Tuesday, July 13, 2004
Tax hikes for thee, but not for me: Today's Wall Street Journal has an interesting look at the tax strategies of the super-rich, specifically the two most wealthy candidates this fall -- senators John Kerry and John Edwards.
The Journal editorial echoes some themes of David Cay Johnston's latest book, "Perfectly Legal," which I'm still slowly working my way through.
Senator Edwards talks about the need to provide health care for all, but that didn't stop him from using a clever tax dodge to avoid paying $591,000 into the Medicare system. While making his fortune as a trial lawyer in 1995, he formed what is known as a "subchapter S" corporation, with himself as the sole shareholder.
Instead of taking his $26.9 million in earnings directly in the following four years, he paid himself a salary of $360,000 a year and took the rest as corporate dividends. Since salary is subject to 2.9% Medicare tax but dividends aren't, that meant he shielded more than 90% of his income. That's not necessarily illegal, but dodging such a large chunk of employment tax skates perilously close to the line.
The Internal Revenue Service takes a dim view of such operations and "may collapse the structure entirely and argue the S corporation is not truly a separate entity," in the words of Tax Adviser magazine. Attorney CPA magazine lists it as No. 11 of its "15 best underutilized tax loopholes," but warns that the IRS "has successfully litigated cases against individuals, particularly sole shareholders of personal service S corporations, reclassifying such deemed distributions as wages subject to social security taxes."
As a political matter, the dodge is especially hypocritical because the income limits on which Medicare taxes are paid were lifted by Democrats in 1993 specifically to hit "the rich," as Mr. Edwards likes to call people in his tax bracket. And the supreme irony? Mr. Edwards has claimed that he set up the subchapter S company to protect himself from legal liability. You know it's time for tort reform when even the trial lawyers say they're afraid of getting sued.
Of course, Edwards' behavior is understandable. Despite what any politician or Hollywood star says, they'd rather spend their money on "stuff" designed to make their already luxurious lives even better.
So would the rest of us, which is why we like tax cuts.
I'm one of the people who would like to see an option for people to set higher tax rates on themselves if they feel they're not contributing enough. With the do-it-yourself tax programs out there, it would be easy to make a box where you could enter your own highest marginal tax rate.
You're a billionaire ketchup heiress and you don't think you paid enough in taxes in 2004.
Do you long for the pre-Kennedy years? Put "90 percent" in that box.
Do you long for Jimmy Carter's economic malaise? Put down "70 percent."
This would allow the super-rich to actually set an example. Of course, some of them already have a similar option -- but they show you they'd still rather spend their own money their own way, instead of trusting the government.