Skip to main content

Mickelson has a point on taxes

By Edward J. McCaffery, Special to CNN
January 28, 2013 -- Updated 0121 GMT (0921 HKT)
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
September 30, 2014 -- Updated 1653 GMT (0053 HKT)
Jeff Yang calls Ello a wakeup call to Facebook and Twitter, and a sign of hope for fast-rising upstarts Pinterest and Snapchat.
October 1, 2014 -- Updated 1423 GMT (2223 HKT)
Paul Waldman says the Secret Service should examine its procedures to make sure there are no threats to the White House--but without losing the openness so valuable to democracy
October 1, 2014 -- Updated 1455 GMT (2255 HKT)
Jesse Williams says the videotape and 911 call that resulted in police gunning down John Crawford at a Walmart reveals the fatal injustice of racial assumptions
September 30, 2014 -- Updated 2303 GMT (0703 HKT)
Mel Robbins says officials should drop the P.C. pose: The beheading in Oklahoma was not workplace violence. Plenty of evidence shows Alton Nolen was an admirer of ISIS.
September 30, 2014 -- Updated 1911 GMT (0311 HKT)
The Occupy Central movement has already achieved much by bringing greater attention to Hong Kong's struggle for democracy, William Piekos says..
September 30, 2014 -- Updated 1911 GMT (0311 HKT)
The Occupy Central movement has already achieved much by bringing greater attention to Hong Kong's struggle for democracy, writes William Piekos.
September 30, 2014 -- Updated 1413 GMT (2213 HKT)
As Prime Minister Narendra Modi visits America, Madeleine Albright says a world roiled by conflict needs these two great democracies to commit to moving their partnership forward
September 30, 2014 -- Updated 1404 GMT (2204 HKT)
John Sutter: Lake Providence, Louisiana, is the parish seat of the "most unequal place in America." And until somewhat recently, the poor side of town was invisible on Google Street View.
September 29, 2014 -- Updated 1311 GMT (2111 HKT)
Julian Zelizer says in the run up to the 2016 election the party faces divisions on its approach to the U.S.'s place in the world
September 29, 2014 -- Updated 1419 GMT (2219 HKT)
Ruben Navarrette says Common Core supporters can't devise a new set of standards and then fail to effectively sell it.
September 30, 2014 -- Updated 1329 GMT (2129 HKT)
Earlier this month, Kenyans commemorated the heinous attack on the Westgate Mall in Nairobi.
September 30, 2014 -- Updated 1859 GMT (0259 HKT)
David Wheeler says Colorado students are right to protest curriculum changes that downplays civil disobedience.
September 27, 2014 -- Updated 0158 GMT (0958 HKT)
Sally Kohn says when people click on hacked celebrity photos or ISIS videos, they are encouraging the bad guys.
September 26, 2014 -- Updated 1155 GMT (1955 HKT)
Loren Bunche says she walked by a homeless man every day and felt bad about it -- until one day she paused to get to know him
September 30, 2014 -- Updated 1332 GMT (2132 HKT)
ISIS grabs headlines on social media, but hateful speech is no match for moderate voices, says Nadia Oweidat.
September 29, 2014 -- Updated 1233 GMT (2033 HKT)
A new report counts jihadists fighting globally. The verdict? The threat isn't that big, says Peter Bergen.
September 23, 2014 -- Updated 2137 GMT (0537 HKT)
Ebola could become the biggest humanitarian disaster in a generation, writes former British Prime Minister Tony Blair
September 26, 2014 -- Updated 1658 GMT (0058 HKT)
ISIS has shocked the world. But will releasing videos of executions backfire? Four experts give their take.
September 26, 2014 -- Updated 1439 GMT (2239 HKT)
Eric Holder kicked off his stormy tenure as attorney general with a challenge to the public that set tone for six turbulent years as top law-enforcement officer.
September 26, 2014 -- Updated 1309 GMT (2109 HKT)
LZ Granderson says Obama was elected as a war-ending change agent, not a leader who would leave behind for his successor new engagement in Iraq and Syria. Is he as disappointed as the rest of us?
September 24, 2014 -- Updated 0910 GMT (1710 HKT)
Gayle Lemmon says the question now is how to translate all the high-profile feminizing into real gains for women
ADVERTISEMENT