Going for the (Tax-Exempt) Gold

Even as lawmakers call for broadening the tax base, it seems like they keep proposing to narrow it. In the latest edition, there appears to be bipartisan support for new legislation to exempt Olympic athletes from paying taxes on their winnings. Sen. Marco Rubio (R-FL), House Ways and Means chairman Dave Camp (R-MI), and President Obama are among the supporters.

Though we at CRFB are big supporters of America's Olympic athletes, it's hard to see the policy justification for this new tax deduction. Here are some of our theories, though:

  • Improved Incentives: At $25,000 per gold medal, there is clearly a larger incentive to perform than at $16,000. Perhaps if the medals were tax-free Michael Phelps would have won 24 medals instead of 22.
  • Reduced Offshoring: We've all heard about U.S. tax policy driving businesses abroad. Perhaps some medal-winners will defect to lower-tax countries (can you say "Cayman Islands Dream Team?") 
  • Stimulus: This country still has very high unemployment -- 8.3 percent according to the latest estimates. We need to get people off the unemployment rolls and into Olympic leotards. Perhaps the tax credit could help.

Of course, there are some downsides to this policy. It has the government picking winners and losers, rather than Olympic judges. If we have a tax break for Olympiads, why not for Super Bowl champions? And what about those athletes with no tax burden? Will there be a refundable credit for medals? If not, the policy is regressive.

Of course, if policymakers do go forward with this policy, at the very least should pay for it. Perhaps a surtax on the losing athletes would make sense. Principles of taxation say you should reduce taxes on things you like and increase them on things you don't; this carrot and stick approach could do even more to encourage our athletes to win.

Better yet, let's leave this proposal as it is -- just a proposal.