Tax Breaks For Gold Medals

Though neither of them have any intention of doing anything about it, in the run-up to the November elections both main political parties in America are at least making noises about the need to reform and simplify the massively complicated tax code in the United States. This is urgently needed – a thick, impenetrable layer of deductions and tax credits doled out by previous Congresses to the favoured special interests or wavering voting blocs of the day have led to an almost incomprehensible system, one which means higher marginal rates overall for everyone and one which benefits almost no one apart from the well-connected and their tax accountants.

So when “rising star” Republican Senator from Florida, Marco Rubio, proposed a tax break for US Olympic medal winners on the cash bonuses that they receive from the US Olympic Committee, you would think that the “first do no harm” rule might apply, and President Obama and others would shoot down the idea. Right?

No. President Obama actually supports this opportunistic piece of pandering, according to Matthew Yglesias, writing at Slate:

If they gave out awards for dumb new policy ideas, President Obama and Republican rising star Sen. Marco Rubio would both be medaling this week. Their achievements? Rubio’s completely pointless bill offering a tax break to recipients of Olympic medals and—even worse—the president’s decision to hop on the bandwagon rather than show the country he has a firmer grasp on the issues than his adversaries do. In the scheme of things, of course, winning Olympic prizes is not an important sector of economic activity, and the medals’ tax status doesn’t really matter. But the overall shape of the tax code does matter a great deal, and the speed with which a bipartisan consensus emerged around making it worse bodes quite poorly for efforts to make it better.

Yglesias goes on to provide some essential background that some early supporters of this harebrained scheme appear to have missed:

In this particular case, the issue is that the U.S. Olympic Committee—the nonprofit group that organizes Team USA for the games—rewards athletes with cash bounties for medals won. Gold medalists receive $25,000, silver medalists get $15,000, and bronze medalists receive $10,000. That’s income, so come spring of 2013 when medalists are filling out their tax forms, it’ll be reported and taxed like any other income. Their after-tax income will be higher if they do win a medal than if they don’t. There’s no “extra tax bill” waiting for anyone. There’s simply extra income, and the income would be taxed. (Some people have confused this with the idea that the medals themselves come with a hefty tax bill, but the real tax issue is about the cash prizes.)

Precisely. This is not about suddenly being landed with an unexpected tax bill just because you worked hard and won an Olympic medal. This is about the IRS treating the prize money that the winning athletes receive as an incentive from the US Olympic Committee as income, which it is, and taxing it at the appropriate marginal rate.

Of course, the number of London 2012 Olympic medal winners as a percentage of the US population is miniscule, so the policy, if enacted, would do no real harm to tax returns or anything else. But the blatant favouritism of rewarding Olympic athletes alone with this tax break, while making other “worthy” types pay normal rates of tax, would set yet another ridiculous and rather alarming precedent:

In terms of fairness, it seems like a strange slight to winners of other kinds of prizes. Are Olympic medalists worthier than winners of the Nobel or Pulitzer prizes? And of course exempting all prize income from income tax could merely encourage all kinds of people to restructure their income as prizes. The J.P. Morgan Memorial Prize for Achievement in Investment Banking, anyone?

And then the money quote:

The underlying issue is that taxes aren’t supposed to be a cosmic judgment on the underlying worthiness of people’s activities. The earnings of a great artist and a reality TV show producer are taxed the same. That can seem a bit perverse at times, but having Congress try to assess which professions are important and which are bad would be much worse.

Republicans always talk about how the government should stop trying to “pick winners”, accusing President Obama of doing this with his subsidies for various forms of green energy (and apparently turning a blind eye toward their own efforts to help their own favoured industries). Well, I would submit to Senator Rubio and President Obama that the successful US Olympic athletes have already picked themselves as winners through their achievements in London. They are to be congratulated and afforded all the respect due to a champion, but their accomplishments do not entitle them to a tax break, particularly at a time when the tax code is crying out for simplification.