On Monday, Sen. Chuck Schumer (D-NY) released a statement calling for the House of Representatives to pass a bill that would exempt Olympic athletes from paying the 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. on their prize money. He said, “Our Olympian and Paralympic athletes should be worried about breaking world records, not breaking the bank, when they earn a medal.” The proposal has already passed the Senate. It has been around since 2012 when first introduced by Sen. Marco Rubio (R-FL). Clearly, this proposal is good politics (who wants to tax winners?!), but this exemption is bad policy.
When U.S. Olympic athletes win medals, they are also supplemented with cash prizes by the U.S. Olympic Committee. The bonuses are $25,000 for a gold medal, $15,000 for a silver medal, and $10,000 for a bronze medal. Under current law, this prize money is considered income and taxed by the IRS. The proposal would exempt this income from the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. .
It makes sense for the IRS to tax this prize money. Olympic athletes, just as most athletes, earn part of their income competing in events and earning prize money. For example, tennis players who will participate in the 2016 U.S. Open will compete for a total prize pool of $46 million. The winner of the men's and women's singles will each get $3.5 million. This prize money is income just as a teacher’s salary is income and is taxed as such. It does not make sense to exempt a specific source of income earned by a specific profession from the income tax, but tax all the income earned by everyone else.
Clearly, this exemption would not cost the Treasury a significant amount of revenue, but this is not how you should go about enacting tax policy. Taxes should raise enough money for government priorities while creating the fewest distortions possible. The tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. should be as broad as possible without taxing the same economic activity multiple times. A broader tax base would allow us to lower marginal tax rates and promote economic growth. This is why tax reformers are looking for ways to eliminate as many of these special exemptions in the code as possible, not add to them. It would simply be counterproductive to poke even more holes in the tax base.
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