Tax Analysts Blog

Phil Mickelson Overreacts to Uptick in Taxes

Posted on Jan 22, 2013
President Obama and Democrats may think that taxes should go up more on upper-income earners, but count Phil Mickelson among those who disagree. The golfer recently told reporters that he planned to make “drastic changes” because of California’s new tax laws. He hinted that retirement might be an option, saying the situation “doesn’t work for me right now.”

Mickelson apologized the next day for offending anyone by implying that higher taxes would affect his lifestyle, but he didn’t really take back the substance of his remarks. He simply called finances and taxes a personal matter that he shouldn’t have discussed in public.

What has Mickelson upset? California voters recently approved the first statewide tax increase since 2004. Proposition 30’s rate increases vary from 1 to 3 percent on those earning over $250,000. The new law will also increase the sales tax a quarter-cent for the next for four years. California’s tax changes coincide with an increase in federal tax rates on upper-income taxpayers. The fiscal cliff compromise allowed the top federal rate to rise from 35 percent to 39.6 percent.

The combination of those two events was devastating to a hardworking millionaire golfer like Mickelson. “If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate's 62, 63 percent,” Mickelson said. "So I've got to make some decisions on what I'm going to do.” He also said that the tax increases already caused him to back out of a bid to buy the San Diego Padres. Apparently he concluded that owning a Major League Baseball team just can’t be profitable because of a temporary 3 percent rise in California’s top tax rates.

Mickelson has earned over $73 million during his golf career from tournaments alone. His endorsements total $40 million a year. Even if he is paying a 60 percent tax rate, that would leave him $16 million a year in income, just from his corporate partners such as Callaway, Rolex, and Exxon Mobil. One of Mickelson’s most prominent sponsors is KPMG, which perhaps should be taking a closer look at the golfer’s tax returns if he is indeed paying a 60 percent effective rate (something that is highly unlikely).

Syracuse professor and TPC founder Len Burman, in a post on Forbes.com, agrees that Mickelson is almost certainly wrong about his tax rate. He calculates that Mickelson’s likely tax rate is around 52 percent -- somewhat high, perhaps, but nowhere near enough to make him reconsider his entire career. Burman calls on Mickelson to “please stop whining and give thanks for being able to earn a fabulous living.”

Many economists and conservatives have called California’s tax increase a self-defeating proposition, pointing out that the rich can simply move out of the state to avoid the excessive rates. That is true (and many upper-income Californians have done just that over the years, contributing to the state’s trend toward becoming a very blue state at all levels). California legislators seemed to anticipate that by making the tax increase effective on 2012 income, so as to capture as much of the estimated $6 billion a year as possible before the wealthy, like Mickelson, simply pack up and move. But the complaints of one of the richest athletes in the world don't do antitax crusaders much good. In fact, it probably hurts their position with the public (much like Mitt Romney’s effective tax rate probably hurt the GOP nationally). If Mickelson wants to make poor business decisions (like deciding against owning a lucrative MLB team) and lifestyle changes (moving to Florida or Canada) based on an uptick in California and federal tax rates, that is his choice. But as he admitted the day after his remarks, he probably should keep the grumbling to himself.

Read Comments (9)

edmund dantesJan 22, 2013

Why did you omit the new Medicare taxes in your analysis?

I think the idea of paying more than 50% of your next dollar (from labor or
investments) to the government is obscene, no matter how much you've earned
otherwise. I'm not surprised that those who can afford to stop are doing so.

Did you see that even Sarkozy is moving to London to avoid the 75% tax in
France? There are limits to what government can demand of people.

vivian darkbloomJan 22, 2013

I wouldn't want Mr. Burman doing my taxes either.

Burman gives the following example of how to calculate the "marginal tax rate"
(or effective marginal tax rate) if an additional $10K is earned and itemized
deductions are scaled back under the Pease rule as a result (in response to an
Op-Ed by Ari Fleisher):

"The phaseout is really a sneaky way to raise marginal income tax rates.
Suppose Mr. Fleischer earned another $10,000. He would lose $300 of itemized
deductions (3% of $10,000), so his taxable income (AGI minus deductions) would
increase by $10,300, not $10,000. Again, assuming he is in the 39.6% bracket,
his additional tax would be $4,079 (39.6% of $10,300), so his effective tax
rate is 40.8%, not 39.6%." The point of the exercise is to determine what the
cost is of earning an additional $10K---not to determine what the rate of tax
is on some fictional amount above that.

Fleisher's *actual* additional earned income in the example is $10,000---not
$10,300. His marginal federal tax rate, that is the rate on the actual amount
of additional income earned, is 42.6 percent, not 40.8 percent ($3,960 + $300)
x $10,000.

Michelson is indeed fortunate, but he probably works hard and has a hell of a
schedule, too. Let's suppose that Michelson's actual marginal income tax and
Medicare tax rate is in the neighborhood of 53 percent. Of every $100 dollars
earned, he gets to temporarily keep $47. But, that's not the end of the
story. Michelson has three choices:

1. Spend it;

2. Keep it and bequeath it to children, etc;

3. Give it away to charity.

As to the first option, California just passed a sales tax increase to 7.75
percent. That brings the tax rate up to 60.75 percent, unless he does all his
shopping at Amazon. Michelson's math is starting to look better than
Burman's.

Suppose then that Michelson (and or his wife) want to gift or bequeath his
estate to his children or other non-charitable organizations rather than spend
it themselves. It's safe to assume that his wealth already exceeds the exempt
threshold and that his marginal estate or gift tax rate is 40 percent before he
earns and saves another dollar.

Add that up to the income and Medicare taxes and the marginal rate is 53% +
(40% x 47) = 71.8 percent. If his children want to spend any of that and enjoy
it....

One does not need to view Michelson as a "whiner". He may just be making a
rational decision that making more money is simply not worth the additional
effort. And, I'd say he's entitled to that choice---and even to honestly
express why he's made that choice.

John S.Jan 22, 2013

You seem to belittle the impact of a 1-3 percent increase in state tax,
accompanied by a massive increase in federal tax.

For productive citizens taxes are among the largest, if not the largest,
financial outlay they face. You minimize the tax impact by calling it an
"uptick". Productive Americans are in fact facing a tax wall. Marginal rates,
after including both state and federal increases, and new taxes for health
care, will see double-digit percentage increases.

Productive citizens didn't get that way by being stupid. An intelligent person
who sees a dramatic increase in his largest expense will certainly change his
behavior.

For the record, my and my spouse's income is nowhere near Mickelson's. Yet our
marginal income tax rate, accounting for federal, state, etc... will certainly
exceed 50% for 2013. As my spouse is the higher earner, this means that my
"personal" effective rate is very nearly our marginal rate. You can bet that
this will impact our decisions going forward.

To the country, that means that two of the net revenue payers are looking at
decreasing their productivity.

Peter MillerJan 22, 2013

I suspect this is mostly about emotion and frustration. Mr. Mickelson would be
the first in line to recognize his fortunate circumstances. But he may be in
the same boat as many successful people who see themselves as chumps, being
almost embarrassed to behold the fruit of their labors slipping through their
fingers for no apparent reason.

Because of the megabucks they must dole out, well-endowed citizens like
Mickelson are perhaps more inclined than the rest of us to be critical of the
(marginal) value gleaned by society from their tax dollars.

This sentiment is nothing new. But it is understandably more pronounced for
successful taxpayers. In today's polarized political environment, this bad
feeling is an open wound that may not heal.

Tara StillJan 22, 2013

Problem is he lives in the state of CA with its liberal public benefits.

tara stillJan 22, 2013

Who would not want to make another dollar if they got to keep some of it?
Taxes are never 100%. Crazy talk!

The GipperJan 22, 2013

It is very difficult to be a Rich White Man in America, as Phil notes.

I believe the "Love it or leave it" line from the Vietnam era applies here.

Let 'em Eat CakeJan 22, 2013

I know poor woman who cleans toilets for a living. She has no tax problems.
Zero, Nil, None. Maybe Phil want to switch life with her. Then he'll be so much
happier.

Jeremy ScottJan 22, 2013

Thank you everyone for the comments.

As a matter of public policy, it is certainly arguable that 50 or 60 percent
tax rates are too high. I also understand that tax rates can be set high
enough to discourage people from working (although there is some evidence that
the rate has to be very high before that starts to occur).

But Mickelson isn't really a "normal" high-income wage earner, in the sense
that he can limit his income to cause it to fall into a lower tax bracket. He
makes over $40 million a year. So his choice isn't to not work the last
quarter of the year to keep his rates down. He would essentially have to end
his career to avoid high taxes. Virtually all of his income is taxed at the
highest rates.

And, to me, that doesn't seem like a very rational choice to make in response
to California and federal tax changes. The rates simply haven't gone up enough
to justify leaving $16 to $20 million on the table. It seems more a fit of
pique. Now if he wants to move out of California, that is a different matter
(although, given his strong ties to the San Diego area, even that might seem a
bit of an overreaction for someone with his means).

The broader point I was trying to make is that the complaints of the extremely
wealthy, like Mickelson, don't exactly help those that are fighting to hold the
line on broader tax increases.

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