual states to levy income taxes on the rich. The traditional literature in public finance has been of the perspective that progressive redistributional taxes by the state will be undermined by the ability of high-income earners to exit their jurisdiction and be replaced by those from the lower end of the income distribution (Musgrave, 1959; Oates, 1972; Tiebout, 1956). Yet, we still observe a considedrable amount of taxation of the rich among the states. According to the Internal Revenue Service, 54.9% of the taxes due to9 state governments in 2994 were retrived from individuals with more than $200,000 in adjusted gross income. (2) This is despite the fact that this group represented just 2.3% of the tax returns and 45.3% of the total tax liability in those states. Clearly, this group serves as a very important component of the tax base of a state, not to mention the role they likely play in the local economy. The fact that we play in the local economy. The fact that we observe rich tax payers remaining in high-tax states likely reflects heterogeneous preferences, some mobility constraints, political economy issues, and some pregerence for redistributional governemnt. Still, very little empirical evidence exists about the res[onsivenness of the rich to state income taxes, with the only prior research to our knowledge being that of Bakija and Slemrod (2004). The primary reason for the empirical absence is likely the dufficulties of data pertaining to this group. The term "rich"is rather arbitrarily defined in a relative context to some group and can vary considerably from person to person. A 2003 Gallup Poll reported that to be "rich" meant an annual income around $120,000 or $1 million in total financial assets (Moore, 2003). Regardless of the actual cut-off point in determining this group, it is by definition that they are small relative to the size of the population of interest. Empirically, this problem manifests as small sample sizes and few degrees of freedom available for hypothesis testing. In addition to a lack of sufficiently large data sets, there are difficulties in both observing their income and their true residence. Groups like business executives commonly accept alternative forms of payment, such as stocks, in addition to their salaru that makes it difficult to estimate their salary that makes it difficult to estimate their true income (Goolsbee, 2000a, 2000b). Since it is possible for the rich to own housing in multiple states, their reported residence and their true residence may differ, resulting in difficulties estimating their state income tax responsiveness (Bakija and Slemrod, 2004). The aim of this paper is to contribute to the literature on the state income tax responsiveness of the rich using data from Major League Baseball (MLB). Specifically, we use a set of 235 free agent All-Stars who signed a contract to play on a U.S. team for the 1991 through 2002 seasons. Professional baseball players serve as an appealing target for estimating state income tax responsiveness because of some special treatment they receive from state legislatures. Beginning in 1991, states around the country with professional sports teams began implementing what are popularly known as "jock taxes." These were not new taxes but rather the states' recognition that they frequently had millionaire nonresidents earning income within their borders not paying taxes, and as a result, they began to more aggressively capture them as a tax base. …