Rep. Pete Stark gave Republican presidential candidate Newt Gingrich a political poke in the eye today by introducing a bill to close a loophole that lets certain self-employed people – including lobbyists – lower their Medicare payroll tax liability by calling their earnings profits or dividends rather than wages.
Stark, D-Fremont – the ranking Democrat on the Ways and Means Health Subcommittee, which oversees Medicare – calls it the Narrowing Exceptions for Withholding Taxes Act.
Yes, that’s right: The NEWT Act.
The bill, Stark says, was inspired by Gingrich’s recently released 2010 tax returns, which showed he used the loophole to save an estimated $69,000 in Medicare taxes.
“It seems Gingrich is continuing to do his part — in his own infamous words — to let Medicare ‘wither on the vine.’” Stark said in a news release. “By taking full advantage of a tax loophole often used by wealthy self-employed lawyers and lobbyists to slash their tax liability, Gingrich is happy to undermine Medicare. This tax dodge throws cold water on his feigned concern for the future of Medicare.”
This provision passed the House of Representatives in 2009 as part of HR 4213, the American Jobs and Closing Tax Loopholes Act of 2010; at the time, the Joint Commission on Taxation estimated that closing this loophole would save taxpayers $11.2 billion over ten years.
All earners are subject to a 2.9 percent tax on wages, which helps fund Medicare, but employee-shareholders at S corporations can use an existing loophole to shield earnings from the Medicare tax by classifying them as profits or dividends instead of as wages. For 2010, Gingrich reported $444,327 of his earnings as wages from Gingrich Holdings, Inc. and Gingrich Productions. By classifying another $2.4 million in profits or dividends he avoided paying an estimated $69,000 in Medicare taxes.
Stark’s NEWT Act would expand the income categories that are subject to Medicare payroll taxes so employee-shareholders of S corporations could no longer avoid paying this tax by reporting artificially low wage income and correspondingly higher dividends or profits. Certain employee-shareholders of S corporations would have to calculate their Medicare payroll tax obligation based on their share of the S corporation’s profits or dividends, not just income reported as wages. The individuals subject to the provision are the employee-shareholders of a professional service business where the principal assets of that business are the skills and reputations of three or fewer individuals.
The bill targets the S corporations that have been identified as the most likely to abuse the system, Stark said: professional service businesses engaged in health, lobbying, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, brokerage services, or investment advice or management.
The Government Accountability Office estimates that in the 2003 and 2004 tax years, individuals who used S corporations underreported more than $23 billion in wage income; the median misreported amount was $20,127.
Stark’s news release cited a New York Times article to illustrate that it’s a bipartisan problem: Former U.S. Senator and 2004 Democratic vice presidential nominee John Edwards used the same method to avoid $591,112 in Medicare payroll taxes over four years in the late 1990s.