Tobin Says Journal of Taxation Article Overstates Tax Problems of Oprah's Studio Audience

Donald Tobin (Ohio State) takes issue with the authors of the "Shop Talk" piece in the January issue of the Journal of Taxation, who claim in an article blogged here yesterday that Oprah Winfrey's payment of $2,500 to each member of the studio audience at her November 22 show did not eliminate the tax liability caused by their receipt of over $13,000 of free stuff:

The recent article in the Journal of Taxation on Oprah’s giveaway to teachers implies that teachers who received the prizes from Oprah will receive hefty tax bills. The article concludes that Oprah would need to give the winners $7,967.74 to cover the tax bills. Although this conclusion may be technically correct based on the author’s assumptions, it is wholly unrealistic.

In reaching this conclusion, the authors argue that Oprah should have reimbursed contestants based on the highest marginal rate. But taxpayers need to have a taxable income of at least $319,101 to be taxed at that rate. How many teachers will have taxable income over $319,101? And if they do, then I really don’t have any sympathy for the huge tax bill. Let them refuse the prize, or pay the tax.

The real question is what will happen to most of the people who received the prize. The people that Oprah was presumably trying to reward. The article indicates that taxpayers received $15,500 in goods and cash. If we assume they are in the 15% bracket – that means they have taxable incomes below $58,100 if they are married - they would have a federal tax bill of $2,325. If we assume a state tax rate of 3%, the amount used by the authors, the tax bill would rise by $465 to $2,790 (and this ignores the fact that the $465 would be deductible if the taxpayers itemized their deductions). Not surprisingly, this $2,790 is very close to the $2,500 cash that Oprah actually provided.

Using the highest marginal rate is unrealistic and distorts the analysis. Why do I care? Why am I willing to take the time to respond to this? Why am I taking this humorous article so seriously? Yes, I do have a sense of humor.

The reason is because these types of distortions contribute to distrust in the tax system. It seems ridiculous that a teacher would need to have received a “gross up” of $303.38 to pay for a $495 leather duffle bag as the authors in the Journal of Taxation contend. It seems ridiculous because in most cases it is simply not accurate. The tax bill on the prize would be around $2,790 (using the 15% bracket), and the taxpayers’ effective tax rates would still be far below that.

The teachers here received a prize with real value. Oprah learned her lesson and included cash with her prizes to ameliorate the consequences of the tax bite on the prize. Lets leave Oprah alone, and give her credit for helping to shine a spotlight on an important segment of our population.

For prior TaxProf Blog coverage of the tax problems caused by attending the Oprah Winfrey show, see here, here, here, here, and here.