Faster, Higher, Stronger, But Not for Taxes

08/13/2012 12:30 pm EST

Focus: TAXES

Terry Savage

Author, The Savage Truth on Money

One part of the US' recent Olympic success provides an important parallel to events going on back in Washington, DC, writes MoneyShow personal finance expert Terry Savage.

As a fitting gesture for the successful US Olympic team, President Obama has announced his support for a bill to make the winners’ medals—and the cash awards that go with them—free from Federal income taxes.

The President was responding to a bill proposed by Republican Senator Marco Rubio to make the winnings tax-free. And several state legislatures have also introduced bills to eliminate state tax on the winnings.

Clearly, both political parties can come together on the value of rewarding excellence, instead of punishing it by taxing success.

The big question is: Why can’t they agree on that same principle in real life, acknowledging that profits are the rewards of excellence determined by free markets?

It’s the Principle, Not the Gold
Let’s set aside the value of those gold medals for a moment. It turns out they aren’t really made even mostly of gold, despite the photos of athletes biting into them—a traditional measure of testing pure gold, which is softer than alloyed metals.

In fact, the gold in each gold medal is worth only about $655—reflecting the fact that there is only 1% gold in those large discs, with the remainder largely made of silver. The silver medals are worth about $335, and the bronze less than $5 each, based on the metal weight of these prizes.

But the US medal winners also get cash prizes: $25,000 for gold, $15,000 for silver, and $10,000 for bronze. The award money comes from the US Olympic Committee. Under current tax laws, that money is taxable income to the winners.

(By the way, that cash prize bounty is not unusual. In fact, it is relatively small. An Italian gold medal winner would receive more than $182,000 for a gold medal, and a Russian gold is worth roughly $135,000 in US dollars. My advice to those winners: quickly convert from rubles or euros into real gold!)

Now, for most struggling American amateur athletes—most of whom rely on sponsors to pay their way—the income tax on their awards won’t amount to much. They’re likely in the lowest tax bracket. Or they have training expenses to write off against their winnings.

But some critics of the plan to eliminate taxes on the medalists have pointed out that Olympic superstars such as LeBron James and Kobe Bryant, each with more than $50 million in annual endorsements—and even Michael Phelps, with his reported $10 million in endorsements—do not “need” a tax break.

The Great Tax Debate
Which brings us right back to the tax debate we’re having here in America. Even the Olympic spirit cannot overshadow the divide between those who want to tax success and accomplishment, by determining who is “worthy” of keeping the rewards of their success, and who should have the rewards of their personal efforts taxed and distributed to benefit others who are more needy.

Put in those terms, the argument sort of makes you squirm.

There is no denying that the success of these athletes did not come from the “community”—although their supporters cheered them on. It came from their personal efforts to be best at what they do. Even the President has acknowledged that.

These gold, silver, and bronze medalists are indeed in the top 1%—elite, special, successful through their own untiring efforts and innate, special athletic abilities.

Does anyone have a “right” to a piece of their winnings? Do we really have the temerity to tax their efforts, to share in the results of their hard work? Is there an excuse to say that they don’t “need” the rewards of their hard work as much as others?

It’s hard to make a case for taxing success when it is so clearly the result of personal effort. But lately it appears less easy to see how that same principle applies to entrepreneurs—whether they are founders of companies like Apple (AAPL) or Microsoft (MSFT), or just small business owners with big dreams.

This is not an argument against all taxes. We need taxes to fund government activities that benefit society. But it is an argument against levying special taxes against those who are most successful.

Sure, the Olympians would likely strive for victory in future games even without financial rewards. Great Britain doesn’t pay any bonus to medal winners, and their teams were very successful.

Many of the Olympic medal winners—whether they are American gymnasts and swimmers or Jamaican runners—will now reap huge financial rewards from endorsements and speaking engagements. We don’t begrudge them their financial bounty. In fact, it serves as an additional inspiration to future competitors.

That same principle applies to entrepreneurs and business builders. They earned the rewards. And because they are the winners, they not only inspire us but also create jobs for us. They should be encouraged, not hit with special tax penalties. And that’s The Savage Truth.

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