Matt Yglesias writes about the contretemps over “taxing Olympic medals,” which the White House has sadly signed onto in an effort to run away from a wedge issue. First of all, the whole thing shows a poor definition in terms. It’s not the medals themselves that get taxed, it’s the cash rewards handed out by the US Olympic Committee, of up to $25,000 for a gold medal. And these are rewards, compensation bonuses for superior performance. It’s really no different from a work bonus, a boost in income in recognition of a good year. So arguing that someone shouldn’t be taxed because their performance is somehow privileged strikes me as really wrongheaded.
With the president now on board, there’s a good chance Rubio’s idea will become law. In fiscal terms, the change will be minuscule. In terms of fairness, it seems like a strange slight to winners of other kinds of prizes. Are Olympic medalists worthier than winners of the Nobel or Pulitzer prizes? And of course exempting all prize income from income tax could merely encourage all kinds of people to restructure their income as prizes. The J.P. Morgan Memorial Prize for Achievement in Investment Banking, anyone?
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. The goal of the tax code should be to try to raise an adequate amount of money in a way that’s economically efficient and meets social equality goals. That tends to mean as broad a tax base as possible—few deductions or exemptions, in other words—to make it possible to raise revenue with relatively low tax rates. Exceptions should generally be justified in terms of broad benefits to society. We have tax breaks for corporate research and development based on the idea that innovation helps the whole economy and not just the most innovative companies. Indeed, even in this age of massive polarization, the desirability, in principle, of a tax code with fewer deductions is a rare point of bipartisan consensus. Over the years, enterprising wonks have even created a whole vocabulary of “tax expenditures” and “spending through the tax code” to try to reframe these giveaways in the eyes of conservatives as a form of maligned subsidies.
That’s right, and it’s also true that this episode shows how the common construction of “tax reform” in Washington is doomed to failure. Tax reform is seen an exchange, where rates get lowered in exchange for “broadening the base,” removing loopholes and deductions so more people pay taxes. And the first time that anyone waves a flag and yells “USA” in the joy of watching an Olympic athlete win the gold, politicians move to exempt them from taxation. And Olympians haven’t even lobbied for it! The idea that the base will stay broadened after the rates get lowered is silly; just look at how quickly politicians are stampeding to add another tax break. Just look at the Presidential campaign, where Obama boasts of “18 small business tax breaks” he signed into law. Washington loves giving out tax breaks, and that won’t end if they manage to do “tax reform.” So all we’ll get out of that will be the lower rates.
Just to segue onto my usual hobby horse, we can make a qualitative distinction between tax relief for Olympic awards, and tax relief for principal reductions. One has to do with an income award; the other has to do with a compensatory damage for fraud and abuse. In one case, the award is physical; in the other, the award is needed debt relief, and the tax will be for money the individual doesn’t have, leading to a series of events (bankruptcy, foreclosure) that will defeat the purpose of the principal reduction in the first place. I think the distinction is clear.