Why we tax success

By Adam Benforado

Olympic gold medals are not solid gold anymore, but each U.S. gold medalist does receive a cool $25,000. That income is taxable, just like a paycheck or lottery winnings. So Aly Raisman, Ryan Lochte, and all the other medal winners could have to hand over part of their winnings to the IRS.

To some, this seems like a profound injustice. Sen. Marco Rubio (R., Fla.) and Rep. Blake Farenthold (R., Texas) count themselves among the outraged, and they have introduced legislation to exempt Olympic medals and prize money from taxes. Rubio said taxes on such winnings are a "classic example" of the madness of a tax code "that too often punishes success."

It's easy to understand the reasoning: Taking away what our talented, hardworking Olympians have won seems to disrespect and discourage such accomplishments. But this sentiment springs from a misunderstanding of the purpose of taxation.

Taxes are dues. They are what we all pay to be part of team America. Without them, we wouldn't have the equivalent of a field to play on, a groundskeeper to keep the grass green, or a referee to ensure that everyone follows the rules.

Similarly, when we sign our children up for Pee Wee Football, ice skating, or field hockey, we understand that it will cost money. When we join a gym, we expect to pay a membership fee. And when we play a round of golf, we pay for access to the course without a second thought. To get the benefits we seek, we have to pay for them.

How did we lose sight of this basic point? It has to do with another feature of taxes: They can be used not just to raise revenue to fund our infrastructure and other societal needs, but also to incentivize and disincentivize behavior.

The examples are all around us. We impose high taxes on cigarettes partly to discourage smoking and improve public health. We give tax breaks to businesses that hire members of groups that have faced employment barriers to alleviate suffering and inspire self-sufficiency.

The Supreme Court recently upheld the individual insurance mandate in President Obama's health-care law on the grounds that it is a tax, and that Congress has the authority to use taxes to effect certain policy goals. Essentially, the government can nudge uninsured people into buying insurance by taxing those who don't.

All this use of taxation as a carrot and stick has given some politicians a clever idea: If they can convince the public that encouraging good behavior and discouraging bad behavior is the main purpose of taxes, they may be able to eliminate quite a lot of taxes on the grounds that they are unnecessary or counterproductive.

Indeed, you might even be able to dupe people into believing that the richest among us should pay the least taxes. After all, if we can increase the number of nonsmokers by having smokers pay more taxes, then we should be able to increase the number of millionaires by having the poor and middle class pay more taxes.

This is the perverse logic behind Mitt Romney's tax plan: It is most generous to those at the top - life's winners - because the government shouldn't incentivize losing. And this is the reasoning behind the proposed exemption for Olympic medals.

In the end, both are wrong. Requiring LeBron James or Warren Buffett to pay taxes on their income doesn't punish success any more than taxing the money earned by teachers, doctors, lawyers, police officers, and garbage collectors does. We are all part of team America, and we should all pitch in.