Nobody likes paying taxes, but most Americans have gotten used to the idea expressed in the famous old maxim: “The only things in life that are guaranteed are death and taxes.” We might all be a little less resigned about the subject if the only guarantee in life was death by taxes.
Professional golfer Phil Mickelson thankfully hasn’t experienced literal death by taxes, but the tax treatment of his recent tournament earnings certainly qualifies as a metaphorical death. Follow this link to read Forbes columnist Ken Badenhausen’s accounting of the various taxes Mickelson paid for his July victories in The Scottish Open and The Open Championship. To summarize, over those two tournaments, Phil’s prize money was a whopping £1,445,000, which equates to $2,167,500. First, the government of Scotland will take 44%, followed by the U.S. collecting 0.9% in self-employment taxes, the 2.9% Medicare surtax, and, finally, California’s state income tax: 13.3%. Add them all up, and Phil will pay a little over 61% of his earnings in taxes.
Put differently: Phil played Thursday’s and Friday’s rounds, and the front 9 on Saturday for various taxing authorities before he started playing for himself.
Tax law inanity doesn’t just stalk professional athletes. Last December, long-term Peloton holding Eaton Corp. “redomesticated” to Ireland as part of its acquisition of Cooper Industries, becoming Eaton Corporation plc. Was this because Dublin had suddenly become a nicer place to live than Cleveland? Hardly. It was all about tax competition: the U.S. top marginal rate for corporate income is 35%, whereas Ireland’s is 12.5%.
An inviolable law of economics is that rational people respond to incentives. Our current tax code is very directly incentivizing major tax payers to leave, and frankly, as long as our tax code is as broken as it is, we should expect more of this kind of activity. A healthy tax policy is one that allows us to meet our shared public expenses and otherwise doesn’t interfere with spending and investment decisions. We hope 2013 is the year when Congress finally takes up serious tax reform.
Phil complained publicly about his tax rate – and then apologized – earlier this year, amid speculation that he might move his family from California to, say, Florida, which doesn’t have a state income tax. Had he done so, he would’ve saved $288,278 on his recent overseas earnings. And just imagine the savings if Phil could incorporate himself as an Irish company. That’s not likely to happen, although “Lefty, Ltd.” has kind of a nice ring to it.