Jackpot win: No tax win?

Published 11:00 pm Wednesday, May 2, 2012

Sheesh! People who hope to win the lottery sure are stingy about paying their “fair share” of taxes.

I refer to a fascinating Motley Fool article by Rich Smith.

Say you win big and take a $100 million lump-sum payout. The highest federal tax bracket, which kicks in at about $388,000 in income, is now 35 percent.

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You will owe roughly $35 million in federal income taxes. But you’ll also owe state and local taxes that can exceed 10 percent in some states.

Thus, you’d pay about 45 percent to 50 percent of your windfall in taxes. Out of your $100 million jackpot, you’d get to keep $50 million to $55 million.

Most folks would be happy to receive $50 million. And to hand over half their jackpot to various governments. Right?


According to a recent poll by the Hoover Institution, average Americans believe lottery winners should not be required to pay more than 10 percent or 15 percent of their windfalls in taxes — well less than what they must pay now.

But Smith points out something even more interesting: Most average Americans also support “raising” taxes on America’s wealthy. The Hoover Institution also finds that 62 percent of respondents support the “Buffett Rule,” which would require that millionaires pay at least 30 percent in taxes.

That is, average Americans want people who earn big money to pay higher taxes than people who win big money in the lottery should have to pay.

However, I think many average Americans are confused about how much the well-off are actually paying in taxes.

The rich already pay the lion’s share of taxes in America, according to the Congressional Budget Office. The top 10 percent of income earners pay more than half of all federal taxes and more than 70 percent of federal income taxes.

According to the Tax Policy Center, those making more than $1 million already pay, after deductions, 30 percent of their income in total federal taxes (income, payroll and other taxes).

There are about 1,500 Americans who earn more than $1 million from investments. On that income, they’re paying only the long-term capital gains tax of 15 percent — and no federal income taxes. That’s how Mitt Romney earns most of his money and why his effective tax rate is relatively low.

President Obama has been talking about such people a lot of late. But even making them pay 30 percent on their capital gains would generate only about $5 billion a year — a paltry sum when you consider America is spending hundreds of billions of dollars more than it is taking in every year.

Meanwhile, says USA Today, households that make between $50,000 and $75,000 pay an average of 15 percent of their income in federal taxes. Households making between $40,000 and $50,000 pay an average of 12.5 percent in federal taxes. Households making between $20,000 and $30,000 pay 5.7 percent.

Those percentages are considerably less than what the “rich” are paying.

If Obama wants to fix our messy tax system, he could embrace the recommendations of his self-appointed Bowles-Simpson deficit commission.

It recommends that taxes be simplified, that rates be lowered and that most deductions be removed — which would result in the “rich” paying more.

Sure, big-time lottery winners would still have to pay a top income-tax rate of 28 percent. That is a far cry from the 10 percent or 15 percent that average Americans want them to pay, but it sure beats the current 35 percent rate.


Tom Purcell is a nationally syndicated columnist.