Mickelson capped a dominant fortnight in Scotland by shooting a final round 66 to come from behind and win The Open Championship. He also won the Scottish Open the previous week. For his two weeks of play, the world’s best golfer (rankings be damned) earned £1,445,000, or about $2,167,500.
The United Kingdom, which has authority to set Scotland’s tax rate until 2016, graduates to a 40% tax rate when income hits £32,010 then 45% when it reaches £150,000. Mickelson will pay £636,069 ($954,000, or 44.02%) on his Scottish earnings.
But that’s not all. The UK will tax a portion of his endorsement income for the two weeks he was in Scotland. It will also tax any bonuses he receives for winning these tournaments as well as a portion of the ranking bonuses he will receive at the end of the year, all at 45%....
The UK is one of few countries that collects taxes on endorsement income for non-resident athletes that compete in Britain (the US also does). The rule has kept track star Usain Bolt from competing in Great Britain since 2009, outside of the 2012 Summer Olympics when the tax was suspended as a condition for hosting the Games. Spain’s Rafael Nadal has also allowed UK tax policy to dictate his tennis playing schedule.
The good news for Mickelson is that he can take a foreign tax credit on his US return so he is not double-taxed at the federal level on this income. The bad news is that the credit does not cover self-employment taxes (2.9%) or the new Medicare surtax (0.9%). Additionally, California does not have a foreign tax credit so he will have to fork out 13.3% there as well. Although he receives federal deductions for his California tax and half of his self-employment tax, these deductions do not benefit him on this income because as they reduce his federal tax they reduce his foreign tax credit.
Without considering expenses, Mickelson will pay 61.12% taxes on his winnings, bringing his net take-home winnings to about $842,700. When expenses are considered (10% to caddy Jim “Bones” Mackay, airfare, hotel, meals, agent fees on endorsement income/bonuses—all tax deductible here and in the UK), his take-home will fall closer to 30%.
At what point do regressive tax policies disincentive people to work? While Phil is certainly happy to win the British Open and he makes lots of money from endorsements, such tax policies hit other people as well. Not only are there disincentive problems but moral problems with redistribution of income which these heavy tax burdens and welfare policies are all about.