Should We Tax Olympic Prize Money?
Slate's Matt Yglesias writes:
If they gave out awards for dumb new policy ideas, President Obama and Republican rising star Sen. Marco Rubio would both be medaling this week. Their achievements? Rubio's completely pointless bill offering a tax break to recipients of Olympic medals and—even worse—the president's decision to hop on the bandwagon rather than show the country he has a firmer grasp on the issues than his adversaries do.
This is one of those cases we've been talking about where economists across the political spectrum all see an issue the same way — and politicians across the political spectrum all see it the opposite way.
The basic economic idea: Taxes should be as simple as possible. A $25,000 prize the U.S. Olympic Committee pays you for winning a gold medal should be taxed exactly the same as $25,000 a restaurant pays you for washing dishes. (This isn't a comment on whether taxes should be high or low. It's only to say that, whatever the rates are, they should be applied consistently.)
The tax code is such a mess because Congress makes all these special exceptions. They decide, say, that income you get for winning a gold medal should be treated differently than income you get for washing dishes.
Any one exception seems reasonable. (Where's your Olympic spirit? Of course we should waive the taxes on our Olympic champs! It's not that much money anyway.) But over time, these exceptions — which we call "loopholes" when we want them to seem bad — add up.
"Each step along the way is great," accounting prof John Yeutter told us earlier this year. "But after 100 years, we have a system that is very, very complex."
This complexity is more than just a hassle. First, there's all the money that goes to accountants and tax lawyers who help people . And then there's the fact that people and companies make all kinds of choices — choices that may not be in anybody's best interest — just to lower their tax bill.
Of course, tax preferences aren't going to drive anyone's choice between competing in the Olympics and washing dishes. But, as Yglesias writes:
The underlying issue is that taxes aren't supposed to be a cosmic judgment on the underlying worthiness of people's activities. The earnings of a great artist and a reality TV show producer are taxed the same. That can seem a bit perverse at times, but having Congress try to assess which professions are important and which are bad would be much worse.