Thursday, November 13, 2008

After Taxes, World Series Winner Finishes Second

The World Series of Poker ended this week at the Rio Hotel and Casino in Las Vegas, and Denmark's Peter Eastgate (pictured above) became the youngest-ever winner of the world title. He is very much the new breed of player: 22 years old, Danish, mathematically brilliant, who gave up a fledgling career in accounting to "turn pro."

As the winner of the main event Peter won about $9.2 million, but would he actually end up with all that money?

Denmark's tax rate is 45% on the first 4 million Danish Kroners (about $680,000) and 75% on income above that. Mr. Eastgate will owe about $6.7 million in Danish taxes, and will get to keep only $2.5 million of his winnings—just 27.23% of his prize. In other words, he faces an effective tax rate of 72.77%. Ouch.

Ivan Demidov of Moscow finished second and won $5.8 million. Russia has a 13% flat tax rate, so Mr. Demidov will owe about $755,247 to the State Taxation Service of Russia. After taxes, Ivan will still have more than $5 million, more than twice as much as the first place Danish winner.


MP: This is a no-brainer, Peter Eastgate should move from Denmark to Moscow.


19 Comments:

At 11/13/2008 12:35 PM, Blogger Highgamma said...

Won't they owe US taxes (based upon however gambling profits are treated in the treaty that exists between the US and each of these companies)?

 
At 11/13/2008 12:37 PM, Blogger Mark J. Perry said...

The United States and Denmark have a tax treaty. Because of the treaty Mr. Eastgate doesn't owe a penny to the IRS. That just leaves the Danish tax authorities. See the link provided in the post.

 
At 11/13/2008 1:15 PM, Blogger bobble said...

hmmm, but if the "high marginal tax rate reduces incentive to earn" theory holds water, this guy wouldn't have been playing in the first place.

and, before you all start yapping about "playing poker is not the same as working", consider securities traders who do pretty much the same thing to earn money

 
At 11/13/2008 1:55 PM, Blogger Andy said...

Once he was at the tournament, the marginal cost of "winning" versus "giving up" is either very small or even negative (there is the pride issue, of course).

 
At 11/13/2008 1:55 PM, Blogger SBVOR said...

I wonder...

Does Mr. Eastgate still have time to move to Moscow and avoid the tax hit?

Would Denmark then wind up with zero tax revenue?

Would Bobble then admit that such punitive tax rates benefit nobody?

Our own experience proves that higher marginal tax rates only benefit those who feel emotional satisfaction over “soaking the rich”.

If we had anything even remotely approaching an honest and fair media, everyone would understand that fact.

 
At 11/13/2008 5:14 PM, Blogger bobble said...

sbvor:"Would Bobble then admit that such punitive tax rates benefit nobody?"

yes, i would admit that.

i'm NOT in favor of high marginal tax rates. i would prefer flat rates if a way could be found to prevent high earners from avoiding tax on all their income.

i think that the effect of HMTR is highly overrated on this blog, though *i have no actual proof*. sbvor, since you seem to be the chart wizard, i'd like to see a chart of marginal tax rates vs y/y GDP growth. i've looked for that data in vain.

 
At 11/13/2008 6:09 PM, Anonymous Anonymous said...

hmmm, but if the "high marginal tax rate reduces incentive to earn" theory holds water, this guy wouldn't have been playing in the first place.

Bull. It does reduce the incentive. However, a first place finish and netting 2.5M, even after taxes, was enough incentive to play. "Reduce incentive" does not mean reduce to zero, and in this case several million dollars was enough of an incentive for this guy to sit around playing poker all day.

 
At 11/13/2008 6:20 PM, Blogger SBVOR said...

This comment has been removed by the author.

 
At 11/13/2008 6:21 PM, Blogger SBVOR said...

Bobble,

Incentives provided (or withdrawn) are at the root of all human behavior.

Your flat tax --- which I also favor --- would dramatically reduce the incentive to avoid paying the tax which one owes. It would also dramatically alter the risk/reward ratio associated with illegally avoiding said taxes.

This is but one of many factors which explain why the Laffer Curve theory has always been proven to be correct.

We will never completely eliminate tax fraud. Nor will we ever completely eliminate voter fraud or crime. However, the easiest and most effective way to reduce all three is to reduce the incentives to engage in that activity while increasing the disincentives to do the same.

As a tangent, the current direction of our “redistributionist” tax code greatly increases the incentives for voter fraud (now that the bottom half of the country can, at will, vote themselves more lollipops at the expense of the upper half).

But, through Social Security and Medicare, the upper half (increasingly) can also, at will, vote themselves more lollipops at the expense of the lower half. In other words, our insatiable appetite for ever escalating Entitlements is causing us to devour ourselves from both directions. And, as long as we idiots continue to demand it, politicians will continue to deliver it.

Regrettably, this trend will lead to far more severe consequences than voter fraud. Worse still, I have exactly zero expectation that this trend will be reversed --- nobody likes to give up what they incorrectly perceive as “free candy”.

America was a lovely ideal. But, unfortunately, it is on a Socialist trend line from which it is not likely to recover. I hope that won’t stop me from trying to save it.

 
At 11/13/2008 10:51 PM, Anonymous qt said...

sbvor,

With the Russian stock market down 68%, the ruble in a tailspin, and foreign direct investment scurrying offshore, chances are fairly good that a math wiz like Mr. Eastgate would pass on Russia.

 
At 11/14/2008 11:10 AM, Anonymous Anonymous said...

Bobble,

people make decisions at the margin. Taxes distort incentives and there's really no way around that. However, progressive taxes are more distortive because they punish risk takers and people who work hard.

The Danish player may be satisfied with the $2.5 million he will net because his opportunity cost (being an accountant) is low.

I'm an independent securities trader and also a poker player. In terms of decision making, Poker and trading are similar. In terms of obligations, Poker and trading are very differemt.

My job is stressful and high risk. Since I run my own shop, I don't have any time off either - no vacations, no days off. It's worth it because the after tax amount I net from my business is just enough to compensate me for the cost of running the business (no leisure time at all). If tax rates are raised, I will either reduce the size of my business or - if taxes are raised enough - quit and do something else which pays a lot less but which allows me a lot more leisure time. I will take the capital currently invested in my business and reinvest it in tax advantaged securities. The effect on my material expenditures (I live well within my means) will be minimal. The effect the quality of my life will be huge. Unfortunately, if I close or reduce my business, my employees will lose their jobs.

Increasing tax rates do impact at the margin. They reduce the incentive to work and invest in productive activity. Highly progressive taxation will pervert incentives more than a flat tax, so I agree with you that a flat tax rate is better.

I suppose an argument can be made that for folks living well beyond their means and unwilling to declare bankruptcy, higher taxation won't change their incentive to work because they've sold that option by living beyond their means.

 
At 11/14/2008 1:48 PM, Anonymous jerry said...

Hey Prof, what's teh life expectancy of Mr. Eastgate in each country? Standard of living? Quality of courts?

What about for yourself? Are you paying less than 13%? Why the hell are you here and not enjoying life in Russia?

 
At 11/14/2008 2:31 PM, Blogger Randy said...

The average federal income tax rate in the U.S. is 12%. That's right, in 2006 the average american paid 12% of their AGI in federal income taxes.

So why do we have a 33% top bracket?

Hint: It's not because our standard of living, courts and life expectancy is higher than Russia's.

 
At 11/14/2008 9:17 PM, Anonymous poor boomer said...

I suggest that within the $20K-$100K income range enjoyed by a majority of Americans (adjusted appropriately for household size), taxes are not particularly progressive.

Yes, effective federal tax rates are progressive above approx $100K, and below approx $20K, but nearly flat in that broad middle.

State taxes are often regressive at the bottom and progressive only at and near the top.

 
At 11/15/2008 12:50 AM, Blogger Robert said...

Don't be surprised to see this guy ask for asylum.

 
At 11/15/2008 12:52 AM, Anonymous Anonymous said...

To anonymous at 11:10 am (AKA Joe the Securities Trader)
Assuming that you are single and your AGI income will be $250,000 for 2008. The 2008 tax rates seem to be 33% for a single filer with AGI between $164,550 and $357,700. If this rate were increased to 36%, you tax liability would increase by about $2,600. You are saying you would go back to work at MickeyD’s because of this?
If your AGI were $500,000 and the 35% bracket increased to 39.6% (along with the increase above), your total tax liability would increase by about $10,000. Your decision at the margin would be to go back to work the checkout line at Target? What color is the sky in your world?

 
At 11/17/2008 12:35 AM, Anonymous Kris said...

Why go to Russia, just take your money and go to a nice island and keep it all. Screw Denmark, screw the US and screw Moscow. Government takes its cut almost every time money changes hands.
Screw them all.

 
At 11/17/2008 11:44 AM, Anonymous makes sense said...

Why is it that no one here, as of yet, has presented the idea of a Federal "consumption tax". States and Municipalities use one and while nobody likes the idea of paying "sales taxes", to this point it is widely accepted and understood.

I'm not a genius by any standard, but because, at some point, money is made to be spent, consumption will generate tax revenues.

Some have argued that this is as well "not fair" to those who have lower income's as say 15% of a purchase to someone who makes $20,000 is a harder hit than it is to those who make much more. "Why?", I ask. It doesn't have to be. Maybe you exclude the tax on items of necessity, such as bread and milk, prescription medicines, and health care expenses.

The concept reduces the number of tax evaders and increases the amount of disposable income that consumers have. Once that is injected into our "free market economy" because of consumption, businesses grow, GDP increases, unemployment decreases, incomes increase which produces more consumption and tax revenue. It rewards those who value being paid for a day's work and produces incentive for those who do not.

 
At 11/19/2008 2:58 PM, Anonymous Anonymous said...

@anonymous 12:52

No, I don't go work at target. What makes you believe that the options for a highly educated and financially successful individual are restricted to their current pursuit or flipping burgers? I shelter more of my income from taxes and accept a lower return on my investments and I reduce how much I work. Using the numbers in your example for the sake of argument, I can make as much money as I did before but I will have a lot more free time and a lot less stress. Some of my employees will also have a lot more time as they will be unemployed.

As you increase the tax rate, the marginal dollar will become worth less to me and leisure time and muni bonds will become much more interesting. Of course, I'm assuming that the increase comes with no tax loopholes (which is rare) so that my effective tax rate rises as well.

 

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