Rhetoric about the level of taxation has saturated American media for more than three decades. It dates back at least to 1980, with the role played by the economist Arthur Laffer's famous curve in Ronald Reagan's presidential campaign. In the mid-90s, there was Steve Forbes's call for a "flat tax." And tax debates of course continued into this year, which began with a deal to tweak the tax system in order to avoid the so-called Fiscal Cliff.
Amid all the storm and stress of these political debates, sports can be a welcome relief. But in the professional realm, income tax issues are scarcely to be avoided. And tax litigation can easily occur.
Consider, for example, Southern California's own Phil Mickelson, the gifted golfer who has become outspoken in his concern about high U.S. tax rates.
Last month, Mickelson thrilled the golf world with a stirring victory in the British Open. The inspiring win came only a few weeks after another heartbreaking loss in the U.S. Open, where Mickelson has now finished second a record six times.
It also came six months after Mickelson publically questioned U.S. tax rates in high earners. The golfer known as Lefty received his own share of criticism for the concern he expressed about he believes to be excessively high rates.
With this as the back story, consider the tax consequences of Mickelson's British Open win at the famed Muirfield course in Scotland. Combined with his win the previous week at the Scottish Open, and translated from British pounds into American dollars, Mickelson earned nearly $2.2 million in prize money for two weeks of (spectacular) work in Scotland.
The tax bite in Britain, however, was not only large. It was remarkably expansive. The taxes on the tournament winnings alone will be about $954,000, or about 44 percent. But that is not all.
The United Kingdom will also seek to tax income Mickelson may receive from endorsements or bonuses connected to the Scottish work. To be sure, Mickelson will be able to take a foreign tax credit for what he pays to the UK. But when his California state taxes are also added in, the tax bite for his Scottish successes is likely to take well over half his earnings.
Source: Forbes, "Phil Mickelson Wins Historic British Open and Incurs 61% Tax Rate," Kurt Badenhausren, July 22, 2013