Cato’s tax experts, Chris Edwards and Dan Mitchell, have written extensively on international tax competition. Their research shows that countries can help attract investment and spur economic growth by lowering their tax rates.

Could countries employ this same strategy to make their sports teams better?

Real Madrid, one of the most popular and successful soccer teams in the world, recently purchased the rights to two of the sport’s top players. They acquired Kaka, who was named the world’s best soccer player in 2007, from Italian powerhouse, AC Milan. And they lured Cristiano Ronaldo, the world’s top player in 2008, away from Manchester United, the reigning champions of the English Premier League.

There are a number of reasons why Kaka and Ronaldo are moving to Spain, but it’s pretty clear that taxes played a significant role. That’s because in 2005, Spain passed a tax break for foreign workers, including soccer players. This gives Spanish teams a huge advantage in bidding wars with teams from higher-tax countries like Italy and England. To make matters worse, England recently raised its top income tax rate.

“The new tax rate in England is going to make things much harder for English clubs,” noted Jonathan Barnett, a leading sports agent whose clients include Glen Johnson, Ashley Cole and Peter Crouch. “It will hinder the [English] Premier League and help the Spanish league because Spain has big tax discounts for footballers, so there’s an enormous advantage to go there. Someone like Ronaldo could be offered the same money at Real Madrid but be 25% better off.”

Similarly, a frustrated executive from AC Milan blames Kaka’s departure on the Italian tax system: “I repeat, this is all a matter of different types of taxation. If we were a Spanish club, we would have saved €40 million.”

Policymakers and soccer fans alike should take note.