My friends at Americans for Tax Reform have received a bunch of attention for a new report entitled “Win Olympic Gold, Pay the IRS.”
In this clever document, they reveal that athletes could face a tax bill – to those wonderful folks at the IRS – of nearly $9,000 thanks to America’s unfriendly worldwide tax system.
The topic is even getting attention overseas. Here’s an excerpt from a BBC report.
US medal-winning athletes at the Olympics have to pay tax on their prize money – something which is proving controversial in the US. But why are athletes from the US taxed when others are not? The US is right up there in the medals table, and has produced some of the finest displays in the Olympics so far. … But not everyone is happy to hear that their Olympic medal-winning athletes are being taxed on their medal prize money. Athletes are effectively being punished for their success, argues Florida Senator Marco Rubio, a Republican, who introduced a bill earlier this week that would eliminate tax on Olympic medals and prize money. …This, he said, is an example of the “madness” of the US tax system, which he called a “complicated and burdensome mess”.
It’s important to understand, though, that this isn’t a feel-good effort to create a special tax break. Instead, Senator Rubio is seeking to take a small step in the direction of better tax policy.
More specifically, he wants to move away from the current system of “worldwide” taxation and instead shift to “territorial” taxation, which is simply the common-sense notion of sovereignty applied to taxation. If income is earned inside a nation’s borders, that nation gets to decided how and when it is taxed.
In other words, if U.S. athletes earn income competing in the United Kingdom, it’s a matter for inland revenue, not the IRS.
Incidentally, both the flat tax and national sales tax are based on territorial taxation, and most other countries actually are ahead of the United States and use this approach. The BBC report has further details.
The Olympic example highlights what they regard as the underlying problem of the US’ so-called “worldwide” tax model. Under this system, earnings made by a US citizen abroad are liable for both local tax and US tax. Most countries in the world have a “territorial” system of tax and apply that tax just once – in the country where it is earned. With the Olympics taking place in London, the UK would, in theory, be entitled to claim tax on prize money paid to visiting athletes. But, as is standard practice for many international sporting events, it put in place a number of tax exemptions for competitors in the Olympics – including on any prize money. That means that only athletes from countries with a worldwide tax system on individual income are liable for tax on their medals. And there are only a handful of them in the world, says Daniel Mitchell, an expert on tax reform at the Cato Institute, a libertarian think tank – citing the Philippines and Eritrea as other examples. But with tax codes so notoriously complicated, unravelling which countries would apply this in the context of Olympic prize money is a tricky task, he says. Mitchell is a critic of the worldwide system, saying it effectively amounts to “double taxation” and leaves the US both at a competitive disadvantage, and as a bullyboy, on the world stage. “We are the 800lb (360kg) gorilla in the world economy, and we can bully other nations into helping enforce our bad tax law.”
To close out this discussion, statists prefer worldwide taxation because it undermines tax competition. This is because, under worldwide taxation, individuals and companies have no ability to escape high taxes by shifting activity to jurisdictions with better tax policy.
Indeed, this is why politicians from high-tax nations are so fixated on trying to shut down so-called tax havens. It’s difficult to enforce bad tax policy, after all, if some nations have strong human rights policies on privacy.
For all intents and purposes, a worldwide tax regime means the government gets a permanent and global claim on your income. And without having to worry about tax competition, that “claim” will get more onerous over time.
P.S. Just because a nation has a right to tax foreigners who earn income inside its borders, that doesn’t mean it’s a good idea to go overboard. The United Kingdom shows what happens if politicians get too greedy and Spain shows what happens if marginal tax rates are reasonable.
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All they need to do is make an extra form for the olympic medal winner to complete on his tax return. If an olympian is making a million dollars from sponsors, there would be a place to deduct the medal winnings, but the athlete should have to pay taxes on all that sponsor money, less his/her training costs and travel.
In this situation, I have no problem with the taxation. Years ago, I did some international traveling as part of my job. It didn’t even occur to me that my income while in various countries be taxed in those countries. I see athletes as contractors in a comparable situation.
Now had my offices actually been in those countries, then that would be another issue entirely.
Finally, I dislike Rubio’s approach since I despise laws, especially tax laws, written so specifically for narrow groups; they are far too close to Bills of Attainder for my taste. It carves out yet another, no doubt badly written, loophole that will cause grief down the line.
(Incidentally, this local taxation for temporary workers has created a mess with some athletes, where cities such as New York want to tax NBA players when they play in New York City.)
And here is another view of the subject….from Salon
http://bit.ly/MWoLcR
What I wonder is how many pages would this bill add to the TAX code regulations? Then would the IRS create a new FORM for it, with 42 page instruction booklet with all the exemptions, clarifications, qualifications and convoluted references to other booklets and tax forms or code?
The IRS would surely make it a multiple layered labyrinth of cross references that would require an international Tax expert to complete correctly, and then don’t forget about the $10K, ‘nonwillful’ penalty that will be in there somewhere! 🙂
However, if the bill becomes a reality rather than just a political news cycle story, we can fully expect that KISS will not be part of the implementation. Complexity is bound to follow.
Here’s an idea: Have the CATO Institute come up with a number of categories for politicians to win gold, silver, and bronze medals for getting rid of the complicated tax code. Then pay them with Food Stamps – Obama has increased the amount after all – which are tax exempt. In the meantime, Marco Rubio should suggest paying the Olympic athletes with Food Stamps to get over the tax burden.
Perhaps I am missing something here. I am all for tax overhaul. I think we are over taxed mainly because our government over spends on a massive scale. But with everything else being equal, how is it wrong to tax the athletes on their winnings (earnings) from their hard work any more than it is to tax any other citizen on the earnings from their hard work?
You said it correctly – they are being taxed on the superior athletic talent. This country is so turned around and wrong. These althletes have worked 24/7 for years and years to perform and be the very best. It is not fair to be taxed on the hard work you did in your sport. Oh and that is without the government help – that could be the problem. This government’s greed is nothing less than sinful. Nothing gets done without someone along the way paying damn taxes for their hard work in all forms. Just sickening and not what America is about at all.