Skip to main content

Mickelson has a point on taxes

By Edward J. McCaffery, Special to CNN
updated 8:21 PM EST, Sun January 27, 2013
STORY HIGHLIGHTS
  • Golf star Phil Mickelson is thinking of leaving California to avoid paying high taxes
  • Edward McCaffery: Lefty has a point -- high tax rates create disincentives
  • He says the problem is that we tax work, not wealth; this is is backward
  • McCaffery: We should be taxing the act of spending, not that of work and savings

Editor's note: Edward J. McCaffery is Robert C. Packard Trustee Chair in law and a professor of law, economics and political science at the University of Southern California. He is the author of "Fair Not Flat: How to Make the Tax System Better and Simpler."

(CNN) -- Phil Mickelson, aka Lefty, is thinking of leaving California and perhaps America because, according to his own reckoning, he is facing tax rates of 62% or 63%. Mickelson, probably the second-most-famous professional golfer in the world after Tiger Woods, later backed off from his initial comments about making "drastic changes."

Reports suggest that Mickelson earned more than $60 million in 2012. In that sense, he appears to be doing better than the Romneys, and perhaps you are not all that sympathetic to him.

The Romneys (remember them?) paid so little tax. In 2011, Mitt and Ann Romney paid federal taxes of $2 million on reported income of $14 million, for an effective tax rate of 14%, all roughly. The Romneys even had to foreswear taking all of their available charitable deductions to make their tax rate seem so high for appearance's sake.

Edward J. McCaffery
Edward J. McCaffery

It does bear noting that Mickelson is doing something to earn his $60 million. Whoever is paying him that much believes that he is worth it. Who are we, really, to argue?

Mickelson's instinctive reactions to high tax rates, even if his math may be a bit muddled, are sound and sensible ones. Tiger Woods certainly agrees with him.

But that is not the problem in the story. Lefty faces such seemingly inescapably high tax rates that he might just pack up his golf bags and leave home. Mitt pays so little tax that he has to ignore the law to pay a higher rate for appearance's sake.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



How can this be?

The Mitt-Lefty paradox has a simple explanation: In America, we tax work. And highly. We do not tax capital or wealth much at all. Indeed, if you have wealth already, taxes are essentially optional under what I call tax Planning 101, the simple advice to buy/borrow/die.

In step one, you buy assets that rise in value without producing cash, such as growth stocks or real estate. In step two, you borrow to finance your lifestyle. In step three, you die, and your heirs get your assets, tax free, and with a "stepped up" basis that eliminates all capital gains. That's it.

Romney, with a personal fortune estimated at $250 million (his five kids have another $100 million) has figured this out. When he pays taxes, at all, he does so at the low capital gains rate.

Not so with Lefty.

He is a wage-earner, albeit a very highly paid one, and he's going to pay over one-half of his income in taxes if he stays in California. We may not be shedding any tears for Lefty any more than we feel for Gerard Depardieu, who recently left France for Russia to escape taxes, or for the Rolling Stones, who many moons ago left England and recorded Exile on Main Street from France.

Yet one fact not making news is that it is still the case that the highest marginal tax rates in America do not fall on the highest incomes, like Lefty, but on certain of the working poor, many of them single parents, who are being taxed at rates approaching 90% as they lose benefits attempting to better themselves.

It's a "poverty trap" that works just like the severe marriage penalties for the lower-income classes. But the working poor do not have the options of going to Canada, Russia or France.

Lefty has a point -- high tax rates create disincentives. If the rates are high enough, people react by moving. This should not surprise us: American companies have been fleeing our shores for years, in droves. Ask Mitt.

But this should worry us, for two reasons.

One, the fact that the high incomers do flee jurisdictions, or flee from the productive activity of working, is a bad thing for the U.S.

Two, the very risk that the rich and famous might leave, aided by the appearance that some do, holds tax reform hostage. We have struggled to raise rates at all on the rich, blocked by the mostly mythical Joe the Plumber as much as by the realities of Mickelson or the Rolling Stones. When we do finally raise rates, as we did at the fiscal cliff, we do so on the wrong rich, in the wrong way. Lefty's taxes went up, Mitt's need not.

The problem -- and it is the same problem as with Mitt's taxes -- is that we are taxing the wrong thing, in the wrong way. In sum, we tax work, not wealth. This is backward.

We should be taxing the act of spending, not the socially beneficial ones of work and savings. Then we could raise tax rates without fear of ill effects.

Mitt's taxes would go up, for he is surely spending more than $14 million a year, as by running for president, and we wouldn't need any special capital gains preference under a consistent spending tax. Lefty's taxes would go down to the extent he saves some of his $60 million, helping us all by working and saving. When and if Mickelson or his kids spend, we could tax him or them then.

And if Lefty is really insisting on both earning and spending $60 million a year? Well, I figure he can buy a lot of borscht in Russia with that.

Follow @CNNOpinion on Twitter.

Join us at Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Edward J. McCaffery.

ADVERTISEMENT
Part of complete coverage on
updated 9:15 AM EDT, Fri July 11, 2014
Michael Werz says in light of the spying cases, U.S. is seen as a paranoid society that can't tell friends from foes.
updated 9:17 AM EDT, Fri July 11, 2014
Eric Liu explains why in his new book, he calls himself "Chinese American" -- without a hyphen.
updated 11:12 AM EDT, Fri July 11, 2014
John Bare says hands-on learning can make a difference in motivating students to acquire STEM skills.
updated 9:20 AM EDT, Fri July 11, 2014
Karl Alexander and Linda Olson find blacks and whites live in urban poverty with similar backgrounds, but white privilege wins out as they grow older.
updated 12:20 PM EDT, Thu July 10, 2014
Frida Ghitis says a poll of 14 Muslim-majority nations show people are increasingly opposed to extremism.
updated 2:28 PM EDT, Thu July 10, 2014
Ruben Navarrette says spending more on immigation enforcement isn't going to stop the flow of people seeking refuge in the U.S.
updated 4:48 PM EDT, Thu July 10, 2014
Faisal Gill had top security clearance and worked for the Department of Homeland Security. That's why it was a complete shock to learn the NSA had him under surveillance.
updated 2:41 PM EDT, Thu July 10, 2014
Kevin Sabet says the scientific verdict is that marijuana can be dangerous, and Colorado should be a warning to states contemplating legalizing pot.
updated 4:47 PM EDT, Wed July 9, 2014
World War I ushered in an era of chemical weapons use that inflicted agonizing injury and death. Its lethal legacy lingers into conflicts today, Paul Schulte says
updated 7:37 AM EDT, Thu July 10, 2014
Tom Foley and Ben Zimmer say Detroit's recent bankruptcy draws attention to a festering problem in America -- cities big and small are failing to keep up with change.
updated 8:01 AM EDT, Thu July 10, 2014
Mel Robbins says many people think there's "something suspicious" about Leanna Harris. But there are other interpretations of her behavior
updated 1:53 PM EDT, Wed July 9, 2014
Amy Bass says Germany's rout of Brazil on its home turf was brutal, but in defeat the Brazilian fans' respect for the victors showed why soccer is called 'the beautiful game'
updated 5:07 PM EDT, Wed July 9, 2014
Aaron Carroll explains how vaccines can prevent illnesses like measles, which are on the rise
updated 8:08 PM EDT, Tue July 8, 2014
Aaron Miller says if you think the ongoing escalation between Israel and Hamas over Gaza will force a moment of truth, better think again
updated 3:03 PM EDT, Tue July 8, 2014
Norman Matloff says a secret wage theft pact between Google, Apple and others highlights ethics problems in Silicon Valley.
updated 6:37 PM EDT, Tue July 8, 2014
The mother of murdered Palestinian teenager Mohammed Abu Khder cries as she meets Palestinian president Mahmoud Abbas in Ramallah, West Bank on July 7, 2014.
Naseem Tuffaha says the killing of Israeli teenagers has rightly brought the world's condemnation, but Palestinian victims like his cousin's slain son have been largely reduced to faceless, nameless statistics.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT