As the Baltimore Ravens bask in their glory after their Sunday night Super Bowl XLVII victory against the San Francisco 49ers, they must now prepare to be hit by the the federal income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . All 53 players on the roster make at least $390,000, so after subtracting a personal exemption (which is actually phased out at $250,000) and a standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , they would all face the top federal income tax rate of 39.6% on their $150,000 in post season earnings for their victories in the Division Playoff, the Conference Championship Game, and the Super Bowl.
Although these players have the ability to pay their taxes when receiving an NFL salary and are amongst the top percent of earners in the United States, the amount of federal income taxes owed on their salaries and post season shares is shocking when only a personal exemption and a standard deduction is subtracted. Haloti Nagata as the highest earner with a 2012 salary of $10.4 million would pay around $4.1 million if this income and his post season income both accrued in 2013. This is probably an overstatement of actual income tax paid because most players would take advantage of itemized deductions (which are now limited) and credits to lower their tax liability to some degree. But even if he had $1 million in itemized deductions, he would still end up paying $3.8 million in federal income tax, plus another $250,000 in federal payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. , and that does not include the employer portion of payroll taxes. His effective federal tax rate would be 39 percent.
Higher tax rates on these players, who have a high income for a few concentrated years, means that their lifetime average tax rates are substantially higher than an individual who makes the same amount of aggregate income over his lifetime but who is paid on a more typically spread out basis. This is a direct result of our progressive income tax system, which heavily penalizes those with temporary or volatile incomes. For example, on average a quarterback in the NFL makes $1,970,982 a year. In order to calculate his total life time earnings and taxes, we assume that he plays 6 years for the NFL and then after retiring from the NFL receives the average salary of a male individual with some college but no degree of $52,580 for 39 years. Thus, he works for a total of 45 years and his total life time earnings of $13,876,516. If we assume the 2013 tax rates remain constant, he will pay 33.6 percent of his life time earnings in federal income tax. However, an individual with the same total life time income that is evenly distributed throughout the 45 years of his working career, which amounts to a yearly salary of $308,367, will only pay 26.8 percent of his life time earnings in federal income tax. This amounts to $945,618.25 less in total federal income taxes paid in one’s lifetime.
Thus, although our federal income tax structure progressively taxes annual income, it does not necessarily progressively tax life time earnings. It fails to be horizontally equitable in the long run because those with the same lifetime earnings do not pay the same amount or percentage of their income in taxes over their lifetime, and it fails to be vertically equitable because those with higher lifetime earnings do not necessarily pay more or a greater percentage of their income in federal income taxes.
Labor economics predicts that professionals will be paid higher for jobs that involve substantial risk or specialized skill, but this example reveals that when that compensation is temporary or volatile, like that of NFL players, the progressive income tax will take an extra cut.
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