Do the Highly Skilled Rich Pay Income Taxes? State Tax Incidence using Major League Baseball Data

This research studies the responsiveness of the rich to state income taxes. Interstate migration is worrisome to policy makers because talent may move, in effect voting for lower income taxes with their feet. Furthermore, businesses may choose to locate elsewhere if they bear the burden of the tax or if they cannot attract skilled labor. To test whether employers or highly productive employees bear the burden of the state income tax and to what extent, I use Major League Baseball Data (MLB) from 1992-2012 of all free agent transactions. MLB data is useful in this analysis because it provides both performance and salary data, which is nearly impossible to observe in other highly skilled markets. I will use team and year fixed effects to find the effect of taxes on take home pay. This will help control for other factors in a free agent’s decision-making processes such as team and city characteristics. Standard errors are too large to yield results on the effect of tax rate. This is likely due to other factors in salary negotiation