Taxes, Media Hype, and Dog Bites Man

-- Posted by Neil H. Buchanan

People often wonder why the tax code is so complicated and riddled with exceptions. There are many explanations, some quite nefarious (special pleading by powerful lobbyists) and others quite banal (life is complicated). One explanation is, however, that people really do not want the tax code to be uncomplicated. At least, every time that people are confronted with what seems like an especially sympathetic taxpayer (or potential taxpayer), they are happy to start granting exceptions. And once one exception is granted, others must follow.

An especially depressing example was last week's little controversy over the taxation of Olympic athletes. Some right-wing sources started pushing a story about the supposedly terrible burden that the federal income tax would impose on "our athletes," and soon politicians were rushing to get ahead of the story by offering special treatment for athletes.

One heavily biased news article (sent to me by a former student, who was rightly gnashing his teeth over the reporter's misrepresentation of the underlying tax law) included this gem: "Come on, government. I know you're as inflexible as the IOC and couldn't decide on pizza toppings unless a bipartisan commission deliberated for 13 days, but you can't make an exception to athletes representing our country in the biggest event in the world? It's not unheard of: Military members are exempt from taxes when they're deployed in a combat zone."

Yes, this guy actually likened people who throw basketballs into hoops, or who run or swim really fast, to people who are sent to fight and die in combat zones! And yes, he thinks that politicians should take time out from real problems to find bipartisan solutions to the crushing tax burden on Olympic athletes.

Unsurprisingly, however, politicians actually responded, with one of the potential Republican Vice Presidential candidates saying: "Our tax code is a complicated and burdensome mess that too often punishes success, and the tax imposed on Olympic medal winners is a classic example of this madness." Yes, the tax code is so complicated that we should add another ad hoc exception to it, based on a meaningless feel-good moment of national chauvinism.  [Update: The cynic in me was not surprised when I heard that President Obama expressed support for this idea, too.  Bipartisanship!]

This is hardly the biggest source of tax complexity, to be sure. But the incident exposes the complete idiocy of our political culture when it comes to taxes. Moreover, many of the stories implied that medal winners would owe taxes on the medals ("Winning a gold medal brings a $9,000 tax bill"), whereas even the right-wing group that pushed the story noted that the taxes would be owed because of a little-known development in recent Olympics: Medal winners receive cash money for their exploits. They are not, in other words, going to have to melt down their medals to get the cash to pay taxes. They will simply do what everyone does: Receive cash, figure out if they owe taxes on that cash, and possibly pay some of that cash to settle up their tax bill.

Many people (see links here) were quick to point out that the anti-tax group was fudging the facts by assuming that athletes were in the highest tax bracket, with gold medalists paying 35% of their $25,000 cash prize to the government. (The group defended itself by noting that it had merely claimed that athletes would pay "up to" 35%. And you can earn "up to" $100,000 per week by selling magazine subscriptions from your home, part-time, too!)

The idea that most of the Olympic athletes would be in the top federal tax bracket is, to say the least, far-fetched. For single people, the 35% bracket currently starts at $379,150 of taxable income, which is far above what most Olympians earn. Many of those athletes, because of the time that they put into training (and not into their careers), are almost surely in the "zero bracket," anyway. Much of any Olympic medal income can be offset by deductions for training costs, in many cases. This is not, therefore, anything like the burden that the anti-tax zealots want to portray.

Moreover, for those who actually are in the 35% bracket, why would we not want to treat their gold medal reward like any other income? Will Kevin Durant, a basketball player making tens of millions of dollars per year from his NBA contract and various endorsement deals, feel "punished" for his success if his $25,000 from the Olympics is not exempted from taxation?

Even if one does not find the analogy to military combat as repugnant as I do, we should remember that the service members who are sent into combat zones are being paid scandalously small salaries (while the military contractors continue to pocket huge sums from no-bid deals). Removing whatever small tax burden we can is almost literally the least we can do.

The enthusiasm with which media outlets grab onto anti-tax stories is, however, deeply troubling. A few months ago, when everyone was talking about the Facebook stock offering (and before that offering became its own bad punch-line), I was contacted by a reporter from a national news network. He had heard about the "overnight Facebook millionaires," the rank-and-file employees of Facebook who had accepted shares and options in the company over the years, and who would suddenly become rich when the company was taken public.

The reporter's angle on the story was that these salt-of-the-earth regular guys and gals were about to be taken to the cleaners by the IRS. They might, he said, make $20 million overnight, and the IRS was going to take 35% of that away. How unfair!

Rather than getting into the details of how people in that situation could minimize their tax bills, I simply pointed out that they would still be left with 65% of $20 million, overnight. Sure, $13 million is less than $20 million, just as salaried workers can see the difference between gross and net pay. Where, exactly, is our sympathy supposed to come from? A person who received what she thought was basically symbolic pieces of paper finds that, because she stuck with the company through the years, she is an overnight millionaire. For other, equally loyal, employees at other companies, that never happens. Our system taxes millionaires more than middle class people (at least in theory). Why should people whose companies do not make them millionaires pay higher taxes to lighten the burden on "Facebook millionaires"?

The good news was that the reporter actually listened to me. After a half hour interview, he said that he no longer felt any gut-level anger about the tax treatment of overnight millionaires. He thanked me, saying that he would work on the story from this new angle.

The story never ran. There was, apparently, simply no news value in even a respectable national news organization running a story correcting the hype about Facebook millionaires. Outrage sells, and there was nothing to stoke people's outrage. Better to talk about whether President Obama hates capitalism. Outrage!