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.
The tawdry tale began on the first of the month when Rubio introduced his Olympic Tax Elimination Act and argued that “athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back at home.”
Indeed, they should probably be focused on their athletic performances. The idea that they’d be worrying about taxes instead smells like yet another effort to exploit public confusion about how taxation of marginal income works. 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.)
By the same token, athletes whose Olympic success helps them become famous are well-positioned for lucrative sponsorship deals whose values will most likely far exceed that of the medal prizes. Double gold medalist in gymnastics Gabrielle Douglas, for example, is currently getting by with a rather amateurish website and a meager online shop of “Gabby Gear.” But even before returning home from the games, she’s already been tapped to appear on Kellogg’s Corn Flakes boxes in what is assured to be only the first of many endorsement deals for a successful, charismatic athlete in a popular sport. And good for her. It seems doubtful that anyone is spurred to athletic excellence specifically in order to live the dream of appearing on a cereal box, but the existence of tangible financial rewards for success is part of what keeps the entire great wheel of Olympic sports turning. At the same time, Olympians’ endorsement income is taxed just like the income of any other actor or celebrity who appears in ads or, for that matter, like the income of any advertising company employee or cereal marketing executive. It’s a great big economy out there full of people earning money, and we all need to pay our share of taxes.
But Rubio’s idea gathered steam.
“We don’t want anybody taking away the Olympic medals tax-wise from the Olympic athletes,” complained Clint Eastwood to reporters outside a Mitt Romney fundraiser, as if treating prize winnings as income were some nutty scheme Obama personally cooked up in Kenya.
Then the president, who courageously rejected rivals’ gimmicky gas-tax holiday schemes on the campaign trail four years ago, decided to endorse Rubio’s bill rather than try to win some points for good sense.
With the president now on board, there’s a good chance Rubio’s idea will become law. In fiscal terms, the change will be minuscule. 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?
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. The goal of the tax code should be to try to raise an adequate amount of money in a way that’s economically efficient and meets social equality goals. That tends to mean as broad a tax base as possible—few deductions or exemptions, in other words—to make it possible to raise revenue with relatively low tax rates. Exceptions should generally be justified in terms of broad benefits to society. We have tax breaks for corporate research and development based on the idea that innovation helps the whole economy and not just the most innovative companies. Indeed, even in this age of massive polarization, the desirability, in principle, of a tax code with fewer deductions is a rare point of bipartisan consensus. Over the years, enterprising wonks have even created a whole vocabulary of “tax expenditures” and “spending through the tax code” to try to reframe these giveaways in the eyes of conservatives as a form of maligned subsidies.
What Rubio and Obama have shown us with the Olympic tax gimmick is exactly how shallow that consensus is. Broadening the tax base to finance big cuts in tax rates is the heart of Mitt Romney’s economic plan. Obama made the elimination of deductions the centerpiece of his plan to raise more revenue from the corporate income tax, and Senate Democrats are counting on broad tax reform as a key element in Democratic budget policy if Obama wins in 2012. But in specific terms, Washington remains hooked on the allure of tax breaks. The more frivolous ones, like the proposed Olympic medal exemption, have the benefit of not being very costly. And the costly ones, like the deductibility of home-mortgage interest or employer-provided health insurance, are important to wide swathes of voters. To make progress on this front, politicians have to be willing to actually articulate the benefits of a broad tax base—less evasion, less distortion of economic resources, the possibility of lower rates—and Democrats in particular need to be willing to make the case that public services are worth paying for.
Until that happens, even if major tax reform somehow does occur, the lesson of the Olympic Tax Elimination Act is that Congress is likely to undermine reform at world-record speed.
Read the rest of Slate’s coverage of the London Olympics.