Proposal to Exempt Olympians’ Prize Money from Taxation: Good Politics, Wrong Solution

According to an analysis by the Americans for Tax Reform, U.S. Olympic gold medal winners may have to pay up to $9,900 to the IRS. They calculate this by assuming gold medalists already have adjusted gross income of at least $400,000 and multiplying 39.6 percent by the cash prize of $25,000. They also show the approximate tax bill of all other medalists and income tax brackets.

In the same week as this analysis, Congressman Blake Farenthold (R-TX) proposed a bill that would effectively exempt Olympic winnings from taxation. He feels that this is a “needless tax,” and “we need a fairer system for all, and eliminating this unnecessary tax burden on our athletes is a good way to start.”

While it is true that we do need a fairer tax system and that this makes good politics in the midst of our patriotic support of our athletes, this bill would do better to address the fundamental reason why our tax code is unfair.

The United States is currently one of the only countries in the world that taxes all income earned, no matter where it is earned. Whether you are an Olympic athlete, a teacher, or a banker, you have to pay taxes to the IRS on income earned in a foreign country. Having to pay taxes on foreign income is unfair. You are essentially paying for services even though you are not benefitting from them. Whether you should be taxed on your income in a foreign country is entirely up to the tax authorities in that country and shouldn’t be up to the IRS. Excluding Olympic winnings, but still requiring others to pay taxes on their foreign income is definitely not any better.

In addition, Representative Farenthold makes the tax system more complicated in a sense. The current means by which you pay taxes abroad requires you to file taxes multiple times (once to the country in which you live and again to the United States) and calculate your foreign tax credit. Rather than moving in the right direction by exempting all foreign-based income, he is proposes to add another exclusion to an already complex tax code.