2/7/2013 3:00 AM ET|
Why you should pity Phil Mickelson
The golfer has a sweet swing but a sour view of the federal income tax. As a pro athlete, he pays a far higher rate than many on Wall Street.
Does Phil Mickelson have a legitimate beef when it comes to his taxes? The Hall of Fame golfer and one of the world's highest-paid athletes recently caused a stir when he threatened to move out of his native California -- and hinted at perhaps even retiring from golf -- because of his high state and federal tax rates.
Mickelson reportedly earned nearly $48 million last year. He was reacting in part to California's newly passed Proposition 30, which raises the state tax rate on people earning more than $1 million from 10.3% to 13.3%.
And as The Wall Street Journal recently reported, federal tax rates on income of more than $400,000 rose this year, from 35% to 39.6%. At the same time, according to the WSJ, "'Obamacare' levies a new 3.8% surtax on investment income and raises the Medicare tax by 0.9% on wages over $200,000. Limits on itemized deductions for high earners have also been reinstated, which will raise many athletes' marginal rates by one to two percentage points."
While "Lefty," as Mickelson is known, quickly backtracked and apologized for his comments, he also opened the door on something that a lot of affluent folks and their accountants already know: Rich people are not all equal when it comes to the taxes they pay.
"If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate's 62, 63%," Mickelson said at the time.
Analysts believe his actual tax rate is closer to 50%, according to CNBC. But still, how does Mickelson end up paying about half his income in taxes when Mitt Romney, who's reportedly worth about $250 million, famously had a rate of around 14% on his 2011 taxes?
Or, to quote Salary.com, "How does a man worth hundreds of millions end up with a tax rate similar to that paid by a household earning $50,000 per year?"
One big difference is in their jobs. "If you look at someone like a professional athlete, they are earning their income through their services, through labor, similar to a construction worker," says Sharon Lassar, a director of the school of accountancy at the University of Denver's Daniels College of Business. "And income that is earned through labor is ordinary income that is subject to U.S. taxes today as high as 39.6%. That's after the legislation that was passed to deal with the fiscal cliff; it was lower before that."
In comparison, Romney's income likely came through capital gains -- the profits from selling assets such as real estate or stocks -- acquired through his partnership with firms that buy and sell other companies. "And the sale of those underlying companies is a capital gain; it generates a capital gain to the partnership," Lassar says.
Romney's income is taxed twice – first at the corporate level and a second time when reported on a personal income-tax return. As he said during his interview with "60 Minutes" last September, "One of the reasons why the capital-gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as 35%."
The income Romney and others like him report on their federal tax returns comes mostly from capital gains, which currently are taxed at a high of 23.8%. But last year, before the fiscal-cliff legislation, they were taxed at a maximum of 15%. "And that's why Mitt Romney's tax rate was just under 15%," Lassar says, "because he also had charitable contributions and other items which reduced his taxable income."
"Essentially, the (federal) policy is this: If you have income from capital, we're going to tax it at a preferential rate," Joseph Newpol, a professor of law, taxation and financial planning at Bentley University in Waltham, Mass., explained to Salary.com. The government's rationale for that lower capital-gains tax rate, he says, is "to encourage people to invest in stocks, bonds and things like that because that's good for the economy, it creates jobs."
Romney also came under fire during his presidential campaign for not providing enough of his tax returns for public scrutiny. But Lassar says those returns wouldn't have provided much political ammunition to Romney's opponents, because they cannot really explain the tangled way that investment income is earned and taxed.
Others look at the discrepancy between what a top athlete and a world-class investor pay in taxes in a more pragmatic way.
"The Mitt-Lefty paradox has a simple explanation: In America, we tax work. And highly," Edward McCaffery, a professor of law, economics and political science at the University of Southern California, said recently on CNN.com. "We do not tax capital or wealth much at all. Indeed, if you have wealth already, taxes are essentially optional."
More on taxes:
VIDEO ON MSN MONEY
It would all be so easy,,,Rich or Poor FLAT Tax 20% on everyone.... No deductions or write offs..
No Need to file with IRS Matter of fact No Need for IRS
What this moron journalist neglects to mention is the significance of a "marginal" tax rate, that is,the amount of tax you pay on the next incramental dollar you earn. With a progressive tax rate, your last dollar is taxed at that highest rate. Ths is what influences your decision on how much incentive you will have to keep working as hard as you are. As the rate goes up, your incentive to work decreases, especially if you have already made a lot of money.
Mickelsons marginal rate is closer to 60% if you include federal,state,3.8% in medicare taxes, and local. And that doesn't include the new 3.8% surtax on investment income. So basically he only keeps 40 cents of every dollar he earns over $500,000. On the $48 million he earned he pays approx $28 million in taxes and he keeps $20 million. And that's why he is considering retiring. I'm sure he doesn't need $20 million to live on. So if he has saved up enough to live on for the rest of his life, why not just call it quits and go enjoy life.
So who loses here. Phils happy because he can enjoy life, but the government loses over $20 million in taxes & the many of the people he employs will lose their jobs.
Why the hell would he choose to be a California citizen and pay $6.5 millon on state taxes when he could call Florida or some other state home, and pay $0. He can still live in california for half the year and save $6.5 million. Raising state taxes only incentivizes people to leave.
I can understand the frustration not only from Mickelson but also numerous other high tax payers who continue to dole out money to the IRS and other tax agencies while the federal and state governments squander hundreds of billions of dollars in fruitless ways. The federal government, through Obama's taxpayer funded "venture capital" program for his cronies who were bundlers for his campaign contributions, gave guaranteed federal loans and funding equaling almost $1 TRILLION to Solyndra and several other green energy start-ups, all of whom now are shuttered or in bankruptcy. Why give money honestly when it is funneled to businesses or people who have special relationships with government officials? People cry about funding for Sandy in the Northeast. However, the bill that was put before the House contained over $40 BILLION in aid for regions of the country which were not impacted by Sandy. Oregon, Washington and Alaska congress people put in pork for money for their states for removal of debris from the damages that occurred in Japan which now have washed ashore in their states. How is that fair? Look at these companies which got hundereds of millions of dollars for electrical cars and batteries. They now are shutting down because there is no demand, and the batteries don't work. Government cannot be the impetus to stimulate the economy through false means and methods because it cannot be sustained. Has to come through the private sector, but Obama, who never has had a private sector job, does not understand that.
"In America, we tax work. And highly... We do not tax capital or wealth much at all."
Maybe that should change. Go to a flat sales tax. Then your capital, or spending, will be taxed sky high. This will eliminate class warfare.
How can you ask such a dumb question? The nimcompoop plays a game for millions of dollars and shows no appreciation for the opportunity that living here in this great country has offered him. He lives in wealth that 99% of us never see , he should be thanking the good lord for what he has and be seeking more ways to help make life a little easier for those who have not been as blessed as he is.
Go ahead phil leave this great country, but please don't come crying back if you want to return someday in the future. How damn selfish can a person be......
It is obvious the article is so patently biased. Why didn't the author use Al Gore, Warren Buffett, or even the Obama's income before he became president as a comparison. If he felt so obligated to use Mitt Romney, why did he fail to mention the huge amount of contributions to many charities that the Romney's make each year.
Phil's only mistake was apologizing for his comments.
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