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How a decades-old loophole lets billionaires avoid Medicare taxes By Paul Kiel, ProPublica This story was originally published by ProPublica. ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox. Series: The secret IRS files: Inside the tax records of the .001% Reporting highlights - Tax Dodge: Most working Americans have to pay Medicare taxes, but some of the richest figures on Wall Street have found a way to opt out, a ProPublica investigation found. - Accidental Loophole: Nearly 50 years ago, Congress tried to fix one financial abuse but unwittingly created an obscure loophole that these billionaires exploit to avoid Medicare taxes. - Battling Abuse: The IRS only recently got tough on people it viewed as abusing the loophole, but it is unclear if the agency will be able to end the practice. These highlights were written by the reporters and editors who worked on this story. For most working Americans, paying their share of the taxes that fund Medicare is an unavoidable fact of life. It’s so automatic for many workers that they may not even realize it takes a bite out of every paycheck. In theory, everyone is required to contribute to the country’s health insurance program for seniors, no matter how poor or rich, from cashiers to CEOs. Not on Wall Street. There, some of the most powerful people in finance found a way to opt out. The trove of tax records behind ProPublica’s “Secret IRS Files” series contains plenty of examples of billionaire financiers who avoided Medicare tax despite earning huge amounts from their companies. In 2016, Steve Cohen, the owner of the New York Mets, paid $0. So did Stephen Schwarzman, head of the investment behemoth Blackstone. Bill Ackman, the
Damaged “Medicare For All” sticker. | Photo by David Seibold/Flickr (CC BY-NC 2.0)
headline-grabbing hedge fund manager, was able to shield almost all his income from the tax. How do they do it? Business owners, like any selfemployed person, whether they’re a freelance Uber driver or a hedge fund manager, have the responsibility to declare their self-employment earnings on their tax returns. Indeed, the vast majority of small-business owners have no choice but to do so and pay the same taxes that wage earners pay, including Medicare. But high-priced tax advisers, wielding a onceobscure bit of the tax code, found a way to make that obligation vanish. By carefully channeling profits through a company in a way that invokes that obscure provision, even a Steve Cohen, with a tax return showing he received hundreds of millions in profits from his hedge fund, can exempt that income from Medicare tax. The three billionaires contacted for this article said they followed the law as written. They also pointed to the fact that they paid substantial income tax, which for them carries a much
higher rate. Medicare tax is 2.9% for most people and 3.8% for high earners. But these maneuvers by the rich hasten Medicare’s future crisis. Sometime in the 2030s, the program’s trust fund is due to run dry. Closing the loophole, along with eliminating other ways around the tax for wealthy business owners, could raise more than $250 billion over 10 years for Medicare, according to recent government estimates. Over the past three years, ProPublica has mined the tax records of the rich to detail the many ways they avoid taxes. We’ve focused on basic structural features of the U.S. system that advantage them. We’ve uncovered maneuvers of questionable legality that seem to have escaped the notice of the IRS. The Medicare tax loophole occupies a gray area. The IRS definitely knows about it, but it’s unclear if the agency will be able to stop it. The potential of the loophole first surfaced in the 1990s, and the IRS soon expressed the view that active business owners shouldn’t be allowed to exploit it. It was only in recent years, however,
that the agency got tough. Today, the IRS continues to battle what it considers a serious abuse, waging a rare, long-shot campaign to prevent some of the nation’s wealthiest citizens from using the loophole. The story of how America’s richest financiers avoid paying Medicare tax gives unique insight into the peculiar, messy way taxes work in the U.S. No one set out to create the loophole when it first entered the tax code in 1977. But a series of seemingly unrelated policy changes, together with a revolution in how American businesses are structured, conspired to deliver a major tax advantage to the wealthy. On Capitol Hill, interest groups have successfully defended that advantage, branding any effort to close the loophole as a tax hike on Main Street businesses. Approaching its 50th birthday, the loophole, for now, lives on. Fixing one problem, creating another Over the 2010s, years of budget cuts sliced deep See Medicare Page 06
VOL. 8,
NO. 203
Supervisors amend process of filling vacancies on Riverside County committees By City News Service
T
he Board of Supervisors on Tuesday approved an amendment to a Riverside County policy pertaining to terms of service for members of committees and commissions overseen by the board, limiting how long members can continue to serve after their terms have expired. Supervisor Karen Spiegel raised the issue of language in Policy A-21 when it was brought before the board by the Executive Office for what were supposed to be routine changes. “I think we need to be responsible and use the words ‘good faith effort’ and (set) a reasonable time limit (for appointing new members),” Spiegel said. “That puts a (few) more screws to it.” The supervisor’s main concern was what she viewed as the weakness in A-21’s current provisions, stemming from the fact that supervisors and their staff members currently face no time requirement, or deadline, for the appointment of new members of committees, advisory groups or commissions in each supervisorial district to replace panelists whose terms have expired.
See Filling vacancies Page 27
Report: IE’s jobless rate drops in November
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By City News Service
ayroll gains topped losses throughout the regional economy last month, pushing Riverside County’s unemployment lower, according to figures released Friday by the state Employment Development Department. The countywide jobless rate in November, based on preliminary EDD estimates, was 5.4%, compared to 5.7% in October. According to data, the November rate was only twotenths of a percentage point above the year-ago level, when countywide unemployment stood at 5.2%. Mecca had the highest unemployment rate within the county in November at 13%, followed by Coachella at 11.6%, Cherry Valley at 9.6%, Desert Hot Springs at 7.7% and Rancho Mirage at 7.6%. The combined unemployment rate for Riverside and San Bernardino counties — the Inland Empire — was 5.3%, down from 5.5% in October, the EDD said. Bi-county data indicated payrolls expanded by the widest margin in the trade and transportation sector, mainly in retailing and warehousing, which added 11,500 positions ahead of the holiday season shopping period. The agricultural, health services, professional business
See Jobless Page 28