Giving Olympians a tax break is bad for America.

Giving Olympians a Tax Break Is Bad for America, and Congress Shouldn’t Do It

Giving Olympians a Tax Break Is Bad for America, and Congress Shouldn’t Do It

Moneybox
Commentary about business and finance.
Aug. 26 2016 5:34 PM

Olympians Don’t Need a Tax Break

And giving them one would be bad for America, too.

USA's Michael Phelps kisses his gold medal on the podium after Team USA won the Men's 4x200m Freestyle Relay Final during the swimming event at the Rio 2016 Olympic Games at the Olympic Aquatics Stadium in Rio de Janeiro on August 9, 2016.
It’s hard to feel sorry for Michael Phelps.

Gabriel Bouys/Getty Images

The Rio Olympics are over, and the Paralympics are less than two weeks away. Nonetheless, America’s athletic finest face one adversary at home: the taxman. As has been widely reported, the U.S. Olympic Committee awards $25,000 to gold medal winners, $15,000 for silver medalists, and $10,000 for bronze medalists. Under current law, they must pay taxes not only on those awards but also on the value of the medals themselves. Sen. Chuck Schumer, the presumptive majority leader should the Democrats win back the U.S. Senate, wants to change that, and the Republicans couldn’t be happier about it.

Schumer is the lead sponsor of and head cheerleader for the United States Appreciation for Olympians and Paralympians Act, which would exempt Olympic winnings from taxation. Calling the current arrangement a “victory Tax” and a “tax penalty,” Schumer stated: “After a successful and hard fought victory, it’s just not right for the U.S. to welcome these athletes home with a tax on that victory.” He further stated: “When they win, there’s no question that they worked hard. So the fact that our athletes are sort of punished by our IRS for winning with a ‘victory tax,’ that’s sort of an oxymoron in itself. Why are we taxing victory?”

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In making this “patriotic gesture,” Schumer has taken two pages straight out of the Republican playbook. First, he insinuates that the IRS is to blame. It’s the one “punishing” the athletes. But the IRS didn’t write the code. If Schumer is wondering who’s to blame, he should look to his own branch of government. Congress enacted Code Section 74 in 1954, which subjects prizes to taxation. It would be a dereliction of duty for the IRS not to collect these taxes.

The IRS has one of the toughest jobs in government, and it keeps getting tougher as Congress asks it to do more and more outside its area of expertise, such as administer the earned income tax credit and the Affordable Care Act’s subsidy program, not to mention evaluate which activities properly count as electioneering, while at the same time Congress slashes its funding. The agency is by no means perfect, but its job doesn’t get any easier when elected officials use it as a punching bag.

Schumer’s jiujitsu move would have gone over well in the recent Republican debates, where blaming the IRS became a competitive sport and was one of the few things that seemed to unite the candidates. If he had also noted that the “IRS Code” was longer than the Bible, his transformation would have been complete.

Second, Schumer’s statement that Olympic athletes “work hard” and are “punished for … winning” could not have been said better by Paul Ryan and his fellow Ayn Rand acolytes. Of course, they aren’t referring to our athletes, but rather to the makers who create jobs and are responsible for our economic growth. Indeed, these are the very arguments Republicans make in support of tax cuts for the wealthy. As Ryan recently tweeted, “If we tax our job creators at higher tax rates than our foreign competitors, they win & we lose.” He could have been talking about our Olympic athletes.

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This aversion to taxing success is dangerous because it has no natural limiting principle. We currently tax Nobel Prize winners. Why not exclude them as well? And why limit the concept to prize-winners? American entrepreneurs and businessmen and women work hard, incur significant costs, take on real risks, and sometimes win as well. They, too, are locked in fierce international competition. Why should we favor our athletes over our job creators? Extend Schumer’s logic, and we’d opt to exempt profit-making business owners from taxes, or at the very least lower taxes on these winners, as the Republicans have consistently urged.

The income tax is not a penalty, despite all its flaws. Rather, it is how we have decided to allocate the costs of government, to pay for things like roads, schools, and defense. Those who earn more pay more, and each time we create an exception and let someone off the hook, the tax code gets a little more complicated and someone else has to pick up the tab. Schumer’s attacks on the so-called victory tax, and in particular his characterization of the tax as a penalty, undermine the income tax itself.

Perhaps the principle at issue is not success, but rather the fact that these athletes represent their country. If that’s the case, then shouldn’t we also exempt the salaries of others who represent us? Members of the U.S. baseball, basketball, and soccer teams, who represent the country in international competitions, are as patriotic as Olympic winners. If we’re really serious about this, we should exempt not only the prize money they may win but also their salaries.

If the problem is that the Olympic athletes are poor, remember that many of our Olympians are now professionals who make considerable amounts of money. Michael Phelps is rumored to be worth around $55 million. Then we’ve got the tennis and now golf stars. Who knows how much the basketball team is worth collectively? It is hard to feel sorry for these athletes because they have to pay taxes on their income like the rest of us.

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For those professionals in less remunerative sports, they likely have expenses that they can deduct from their winnings, reducing or completely eliminating any taxes they might owe. No one ever went broke earning a profit, even if he did have to pay a tax on it. It is the people who incurred expenses and won nothing who truly deserve our sympathy.

For those who are true amateurs, as was once the rule in the Olympics, the possibility exists that they will have spent more money training than they earn in prize money. Unlike the professionals, they cannot deduct their expenses under the normal rules and may end up owing taxes even if they have lost money. If this is Schumer’s concern, he may actually be onto something. However, the answer isn’t to exempt the prize money for all Olympic athletes, including multimillionaires, from taxes on their winnings. Instead, a rule already exists to address this concern.

The so-called hobby loss rules permit those engaged in not-for-profit activities, including the Olympics, to deduct their expenses to the extent of any gains they have from the activity. Thus, an amateur Olympian who spent $50,000 training and won a $15,000 prize would be able to deduct $15,000 of his expenses, zeroing out his income and avoiding a tax. Issues may arise with timing—that is, the expenses may be incurred in one year and the prize money earned in another, but that can easily be remedied. Unlike Schumer’s proposal, which creates yet one more special-interest loophole in the tax code, this approach targets the relief to those who actually need it and is consistent with basic tax theory.

Look, I get it. Our athletes have sacrificed much to get to the Olympics, and they bring glory and honor to themselves and our country when they do well. Taxing them on the value of the medals they receive may be theoretically correct as a matter of tax law, but it strikes a discordant note. So let’s exempt the medals from tax. However, the notion that taxing Olympians on their prize money is wrong because it punishes success sets a truly bad precedent and opens the door to special pleading by all who have achieved success.

Schumer is in great company here. Marco Rubio and Mitt Romney supported a similar law in 2012. There is something sad about the fact that the only point of bipartisanship in Congress these days seems to coalesce around tax policy that favors a chosen few at the expense of the rest and adds additional complexity to an already complicated tax code. The current bill passed with unanimous consent in the Senate, and the House returns in September and is almost certain to pass it. There is an old adage that bad facts make bad law. It appears that an excess of patriotic fervor and pandering may lead to the same result.