ATR Responds to Politifact's Critique of Their Olympic Tax Analysis

Yesterday, the Tampa Bay Times's Politifact unit assigned a "mostly false" label to a July 31 blog post by Americans for Tax Reform (ATR) which argued that American athletes winning medals in the London Olympic Games would pay hefty taxes as a result of their success. For example, a gold medal winner could pay up to nearly $9,000 for each gold medal victory.

Today, ATR Tax Policy Director Ryan Ellis issued a strong critique of Politifact's analysis and unfair conclusion, explaining how it is fundamentally flawed (portions bolded and underlined reflect my emphasis):

ATR's primary claim is that the prizes are taxable, not that all medalists will necessarily owe $9,000 in taxes.  Poltifact admits that after they checked with their own experts, it was confirmed that prizes awarded would be taxable.  On this finding alone, the verdict should have been "mostly true," at least.

ATR consistently said that prizes were taxable "up to" a 35% marginal tax rate.  We deliberately used this language because we know that Olympians will pay taxes at whatever marginal tax rate they happen to find themselves in this year.  For many Olympians, they will find themselves in the top marginal income tax bracket.  That certainly is not going to be an uncommon tax rate for many winners, given the advertising and other endorsements they should enjoy with their celebrity in the same tax year they won the medal and accompany cash prize from the U.S. Olympic Committee.  Politifact took great umbrage at the $9,000 tax bill per gold medal, but that's a simple matter of arithmetic for a top-rate taxpayer, and in any case is sufficiently-qualified by "up to."

Deducting training expenses is not as easy as Politifact makes it sound.  To hear it from Politifact, deducting training expenses is a simple write-off easily handled by any accountant.  Anyone who has prepared multiple tax returns can attest that this is simply not as easy as Politifact makes it sound.

First, the athlete needs to keep records of his expenses.  This may involve issuing W-2s and 1099s to trainers.  If any training is overseas, there can't be any personal pleasure in the trip for it to be deductible. None. 

Even if a medalist takes a few hours to see, for example, Parliament, that would disallow all travel expenses from being deductible. 

Equipment purchased must be individually accounted for as a depreciable expense.

Second, the athlete must itemize his deductions, rather than take the standard deduction.

Third, the athlete must reduce his training expenses by 2 percent of his adjusted gross income.  For an athlete earning $250,000, that means disallowing the first $5,000 of expenses.

Finally, if the athlete finds himself in the alternative minimum tax (AMT), which many six-figure earners do, this deduction is disallowed completely.

An athlete may be self-employed, but they would then face a self-employment tax of at least 2.9 percent on top of income tax (likely much more than this since the first $100,000 or so faces a self-employment tax rate of 13.3 percent in 2012).  Alternatively, an athlete may have a personal service corporation (PSC) with a flat rate of 35 percent.  Expense deductions face fewer hurdles here, but higher marginal tax rates.  In these cases, ATR may have even been overly-conservative in our estimate.

In any event, ATR stated the simple fact that, "U.S. Olympic athletes are liable to pay income tax on medals earned and prizes received at the London games."  That isn't in dispute, and we never claimed that deductions were not also available (even if they were hard to use compared to the ease of reporting the income).  We also didn't point out that Olympic athletes often get advertisement and speaking fees, which may in part cancel out Politifact's point about being able to deduct training expenses.

Politifact seems confused about how to use average vs. marginal tax rates.  The article pointed out that even a top-bracket taxpayer has an average tax rate (that is, taxes divided by income) of less than 35 percent.  The best answer to this is, "so what?"

When you're looking at the effects of taxation on income, economic analysis is always done at the margin.  One looks at the marginal income tax rate because that's the tax rate paid on the last dollar earned.  For example, if someone is in the 30% bracket but has an average rate of 10%, what will an extra $1000 in income cost that person in taxes?  The answer is $300--the marginal tax rate times the income--and the average rate has nothing to do with anything.

To even bring up average rate betrays a basic inability to analyze this question properly.

The goalposts got moved in order to slam ATR.  At the end of the article, Politifact admits that our claim--that Olympic prizes are taxable--is accurate.  But they render our analysis "mostly false" because they don't like the $9000 number.  We think that number is very defensible, but we also made it clear that this was the amount only for top-bracket taxpayers.

Politifact moving the goalposts and declaring something mostly false that is mostly if not completely true? Hmm, where have we seen that before? Try here and here for starters.