Taxman’s yellow card and Ronaldo’s foul act

Before his team lost on June 30, Portugal’s superstar forward Ronaldo was having a thrilling World Cup. There was his stunning performance against Spain, where he scored three of the game’s six goals. There was his outstanding early header against Morocco, which prompted his coach to declare that Ronaldo was ageing “like a port wine.” Exhilarating displays of virtuosity! Brilliance and showmanship! What’s not to like? Well — besides his collapse during last weekend’s game — what about this: The day of the Portugal-Spain match, Ronaldo, who plays for Real Madrid, had acknowledged evading 14.7 million euros (about $17.1 million) in taxes between 2011 and 2014. That’s enough to pay for 800 full-time Spanish primary school teachers for one year or to treat 1,000 patients with breast cancer. And Ronaldo is far from an isolated case. In 2017, his archrival, Lionel Messi of Argentina — who plays for FC Barcelona — was given a 21-month prison sentence (which was changed to $2.5 million in fines) for the same crime. In both cases, the Spanish authorities found the players guilty of dodging taxes on the income derived from their image rights. These rights — which they, like many other professional athletes, had transferred to shell companies in exotic tax havens — account for a large part of their income. For the top players on the planet, such rights can amount to many millions of dollars a year. That some of the world’s most famous athletes could defraud tax authorities seems at first incomprehensible: They should know that their tax returns will be closely scrutinized, and being labelled tax evaders certainly does not enhance the value of their image or their popularity with fans. But as the cases of Ronaldo, Messi and many wealthy individuals caught in recent leaks such as the Panama Papers and Paradise Papers illustrate, tax evasion is pervasive among the rich, deserving athletes or idle rentiers alike. Why? Not because they are evil people or impervious to the consequences of their actions, but because they are wooed by a global tax evasion industry. Have you ever been invited by a Swiss bank to a golf tournament in Miami or an exhibition’s opening in Paris? Neither have I. But the world’s “ultra-high-networth individuals” — whether they live in the United States, France or elsewhere — regularly are. Law firms and financial intermediaries sell the superrich on shell companies, offshore bank accounts, trusts and foundations — arrangements whose purpose is to conceal assets by disconnecting wealth, and the income it generates, from its actual owner. Although this industry presents itself as legal and legitimate, in many cases the products it sells are illegal, because people usually have to pay taxes on their worldwide income (whether it’s “earned” in the British Virgin Islands or Spain makes no difference, as long as you live in Spain), and transactions whose sole purpose is to avoid taxes are typically not legal. In the case of Ronaldo, Spanish prosecutors considered as an aggravating circumstance that he created shell companies for the sole purpose of confusing the taxman. Why should we care about Ronaldo’s income and tax affairs? Because they illustrate our collective failure to adapt to globalization, and the lessons we can draw from this example extend beyond soccer to the rest of society. Over the past three decades, the winners of globalization have seen their income boom. Ronaldo’s image rights are worth more than a billion dollars because his brand is particularly valuable to a company like Nike with a worldwide customer base. But the tax rates of these winners, instead of rising, have fallen dramatically. From 1930 to 1980, the top marginal income tax rate in the United States averaged 78 per cent; today it’s 37pc. Instead of redistributing the gains from globalization, the tax system has concentrated them into just a few hands. This path is unlikely to be sustainable, economically or politically. But we can fix this. We’re often told that taxing the most successful among us is impossible or counterproductive. But in fact, professional sports often shows how misguided this argument is.

For one, governments could drastically curb tax evasion by increasing the sanctions against the intermediaries that facilitate it. It’s unlikely that longer prison time or bigger fines would have deterred Ronaldo or Messi. But revoking the licenses of the banks found helping tax dodgers and imposing sanctions against tax havens would cause the supply of tax evasion services to shrink. Once tax evasion was curbed, governments could tax top incomes at higher rates, for the greater good. And don’t believe anyone who says this would harm the economy — these claims usually don’t make much sense. Look no further than Ronaldo: His image would still be as valuable to Nike if he had to pay more in taxes, and it does not cost him much to provide it — so nothing bad would happen if he had to pay more. With a lower after-tax income, he would still score as many goals. You don’t hurt anyone when you tax the Ronaldos of the world — you just make it possible for everyone to gain when they do.

The United States isn’t typically known for its redistributive tax policies nowadays, but even Americans still understand this basic truth: Skyhigh incomes for star athletes are socially useless. That’s why American sports leagues have either salary caps (as in the NFL) or luxury taxes (as in the NBA) that severely limit how much teams can spend on players. There is no such thing in European sports: Countries lure the best players by offering them sweet tax deals, and clubs from the Union of European Football Associations recycle billions of dollars from Russian oligarchs, with no spending limit (except for how much debt they can accumulate). So while inequality has increased less in Europe overall than in the United States, when it comes to professional sports it’s the opposite. European soccer — with its tax evasion, unfettered tax competition and unconstrained inequality — is one possible path for the rest of our societies, and the one the United States is currently favouring. We can keep going down that path. Or we can emulate the NBA instead of mimicking the UEFA In professional sports, as in the rest of the economy, inequality is a choice: Policies exacerbate it or prevent it. Some countries do better than others, and we can learn from others and from the past.