The IRS is Going for the Gold. Bob Bauman

I am a proud Marylander from the Eastern Shore, and like many Marylanders, I have been following closely Michael Phelps’s impressive performance at the London Olympic Games.
Phelps is a native of Baltimore, and I’ve been eager to watch him rack up many more medals in what he’s said will be his final Olympic Games.
As I cheered him on at home, Michael went on to claim three silver medals and one gold, making him the most decorated Olympian on record. He didn’t stop there, and by the time of his final race, he had three more golds.
When Michael returns to Baltimore, he will be met with cheering crowds, plenty of confetti and free access to the Inner Harbor, the National Aquarium and the entire Chesapeake Bay, if he’s in the mood to take another swim.
He will also have some unwanted bureaucrats waiting for him… agents of the U.S. Internal Revenue Service.

Tax the Gold, Silver and Bronze

It seems the U.S. Internal Revenue Service has its greedy eyes on every winning American athlete in London. That’s because a gold medal, worth about $650 at current gold prices, could cost athletes about $236 in taxes. While a bronze medal, which is worth $5, could only cost an athlete $2 in taxes.
As of this morning, U.S. athletes have won 30 gold, 19 silver and 22 bronze medals, for a total of 71, just behind China with 74 and ahead of the host United Kingdom with 48.

The real bite, however, is not medals, but the taxes to be taken out of Olympians’ cash bonuses. The U.S. Olympic Organizing Committee awards 2012 U.S. champions $25,000 for a gold medal, $15,000 for silver and $10,000 for bringing home a bronze.

For example, Allison Schmitt swam a sizzling final leg to lead the U.S. to a gold medal in the 4×200 freestyle relay. Congratulations, Allison. You now owe the IRS $26,679 for your triumphs. Michael Phelps, with his stunning performance, owes somewhere in the range of $45,000 for his 2012 victories.
At a 35% income tax rate, for each medal, bronze medalists will owe the IRS a total of $3,500, silver medalists will owe $5,250 and top finishers will be liable for $8,750, according to calculations by Americans for Tax Reform.

Rubio’s Reform

U.S. athletes are effectively being punished for their success, argues Florida Senator Marco Rubio, who introduced a bill earlier this week that would eliminate tax on Olympic medals and prize money. (President Obama agreed with him!) Rubio said this tax is another example of the “madness” of the U.S. tax system, which he called a “complicated and burdensome mess.”
No argument from us, senator. We’ve been saying that for years.
Our friend, Dan Mitchell of the Cato Institute, points out that it’s important to understand that the senator’s bill isn’t a feel-good effort to create a special tax break. Instead, Senator Rubio is seeking to take a small step in the direction of better tax policy.
More specifically, Senator Rubio agrees with The Sovereign Society that we should end the current U.S. system of “worldwide” taxation and shift to “territorial” taxation, the common sense idea of sovereignty applied to taxes. If income is earned inside a nation’s borders, that nation gets to decide how and when it is taxed.

Continuing Battle for Tax Freedom

The Olympics have exposed a continuation of the global battle between conservative and libertarian advocates of source-based (territorial) taxation on one hand, and those high-tax leftists who want residence-based (worldwide) taxation, on the other.
President Obama, the Democratic Party, the Organization for Economic and Community Development (OECD) and their kooky Left allies, such as the so-called “Tax Justice Network,” avidly support worldwide taxation that allows their big spending government to collect tax on any income taxpayers earn worldwide. That, unfortunately, is current U.S. tax law.
But, to tax income earned outside their borders, government’s tax collection agency, such as the IRS, must be aware of the income; thus the PATRIOT Act, the demand to eliminate all financial privacy, the bullying of governments such as Switzerland, the attempt to impose FATCA on every bank in the world.
In contrast, under the territorial method of taxation, countries such as Panama and Uruguay, for example, reserve the right to tax the income earned inside their borders, regardless of who earns the money; but they do not assert the right to tax income earned in other countries.
While this may seem to be a rather obscure debate, known or understood by few, the eventual outcome has profound implications for all of us, as Americans have just discovered about their suddenly taxed Olympic medalists in London.
As Dan Mitchell points out, radical leftists like Michigan Senator Carl Levin prefer worldwide taxation because it undermines tax competition among counties removing individuals’ and companies’ ability to escape high taxes by shifting activity to jurisdictions with better tax policy.
Indeed, this is why politicians from high-tax nations, like Levin and Obama, are so fixated on trying to shut down so-called tax havens. It’s difficult to enforce bad tax policy, after all, if some nations have strong human rights policies on privacy.

Hope and Change

Unfortunately for American Olympians, U.S. taxes follow them wherever they earn and wherever they go.
Fortunately for us, there are still ways to safely and legally move your assets to nations with more progressive low-tax policies. Uruguay, for example, has a secure banking system and offers interest yields far better than we can find here at home.
While it might be too late for our returning Olympic champions, there is still time for you to take steps to protect yourself from America’s draconian tax laws.
Until next time,

Bob Bauman