Free Markets, Free People

Ryder Cup

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.