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Rep. Charles Rangel Headshot

NEWT Can Close Tax Loopholes

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Lately in American politics there has been a lot of talk about taxes. This conversation has been mostly about who should pay more (or less) and there has been some heated discussion, to say the least, on all sides. One thing I think we can all agree on, however, is that everyone should pay the amount the law currently asks for until that law is changed. This is what my new bill, H.R. 358 the Narrowing Exceptions for Withholding Tax Act of 2013 (NEWT) helps to do.

As every American who has ever received a paycheck is aware, the amount of money earned and the amount actually brought home are not the same. This is because some money is withheld by your employer for a variety of reasons, including retirement plans, health insurance, and taxes.

One of these taxes is labeled "FICA" (Federal Insurance Contributions Act), which you probably have seen on your own pay stub at some point. As a part of FICA, every employed taxpayer is required to pay 1.45 percent of their wages to fund health insurance for those over 65 and the disabled, what we know as Medicare. Your employer is also required match that amount, meaning each working American pays a total of 2.9 percent of their earned income, even those who are self-employed.

Or at least that is how it is supposed to work. There are some self-employed Americans, usually folks that are making far more money than the average person, that have found a way to take advantage of this system. By using a loophole in the tax code, these individuals have organized their businesses in such a way that their earnings, what you and I would call "wages," can technically be called "profits" and therefore are not subject to Medicare tax.

Just to be clear, these people are earning money for the actual work they do, just like any other employed American, yet they are simply pretending the money is earned as a return on investment, which is what the "profit" designation is really for. It is not only morally wrong to use the tax code to avoid paying your share of Medicare tax, but also unfair. We should not allow a part of the population to avoid paying what the spirit of the law requires.

There are two prominent Americans that provide useful examples of how this loophole is exploited: Newt Gingrich and John Edwards. In 2010, Speaker Gingrich earned over $2.8 million for work including speaking engagements and consulting. This money was not paid directly to Gingrich, but instead to his businesses Gingrich Holdings, Inc. and Gingrich Productions. These businesses then paid Gingrich a salary of $444,327, of which the full 2.9 percent Medicare tax was paid, but also paid him roughly $2.4 million in "profit" as the owner of the business, upon which no Medicare tax was paid. This allowed him to avoid $69,000 of Medicare tax in that year alone. John Edwards used a similar arrangement for his work as a trial lawyer in the late 1990s. Edwards earned $26.9 million over four years, but only paid himself a salary of $360,000 per year. By designating the rest of the money as profits, Edwards avoided an estimated $600,000 in Medicare tax, certainly no small amount.

For most Americans, this is an easy call. As the wealthiest nation on Earth, we have made a commitment to provide health care for those over 65. In order to pay for this, each of us should contribute the same, flat percentage of our earned income. At a time that we are talking about saving money in Medicare, we should first collect all the money that should be paid into the program. In 2009, when I tried to close this loophole, the Joint Tax Committee estimated that it would raise almost $12 billion over 10 years. It is time we pass NEWT, to ensure that everyone is paying his fair share.