There Really Are Two Americas

From The Wall Street Journal's OpinionJournal.com Featured Article Tuesday, July 13, 2004

Liberal Loopholes
Edwards and Kerry want to raise taxes, but know how to avoid paying them.

I know which of the "two Americas" I fit in. Guess what, it is not the America of the two Johns. So my question is how much of the promised tax increases will actually hit the super-rich like Kerry/Edwards and how much will the upper middle-class wage earners pay?
The Kerrys and Edwards have exploited plenty of tax loopholes over the years. Of course, nobody is obligated to pay more than what the letter of the law requires. But the complex tax code benefits the wealthy, who can afford tax attorneys and complicated schemes to skirt the law. And high marginal rates give them plenty of incentive to do so.

Senator Edwards talks about the need to provide health care for all, but that didn't stop him from using a clever tax dodge to avoid paying $591,000 into the Medicare system. While making his fortune as a trial lawyer in 1995, he formed what is known as a "subchapter S" corporation, with himself as the sole shareholder.

Instead of taking his $26.9 million in earnings directly in the following four years, he paid himself a salary of $360,000 a year and took the rest as corporate dividends. Since salary is subject to 2.9% Medicare tax but dividends aren't, that meant he shielded more than 90% of his income. That's not necessarily illegal, but dodging such a large chunk of employment tax skates perilously close to the line.

The Internal Revenue Service takes a dim view of such operations and "may collapse the structure entirely and argue the S corporation is not truly a separate entity," in the words of Tax Adviser magazine. Attorney CPA magazine lists it as No. 11 of its "15 best underutilized tax loopholes," but warns that the IRS "has successfully litigated cases against individuals, particularly sole shareholders of personal service S corporations, reclassifying such deemed distributions as wages subject to social security taxes."

As a political matter, the dodge is especially hypocritical because the income limits on which Medicare taxes are paid were lifted by Democrats in 1993 specifically to hit "the rich," as Mr. Edwards likes to call people in his tax bracket. And the supreme irony? Mr. Edwards has claimed that he set up the subchapter S company to protect himself from legal liability. You know it's time for tort reform when even the trial lawyers say they're afraid of getting sued.

Senator Kerry's personal finances are not so complicated, since most of his income comes from his government salary and a modest inheritance. But he owes his jet-setting lifestyle and indeed some of his political success to the wealth of his wife, Teresa Heinz Kerry. Her personal assets have been estimated at up to $3.2 billion, and the couple travel among their five houses scattered around the U.S. on a $35 million Gulfstream V jet. During a tough election for the Senate in 1996, Mr. Kerry sidestepped a gentleman's agreement with opponent William Weld to limit the spending of personal wealth on either side to $500,000 by having his campaign borrow $1.7 million from his wife.

Mrs. Heinz Kerry's finances remain largely a closed book, since she has so far refused to release her tax returns. What we do know so far is that she has prepaid $750,000 in federal taxes on $5.1 million in income for 2003--an effective tax rate of 15%. That is because a significant portion of the income came from tax-free municipal bonds, which is perfectly legal.

Even so, her net income must be much higher. We know that since the death of her husband John Heinz in 1991, Mrs. Heinz Kerry has invested shrewdly and possibly even doubled her inheritance. Even if one takes a conservative estimate of her net worth, say $1 billion, an income of $5.1 million means a paltry return of just 0.5%. More likely, the majority of her investment income is sheltered within trusts so that tax is deferred until she or her family actually wants to spend it. Again, perfectly legal, but this is a luxury that the average middle-class professional working for a wage does not have. These are the non-rich who will pay the bulk of any Kerry tax increase.

So when John Kerry and John Edwards say that they want to tax the wealthiest Americans, let's be clear about what they really mean. They want to tax the most productive people at higher marginal rates and close loopholes for corporations, while they themselves dodge taxes by exploiting loopholes they plan to preserve.

Their double speak means what is good for them they will protect and what soaks it to the middle class they will endorse.

I really do not envy them their wealth, it just really makes me angry when they try to fool the masses with "they are one of us" slogan. They eat at Wendys like the common man and then go to their real lunch catered by the local club for the wealthy. Kerry intrudes on the Marines having their meal for a photo op because he is
not held to the same etiquette of common people.