By Edward Zelinsky
As every baseball fan knows, Albert Pujols has signed a ten year, $254 million contract with the Los Angeles Angels. Pujols, a three-time MVP who has hit 445 home runs so far in his major league career, deserves every penny he is paid. The competition for Pujols demonstrated meritocracy and markets at their best.
Pujols is not a poorly-performing CEO whose salary has been inflated by a compliant compensation consultant and ratified by a passive board of directors the CEO himself has selected. Pujols’ salary was established in a transparent and open marketplace by purchasers seeking his services on an arms-length basis against other bidders, baseball teams trying to win more games. Pujols has earned the rewards of the marketplace in a truly competitive fashion.
Pujols joined the proverbial 1% honorably, through hard work and professional success. I suspect that many of the folks who identify with Occupy Wall Street will disagree, but Pujols should not be lumped together with overpaid, underperforming CEOs – of which there are many.
Pujols will pay lots of taxes. Since his salary will, for federal income tax purposes, be characterized as ordinary income, he will pay roughly a third of his income to the federal government. Pujols will play in California, a high tax state. Even if he does not become a California resident, he will owe nonresident California income taxes on the portion of his salary properly allocable to his time and effort in the Golden State. When Pujols deducts his California income taxes from his federal taxable income, he could trigger, for federal income tax purposes, the alternative minimum tax (AMT).
Is Albert Pujols undertaxed? Acknowledging the inherent subjectivity of the question, my answer is “no.” Pujols will make millions annually, but will not benefit from the lower rates applicable to capital gains income.
Indeed, Pujols’ tax situation (as best we can tell) exemplifies an important lesson which emerged in discussion of the Buffett Rule: There are actually two types of millionaire taxpayers, those taxed at regular rates on ordinary income and those taxed at lower capital gains rates.
The real debate we should be having is whether to increase capital gains rates. Albert Pujols will pay plenty of tax on his ordinary income. And he deserves every penny he earns.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.