Pete Stark jabs at Gingrich with ‘NEWT Act’

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.

Pete StarkStark, 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.

Newt GingrichAll 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.

Josh Richman

Josh Richman covers state and national politics for the Bay Area News Group. A New York City native, he earned a bachelor’s degree in journalism from the University of Missouri and reported for the Express-Times of Easton, Pa. for five years before coming to the Oakland Tribune and ANG Newspapers in 1997. He is a frequent guest on KQED Channel 9’s “This Week in Northern California;” a proud father; an Eagle Scout; a somewhat skilled player of low-stakes poker; a rather good cook; a firm believer in the use of semicolons; and an unabashed political junkie who will never, EVER seek elected office.

  • Elwood

    Who disturbed Pete’s nap?

  • John W

    Pete, while you’re at it…

    How about the “carried interest” loophole that allowed Romney to pay 15% income tax and no Medicare Tax on $7 million of income that did not involve either (a) one dime of investment risk — the normal rationale for special treatment of capital gains; or management services on Romney’s part — since he has not worked at Bain since 1999? Nobody even pretends to justify this loophole. In the normal workplace (say a car salesperson), “carried interest” would be called a “commission,” subject to ordinary income tax and all payroll taxes.

  • arthur

    I knew there was a reason I kept voting for this man. Keep it up Pete!

  • RR, Senile Columnist

    Yeah, ol’Pete knows a hot button when he sees one. “S ” corps. Have been in the tax code for decades, closely scrutinized by the IRS and state tax collectors just as long,and were barely mentioned by anybody on Capitol Hill until now. Uncle Pete wants to press the theme that the Repubs are the party of the super-rich, the One Percenters. Next broadside: the Deserving Rich in Hollywood vs the Undeserving Rich on Wall St.

  • Publius

    Taxing income is a joke, and makes liers out of alot of honest people. Why scorn someone for taking advantage of a law that is on the books? Last time I checked Pete has been in congress over 35 years. Instead of making political statements and being an elitest smart ass, Stark should do something to correct the unbalanced way we are taxed.

    We need a fair tax based on consumption. Blow up the current tax code and replace it with a consumption tax. Accountants, tax attorneys and every employee at the IRS will quiver. The politicains will lose their choke hold on the middle class and the economy would grow 10% the first year. There is no other way. The income tax has failed. There is no amount of tinkering that can repair it.

  • John W

    Re: #5 “We need a fair tax based on consumption.”

    The transition would be a real hit to people who have paid income taxes and saved all their lives and and now would have to pay a 30% “fair tax” when they spend the money they saved from after-tax income. Paying 30% “fair tax” on a new home purchase would also do wonders for the housing sector.

  • Publius

    #6 You are correct there would definitely be a transition period. The fair tax would only be applied to new goods. All inventories currently in stores and wharehouses would be exempt. The toughest transition would be the funding for the Fedral Government not for the consumer. Ask your self one question; why tax productivity?

    By eliminating the income tax those people who have saved all of their lives will now be free to collect their money, and the interest accumulated, free of all taxes. The people who have saved all of their lives would also be free of the costly burden of conforming to the tax code when they use their money. No more accountants, no more tax shelters, no more death tax, no more capital gains, no more Swiss bank accounts. Dodging tax burden will no longer be a motivating force when it comes to making financial decisions. The sum would be a massive release of capital into the economy bigger than any stimulus given by the State.

    Passing the Fair tax would improve the housing market not hinder it. When a new house is built there are imbedded taxes in the price of the home. Payroll taxes, corperate taxes, compliance burdens are all added to the sales price of a new home. Once you rid the builder/developer of all these taxes and regulatory burdens the market will demand that the price of the home drop. The price of new goods will rise at most 3%, in some cases it will drop. The existing home will not be subject to the tax and therefore increase the demand for used houses, the glut of houses on the market today would dry up and increase the demand of a new house.

    Wouldn’t it be nice for drug dealers, and all underground cash businesses to pay taxes? How about tourist paying for Social Security? How about lowering the prices of U.S. exports overseas by 20%? With 0 capital gains and 0 corperate taxes America would once again be the most desirable place to open a business.

    No more loopholes. No more IRS. Everyone in America pays their fair share. No more freeloaders. Everyone is vested.