Thursday, July 8, 2010

Obligatory LeBron James Economics Post

Take that New York. Could LeBron's decision "I'll take Miami, rather than I'll take Manhattan" have been influenced by taxes? Here's a nice little discussion:

“On a five-year contract worth $96 million -- what he'd get from the Knicks or the Heat -- LeBron would pay $12.34 million in New York taxes.” Florida has no state income tax.
Theoretically LeBron could have stayed in Cleveland and earned more money. But remember, its not what you make, its what you keep. Because of the so-called "Larry Bird rule" Cleveland could have, and maybe did, offer LeBron $100.2 million vs the paltry $96.1 million offered by the Heat. How would that work out?

Let's say LeBron has the choice to stay in Cleveland or go play with the Miami Heat. James may have a higher salary in Cleveland, but Florida has no state income tax. Ohio, on the other hand, has a top rate of 5.925%, plus Cleveland's own income tax rate of 2%, for a total of about 8%.

That makes Miami look like a clear winner because 8% of $100 million is $8 million, almost double the Cleveland salary advantage. But not so fast Florida. True, if James plays in Miami, none of his neighbors will be paying state income tax, but thanks to the jock tax, LeBron will. [ed. note, the jock tax somewhat diminishes the tax advantage of Miami, but not completely.]

I have no way of knowing if these considerations weighed on LeBron's mind when he made his decision, but interestingly enough his final choice aligned with his economic self interest. Don't profess yourself shocked.

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