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Move to Russia Nets Kovalchuk Around $3.6 Million Thanks to Income Tax Savings


Austin Peters
July 15, 2013

After New Jersey Devils hockey star Ilya Kovalchuk announced he was ”retiring” from the NHL last Thursday and it became clear that he would be instead signing for the Russian league team SKA St. Petersburg, speculation arose about what the motive for such a change might be. One possible reason might be economics: next year, Kovalchuk is likely to snag an additional $3.618 to $3.63 million thanks to a new contract and savings on federal and state income taxes.

While there certainly could be other more substantial reasons for the change, the move highlights the differences between the complex tax code of the United States and the flat tax in Russia.

In New Jersey, Kovalchuk would have faced top marginal income tax rates of 8.97 percent from the state, and 39.6 percent at the federal level for the upcoming season. By crossing the pond, “Kovy” will be subject to a revamped 13 percent Russian flat income tax.

Using multiple online tax calculators (from tax-bracket.org and yourmoneypage.com) to take into account basic deductions and three dependent children, his contracted salary of $11.3 million with the Devils for the 2013-2014 season would have caused him to owe about $4.9 million in taxes.

In stark contrast, the only income tax he would have to pay in Russia is the flat 13% PIT (Personal Income Tax). Kovalchuk’s new contract has been reported to range from $10-$15 million (and perhaps even as high as $20 million). Assuming the low end of this estimate, $10 million, he would owe $1.3 million in income taxes.

When compared to his tax liability in the United States, this is a savings of $3.6 million.

Furthermore, next year would have been a peak earning year for Kovalchuk in the U.S. If we compare the tax burden on his average NHL salary over the life of his contract, $6.7 million, we find a domestic burden of around $3 million versus just $867 thousand on that same amount the motherland.

While Russia has a much lower income tax, they also have a high Value Added Tax. Russia’s VAT (Value Added Tax) is 18% while the sales tax in New Jersey is 7.0%. Nonetheless, this does not mean that taking the VAT into consideration makes his overall tax burden relatively even in both countries.

Even if we assume that Kovalchuk spent all of his income on goods subject to sales tax (a very unrealistic, if not impossible scenario), Kovalchuk total overall tax burden would still be substantially lower in Russia than in the United States, 31% and 55.57% respectively.

Property taxes are a relative push with max 2.2 percent burden in Russia compared to Newark’s 2.98 percent. Our estimates also do not include the complexities surrounding the so called “jock tax” which allow states to tax visiting athletes for the time spent playing games within their borders. This tax system on entertainers makes an already gargantuan task of estimating a worker’s income tax burden nearly impossible for anyone outside an accounting firm.

This examination is helpful in demonstrating just how burdensome our nation’s tax system has become, but there are many more layers to this financial situation, including income from endorsements, and how Russian business passes on costs from a recently modified social welfare tax system (similar to Social Security and Medicaid). There can be no doubt however, that the tax incentives in this case favor departing what is supposed to be known as the land of opportunity.


 

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Submitted by Bill at: July 24, 2013
Another reason for the FAIR Tax.