Free Markets, Free People

Taxes Matter and Can Destroy Incentive

Let me tell you how it will be
There’s one for you, nineteen for me
Cos I’m the taxman, yeah,
I’m the taxman
Should five per cent appear too small
Be thankful I don’t take it all
Cos I’m the taxman, yeah,
I’m the taxman

– Beatles, 1966

One of the common laments from fiscal conservatives is that static tax analysis assumes no adjustments by taxpayers to avoid paying at the highest rates. Generally speaking, the higher any activity is taxed, the less of that activity we will get. Even when the activity is just fun and games, such as competing in the Ryder Cup matches in Europe this Fall:

Players competing in the match between Europe and the United States at Celtic Manor, Wales, could be seriously affected by new rules issued by the customs and revenue agency, which can now tax foreign sportsmen and women not just on prize money earned but on sponsorship and endorsements.

Why would that matter? Because the prize money is a pittance compared to what endorsements bring in. Tiger Woods, for example, when he was playing well could win a tournament and take home as much as $1.5 Million in prize money. At the same time, his endorsements earn him in excess of $90 Million per year, which is down from a staggering $128M/yr just two years ago. By comparison, Phil Mickelson, who actually has played well this season, brings in an estimated $61 Million. That’s a lot of money to subject to taxation in the UK just for playing one (albeit prestigious) tournament.

According to the AP article, Usain Bolt (possibly the fastest man alive) and other athletes have already skipped British competitions because of the imposing tax rules, much like how the British Invaders of the 1960’s started spending more and more time in the Carribean, Monaco, and even New Jersey in order to avoid punitive tax rates. Because, in the end, incentives matter, and taxes can create a huge incentive to forgo certain activity.

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13 Responses to Taxes Matter and Can Destroy Incentive

  • Considering that they play the Ryder Cup for no prize money,  it’s a simple tax grab at 2% of their annual endorement earnings, based on spending a week over there.  Ditto for the British open, and any tune up torunaments they play in Ireland.  Naked greed on the part of governments.   Watch for New York trying the concept at the Westchester Open.  Or California for Pebble Beach.

  • The power to tax is the power to destroy.
    People will vote with their feet.  We don’t like being destroyed…or enslaved by even degrees.

    • Where are you going to go?
      America is the last hope for individual rights.  Unless things turn out quite different than all evidence suggests, our great-grandchildren will curse us one day, because we could have stopped it.

      • You misunderstand.   People…provided a choice…will vote with their feet.  New York state is learning this, as is Kulhifornia.
        Part of the totalitarian urge by the Collective is to deprive us of any choice under Federalism.  They seek to “normalize” the entire country under the same regime via the central government.
        I think we are at a pivotal point in history, and it could result in a “parting of the ways” in one form or another.  I quite agree with your point about our progeny, and I’m very willing to put everything I have on the line so I never face them in shame.

  • I’ve often wondered if any has ever tried to calculate the IMMENSE waste of genius expended in devising tax systems, and in defeating tax systems.  One of the MANY hidden costs of BIG GOVERNMENT.

    • I saw an analysis several years back that estimated the savings of a flat tax in compliance, filing, accounting, etc. It was about half a trillion dollars. I bet it’s more now. And it does not include the growth effects of spending money in a more intelligent way than dodging or appeasing the tax man.

      Imagine the economic stimulating effects of half a trillion, without the government spending anything.

      The only sacrifices for legislators would be the ability to manipulate the system for their constituents and contributors, and engage in their pet social engineering causes. Which, of course, is enough that they’ll never go for the flat tax.

      • In a CATO podcast, the finance minister of Bulgaria specifically said that the flat tax helped businessmen with little accounting skills, allowed them to hire so-so tax administration officials, and made corruption harder to commit.

    • Ditto for all of the SarbOx BS.  There is a huge amount of waste in the compliance documentation, and the CYA decision making, due to this poorly thought out legislation.

  • I think the tax code should be made even more complicated in order to create even more jobs.  I can’t believe the Obama administration hasn’t thought of this.  Talk about an easy stimulus.