In its latest round of reporting based on private tax records stolen from the IRS, ProPublica reports that many billionaires have avoided paying Medicare taxes despite earning huge amounts from their companies. Steve Cohen, billionaire owner of the New York Mets, paid $0 in 2016 – a move that, to say the least, left him better able to land Juan Soto last week in a record $765 million deal. Stephen Schwarzman, head of the investment behemoth Blackstone, also paid zero. Bill Ackman, the headline-grabbing hedge fund manager, was able to shield almost all his income from the tax. How do they do it? The answer is complex, but, this article reports, it has its roots in the 1970s when Congress tried to prevent federal workers – who are do not pay Social Security and Medicare taxes and are therefore ineligible to receive benefits – from becoming eligible for those benefits by channeling some of their earnings into limited partnerships, which would pay them a salary that was taxed:
The solution, Congress decided, was to exclude most income earned by limited partners. It wouldn’t count toward self-employment income and, as a result, wouldn’t be subject to self-employment tax, which goes to Social Security and Medicare. As part of a major 1977 Social Security reform bill, this soon became the law. It seemed like an easy fix. At the time, limited partners were, as a rule, passive investors. The line between the two types of partners that made up a limited partnership was real: General partners ran the business, and limited partners didn’t. … A new business structure, the limited liability company, exploded in popularity in the ’90s. LLCs limited the legal liability of all owners regardless of their role. Limited partnerships morphed into something that functioned similarly. After the change, the fact that someone was a limited partner said nothing about what they did for the business. They could be the CEO or a passive investor. It became common for owners to serve as both limited and general partners. In this new world, the 1977 law was no longer a narrow exclusion. It was a broad grant of tax avoidance to anyone with a canny tax adviser.
This article reports that the Medicare tax is 2.9% for most people and 3.8% for high earners. But these maneuvers by the rich are hastening 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.
ProPublica
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