David R. Henderson  

Lefty's Laffer Curve

Acemoglu on Human Capital and ... When is a Spending Multiplier ...

Golfer Phil Mickelson, aka "Lefty," recently hinted that he was thinking of leaving California because of the high tax rates there that, combined with federal income and payroll taxes, make his tax rate (I'm pretty sure he meant marginal, not average) above 60 percent. He exaggerated but only slightly. Because he makes more than $1 million a year, his state marginal tax rate (MTR) is 13.3 percent. (I posted about this 2 months ago and understated the marginal tax rate: I will make the correction anon.) His federal MTR is 39.6 percent plus the ObamaCare 3.8 percent payroll tax, for a total MTR of 43.4 percent. Add those together and you get 56.7 percent. That's close to 60.

In the same post I noted above, I predicted that a number of high-income people will leave California. It's true that Phil Mickelson said he regretted his remarks. In a statement he released Monday, he said, "Finances and taxes are a personal matter and I should not have made my opinions on them public." I don't know why he shouldn't have, but notice what he didn't say: he didn't say that he had decided not to move.

That high-income golfers take taxes into account in choosing where they live should not be surprising. Here's a segment from an Associated Press story by Doug Ferguson:

A majority of PGA Tour players live in Florida and others in Texas, two states that have no state income tax. Tiger Woods grew up in Southern California and played two years at Stanford. He was a California kid when he won an unprecedented three straight U.S. Amateur titles, but when he made his professional debut in Milwaukee a week later, he was listed as being from Orlando, Fla.
"I moved out of here back in '96 for that reason," Woods said Tuesday.
"I enjoy Florida, but also I understand what he was -- I think -- trying to say," Woods said of the Mickelson comments. "I think he'll probably explain it better and in a little more detail."

For those of you who don't follow golf, this last quote from Tiger is quite striking: Tiger and Lefty do not like each other, to put it mildly. But I find it gratifying that implicitly Tiger is defending Phil's right to legally keep as much of his income as he can.

One final note: I was disappointed to see this line from Mickelson's statement: "I apologize to those I have upset or insulted, and assure you I intend not to let it happen again." I'm sure that he upset people, but those people should deal with it. There's no need for an apology. As for insults, I read the whole part of the conversation quoted and I couldn't find a single insult. Mickelson was simply saying that he was going to respond to the incentives that Jerry Brown, California voters, President Obama, and Congress put in place.

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COMMENTS (22 to date)
Ken B writes:

I think the apology too is a response to incentives that Jerry Brown, California voters, President Obama, Congress, OWS, the media, and our general recent political discourse have put in place.

Finch writes:

> I don't know why he shouldn't have[...]

I don't know if this is what he meant, but to paraphrase Michael Jordan, "Democrats buy golf clubs too."

Mike Rulle writes:

I assume he apologized to play it safe with sponsors. Already ESPN started with the "how much money does anyone need" argument. Since Phil makes in the 40-50 mil range, he should be "ashamed to complain" given how much his fans make.

The general rule of envy is if one "makes more than me" they are greedy and selfish if they do not happily give money over to Government.

Envy has become justice.

silver writes:

His real marginal rate is approximately 51%-state income taxes are deductible.

Fed Income 0.396
Medicare 0.038
Total Fed 0.434

State 0.133
Fed Benefit -0.057722
Net State 0.075278

Total 0.509278

Brandon Berg writes:

Since state taxes are deductible at the federal level, you have to discount them a bit. It's actually more like 8%.

That said, capital gains taxes make it considerably worse. If you make $10 million and invest it at 7% for 10 years, it roughly doubles, to $19.7M. Now add a 40% income tax, and you only have $6M to invest, so you end up with $11.8M. With a 25% capital gains tax (California + federal), you only get a 5.25% effective return, leaving you with $10M after ten years.

David R. Henderson writes:

@silver and Brandon Berg,
I had thought about that but then I vaguely recalled reading that state income taxes are not deductible at the federal level for very high-income people. Was I wrong about that?

Joe Kristan writes:

David: you are probably thinking about alternative minimum tax. When your income exceeds $1 million, it usually doesn't apply, absent a big capital gain. I come up with a rate for Mr. Mickelson of just short of 52% -- plenty bad enough.

I think Finch has it right, Mickelson is trying to protect his endorsement income by what Oscar Wilde put as, "I apologize for the intelligence of my remarks."

Also, Mickelson probably has incorporated at least some of his earnings and could be paying federal and state corporate taxes too.

David R. Henderson writes:

@Patrick R. Sullivan,
"I apologize for the intelligence of my remarks."
Love it. I'll have that one in my tool kit from now on.

silver writes:

@David R. Henderson,
You are correct, there is a phaseout (up to 80% which Phil will hit) of the federal benefit. I guess I should stick to corporate tax.

MingoV writes:
His federal MTR is 39.6 percent plus the ObamaCare 3.8 percent payroll tax, for a total MTR of 43.4 percent.

Two taxes were omitted on self-employed "Lefty." He has to pay both halves of the Medicare payroll tax (2.9% of all income) and both halves of the Social Security payroll tax ($14,099).

genauer writes:

marginal tax rate in Germany is 45% * (1+ 5.5%)=47.5%

and no capital gains tax on the stuff I bought before 2009

genauer writes:

just to be clear,

no state tax in Germany.

and medicare, unemployment, care and Social security contributions are capped at 2.2x average salary, or lower.

There would be government collected tithe (8-9% of the tax), if you declare to belong to.

Arthur_500 writes:
His real marginal rate is approximately 51%

Add in 12.4% Social Security (limited to be sure) and the rate rises. Admittedly he probably limits out on the first tournament.

ThomasH writes:

This sounds like an argument to shift more of redistribution expenditures like Medicaid from States to the Federal Government, as ACA does and the 2009 Stimulus did temporarily.

David R. Henderson writes:

Thanks. Could I trouble you for a cite?
Two taxes were omitted on self-employed "Lefty." He has to pay both halves of the Medicare payroll tax (2.9% of all income) and both halves of the Social Security payroll tax ($14,099).
I omitted neither. The 3.8% tax is the Medicare payroll tax for high-income people. And the Social Security payroll tax is not a MTR for Lefty. His marginal Social Security tax rate is 0.

Ben Hughes writes:

Folks, it's worse than that. Everyone is talking about the up-front rates at various levels of government. What should matter is total tax *incidence*. I know that's hard to calculate. But if anything it skews the marginal rate up even further. Even if counting capital gains, the 50%+ figure surely doesn't factor in the incidence of the (very high) corporate tax on shareholders, whatever that is.

David R. Henderson writes:

@Ben Hughes,
You're right that if Lefty gets money through a corporation that then pays him, the MTR is even higher. But that's not about tax incidence. In fact, the assumption that makes most sense is that because of capital mobility across borders, the incidence of the corporate income tax is mainly on workers and consumers, not on owners of corporations.

Steve Y. writes:

It seems that one of the few remaining social taboos is for rich people to complain about their taxes, so it's not surprising that Phil stopped digging a deeper hole and promised no longer to talk about the subject.

Nevertheless, I'd like to add another word of sympathy, but for a problem that no one has yet brought up: tax complexity at the state level. Professional golfers must pay taxes in each state where they win; a busy golfer must file dozens of tax returns, allocating winnings and expenses to each state. The states try to be "fair" by trying not to double-tax income, but somehow state tax boards always seem to decide gray areas in their own favor.

The real money lies in trying to be the state of residence, which gets assigned the intangible income (interest, dividends, royalties, etc.) , which for someone like Phil Mickelson now greatly exceeds his annual golf winnings. If he moves to Florida, say, but leaves a condo in California to visit his kids who may wish to finish school there, you can bet that California will ask for an accounting of days spent in Florida versus days spent in California and contest the domicile change. For a good overview, see Hodgson Russ' posted article "The Multistate Tax Quandary for Professional Athletes".

Phil Mickelson appears to be a good, successful family man who gives something back through charitable works but is spending more and more time worrying about the problems of wealth, which he can't talk about.

Many of us would like to be very rich and very famous, but, really, it's not all it's cracked up to be.

Ken B writes:

DRH quoting PRS quoting OW

I apologize for the intelligence of my remarks."
Love it. I'll have that one in my tool kit from now on.

I eventually left it out of mine, due to lack of chances to use it, like a 2-wood.

Steve Sailer writes:

hil has probably paid over $50 million in California income taxes, while Tiger has paid $0 in income taxes to any state. As a native Californian taxpayer, I appreciate that native Californian Phil, unlike native Californian Tiger, has chosen to pay approaching 10% of his income into our native state's tax coffers, which reduces how much I have to pay.

If Phil feels like kvetching about the state that he has been so expensively loyal to wanting more, I sympathize.

jdgalt writes:

This doesn't yet relate directly to Mr. Mickelson, but it easily could:

Starting about a year ago, the federal government now imposes a good-sized wealth tax on people who expatriate from the US in order to avoid taxes. (Specifically, the expat is deemed to have sold all his property for its fair market value the day before he left, thus making capital gains tax due on all of it.)

I'm surprised that no one has yet challenged this new tax in court (it does seem to violate the Learned Hand ruling that tax avoidance is OK). But if upheld on that ground, a practical problem arises: how do you prove why somebody left the country? Perhaps the government will only try to enforce this tax against people who publicly announce that they left because of high taxes. In that case a First Amendment challenge should follow, and should win.

More to the point, though, if the US can do this, I see no legal reason that California couldn't do the same to people who move out of the state for tax reasons. So if I were Mickelson, I'd go soon.

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