Misunderstanding Tax Reform: The Case of The Olympic Tax Elimination Act

August 08, 2012

Last week Florida Senator Marco Rubio and Illinois Congressman Aaron Schock proposed The Olympic Tax Elimination Act, a bill designed to exempt the honorariums and physical medals earned by Olympic athletes from the U.S. Federal income tax. This week, White House Press Secretary Jay Carney offered that if the bill reaches the President’s desk, he will indeed support it.

In addition to the physical medal earned by Olympic athletes finishing first, second, or third in their respective event, these athletes are given an honorarium by the U.S. Olympic Committee: $25,000 to gold medalists, $15,000 to silver medalists and $10,000 to bronze medalists.

An analysis by Americans for Tax Reform attempted to calculate the tax burden that American Olympic medal winners face on their honorarium and the medal itself, given America’s top tax bracket of 35%:

 

Medal Tax

Prize Tax

Total Tax Burden

Gold

$236

$8,750

$8,986

Silver

$135

$5,250

$5,385

Bronze

$2

$3,500

$3,502

*Note: Our research suggests that though it is not generally the policy of the IRS to collect taxes on gifts such as Olympic medals, court precedent does hold that the IRS can consider such non-monetary winnings as income and tax it as such.  

Senator Rubio released the following quote in a press release on the bill:

Our tax code is a complicated and burdensome mess that too often punishes success, and the tax imposed on Olympic medal winners is a classic example of this madness,” said Rubio.  “Athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back home."

“We need a fundamental overhaul of our tax code, but we shouldn’t wait any time we have a chance to aggressively fix ridiculous tax laws like this tax on Olympians’ medals and prize money,” he added.  “We can all agree that these Olympians who dedicate their lives to athletic excellence should not be punished when they achieve it.”

Senator Rubio and Congressman Schock are correct that these high taxes on Olympic medal winners are symptomatic of our broken code, but they misunderstand the problem and offer the wrong solution. Such ad hoc exemptions to the tax code are precisely the problem. Far from addressing the fact that “our tax code is a complicated and burdensome mess,” Senator Rubio and Congressman Schock offer yet another unjustifiable loophole into the federal income tax code.

There is no reason to privilege the winnings of American Olympians over the income earned by any other hardworking citizen. Moreover, exempting Olympic prize winnings alone sets up a dubious special standard for Olympians over all other types of competitors. After all, why just exempt the prize winnings of Olympians? Other sports and activities also have prize winnings—should competitors in these events face less favorable tax treatment for their hard earned rewards?

The real problem with the taxes Olympians face taxes is two-fold: First, why is the U.S. taxing this foreign earned personal income in the first place? The United States and Eritrea stand as the only countries to enforce a world-wide taxation system for personal income.

The second problem is America’s high rates of personal income taxation and extremely progressive rate structure. Those Olympians that find their way into the upper tax brackets of the income tax will face increasing penalties for success. The more medals they win and the more endorsements these athletes earn, the bigger the share the government will claim. This is a tax on success.  A move to a flatter tax code, or even to a system of federal taxation based on consumption, would help to rectify this inequity.

The formula for improving federal tax policy for America’s most outstanding athletes is no different than the formula for a better tax policy for every American: reduce the rates, eliminate loopholes, and move to a territorial or home system of income taxation that only taxes income earned in the U.S. Adding new exemptions and loopholes only complicates our tax code further and distracts from fundamental tax reform.

More on tax reform here. More on the progressivity of the federal income tax here.

Follow Will Freeland on Twitter @WilliamFreeland

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