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Lebron James Has A Really High Tax Rate

It’s a report that had heads (not basketballs) spinning:  According to a ProPublica investigation released in the summer of 2021, LeBron James had a vastly higher tax rate than Los Angeles Clippers owner Steve Ballmer. The reported indicated that James’ tax rate on his 2018 income was nearly triple that of Ballmer’s, although he made approximately 19% of what Ballmer made that same year.

The numbers clearly tell the story. James reported $124 million in income three years ago and paid a federal tax rate of 35.9%. Ballmer, the former Microsoft CEO, told the IRS that he made $656 million; he paid $78 million in federal taxes, a rate of 12%. James, meanwhile, paid over $44 million in taxes on reported income that was $532 million less than Ballmer’s reported income.

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Tax Code Provision

One has to wonder:  How did Ballmer finagle paying far less in taxes relative to James? The answer is an accounting trick used by many other professional sports team owners. According to ProPublica, Ballmer took advantage of a provision in the U.S. tax code that stipulates that when someone buys a business, they’re often able to deduct almost the entire sale price of the business against their income during the ensuing years. The end result:  They pay less in taxes based on their reduced income. The underlying logic of the provision is that the purchase price was composed of assets such as equipment, buildings, patents, and more, that degrade over time and should be counted as expenses.

It’s common knowledge that owning a major professional sports franchise in the United States is an incredibly lucrative business. Today, owning a team in the major four sports leagues requires billions, not millions, of dollars. The Clippers are one of the most lucrative sports franchises. Since Ballmer purchased the team in 2014 for a record price of $2 billion, the team has been  hugely successful. During that same period, Ballmer has been able to decrease his tax rate because of the team’s high purchase price and the fact that the Clippers have reported operating losses.

ProPublica obtained IRS records that show the Clippers have reported $700 million in losses for tax purposes from 2014 to 2018. Not only does Ballmer not have to pay tax on any real-world Clippers profits, he can use the tax write-off to offset his other income.

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Amortization And Franchise Ownership

The ProPublica report shed light on how team owners can use their franchises to pay less than they otherwise would in taxes. After reviewing dozens of tax returns of team owners, the report revealed that owners across all sports enjoy a tax cut and are paying less in taxes relative to the athletes that make up their successful teams and franchises.

That tax cut is based on a standard accounting practice of amortization and a 2004 tax cut implemented by then-President George W. Bush. The 2004 tax cut allows pro sports team owners to vastly expand the scope of what they can and can’t write off on their tax returns. Someone who purchases a team, or an asset, can write off multiple things involved with the operations of the team — including player contracts.

Because team owners can legally write off significantly more than they had before the 2004 tax cut, they can claim lower tax rates. According to the report, Ballmer saved approximately $140 million on his taxes in that five-year span that the Clippers reported $700 million in operating losses.

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Should The Rich Be Taxed At A Higher Rate?

The fact that the rich can hold on to more of their green because of tax loopholes has some people seeing red. The current marginal tax rate for people making between $9,876 and $40,125 is 12%; those making more than $40,125 have every dollar above that up to $85,525 taxed at 22%. All of which means that the average taxpayer paid a significantly higher federal tax rate in 2018 than did Ballmer.

According to an April  2021 Yahoo News/YouGov survey, 65% of Americans want tax loopholes closed that allow corporations to put their money in offshore banks, 15% of survey respondents want to keep those loopholes, and 51% want the corporate tax raised for proposed infrastructure improvements.

Whether or not the tax loopholes are changed in the future, the fact is that millionaires – or billionaires – paying less taxes than the average person will most likely never be looked on favorably in the court of public opinion.