Joe Biden Used Tax-Code Loophole Obama Tried to Plug

Democratic presidential candidate Joe Biden used a tax loophole that the Obama administration tried and failed to close, substantially lowering his tax bill.

Mr. Biden and his wife, Dr. Jill Biden, routed their book and speech income through S corporations, according to tax returns the couple released this week. They paid income taxes on those profits, but the strategy let the couple avoid the 3.8% self-employment tax they would have paid had they been compensated directly instead of through the S corporations.

The tax savings were as much as $500,000, compared to what the Bidens would have owed if paid directly or if the Obama proposal had become law.

There’s no reason for these to be in an S corp—none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.

“As demonstrated by their effective federal tax rate in 2017 and 2018—which exceeded 33%—the Bidens are committed to ensuring that all Americans pay their fair share,” the Biden campaign said in a statement Wednesday.

The technique is known in tax circles as the Gingrich-Edwards loophole—for former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat—whose tax strategies were scrutinized and drew calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current contenders for the 2020 Democratic nomination Sens. Elizabeth Warren and Bernie Sanders, received their book or speech income differently and paid self-employment taxes.

Some tax experts have pointed to pieces of President Trump’s financial disclosures and leaked tax returns to suggest that he has used a similar tax-avoidance strategy.

Unlike his Democratic rivals and predecessors in both parties, Mr. Trump has refused to release his tax returns, and his administration is fighting House Democrats’ attempt to use their statutory authority to obtain them. Democratic presidential candidates have released their tax returns and welcomed criticism to draw a contrast with Mr. Trump.

Mr. Biden, who was vice president from 2009 to 2017, has led the Democratic field in polls since entering the race. He is campaigning on making high-income Americans pay more in taxes and on closing tax loopholes that benefit the wealthy.

Mr. Biden has decried the proliferation of such loopholes since Ronald Reagan’s presidency and said the tax revenue could be used, in part, to help pay for initiatives to provide free community-college tuition or to fight climate change.

We don’t have to punish anybody, including the rich. But everybody should start paying their fair share a little bit. When I’m president, we’re going to have a fairer tax code,” Mr. Biden said last month during a speech in Davenport, Iowa.

The U.S. imposes a 3.8% tax on high-income households—defined as individuals making above $200,000 and married couples making above $250,000. Wage earners have part of the tax taken out of their paychecks and pay part of it on their returns. Self-employed business owners have to pay it, too. People with investment earnings pay a 3.8% tax as well.

But people with profits from their active involvement in businesses can declare those earnings to be neither compensation nor investment income. The Obama administration proposed closing that gap by requiring all such income to be subject to a 3.8% tax, and it was the largest item on a list of “loophole closers” in a plan Mr. Obama released during his last year in office. The administration estimated that proposal, which didn’t advance in Congress, would have raised $272 billion from 2017 through 2026.

Under current law, S-corporation owners can legally avoid paying the 3.8% tax on their profits as long as they pay themselves “reasonable compensation” that is subject to regular payroll taxes. S corporations are a commonly used form for closely held businesses in which the profits flow through to the owners’ individual tax returns and are taxed there instead of at the business level.

The difficulty is in defining reasonable compensation, and the IRS has had mixed success in challenging business owners on the issue. The Bidens’ S corporations—CelticCapri Corp. and Giacoppa Corp.—reported more than $13 million in combined profits in 2017 and 2018 that weren’t subject to the self-employment tax, while those companies paid them less than $800,000 in salary.

If the entire amount were considered compensation, the Bidens could owe about $500,000. An IRS inquiry might reach a conclusion somewhat short of that.

“The salaries earned by the Bidens are reasonable and were determined in good faith, considering the nature of the entities and the services they performed,” the Biden campaign statement said.

For businesses that generate money from capital investments or from a large workforce, less of the profits stem from the owner’s work, and thus reasonable compensation can be lower. For businesses whose profits are largely attributable to the owner’s work, the case for reasonable compensation that is far below profits is harder to make.

To the extent that the Bidens’ profits came directly from the couple’s consulting and public speaking, “to treat those as other than compensation is pretty aggressive,” said Steve Rosenthal, a senior fellow at the Tax Policy Center, a research group run by a former Obama administration official.

Mr. Nitti said he uses a “call in sick” rule for his clients trying to navigate the reasonable-compensation question: If the owner called in sick, how much money could the company still make?

“The reasonable comp standard is a nebulous one,” Mr. Nitti said. “This is pretty cut and dried. If you’re speaking or writing a book, it’s all attributable to your efforts.”

The IRS puts more energy into cases where the business owners pay so little reasonable compensation that they owe the full Social Security and Medicare payroll taxes of 15.3%, Mr. Nitti said.

In a statement released Tuesday along with the candidate’s tax returns, the Biden campaign noted that the couple employs others through its S corporation and calls the companies a “common method for taxpayers who have outside sources of income to consolidate their earnings and expenses.”

Joe Biden, S-Corp Millionaire

Nearly every Democrat running for President is using the stock line that the U.S. economy “isn’t working for average Americans.” Last week we showed why that wasn’t true. And we now know it certainly is working for Joe Biden, as the release of his tax returns this week shows.

The former Vice President describes himself as the lunch-bucket son of Scranton who was the poorest member of the U.S. Senate. Not anymore. In the past two years Mr. Biden and his wife, Jill, earned more than $15 million. The presidential candidate cashed in on the political speaking circuit, earning as much as $234,820 for a single speech. It’s good to be a former Veep, especially when companies are flush enough to pay such a princely fee. He’s no Ordinary Joe, but good for him.

Kamala Shotguns Joe Sixpack

WASHINGTON — In January, a reporter contacted the nascent Biden campaign to request an interview. She wanted to ask the former vice president about lingering criticisms that were bound to come up on the trail: how, as a senator, he failed Anita Hill; his lead role in the 1994 crime bill; his vote for the Iraq war; his mixed record on abortion rights; his handsy ways; the hot mess that is Hunter.

And that little girl was me.

I was promptly rejected for an on-the-record sit-down. Talking to some in the Biden circle, I sensed a myopia. They seemed to think they could blow past the past, walling off the candidate and ignoring the imbroglios that were obvious fodder for the pack of hungry Democrats and the rapacious president who would soon be in full cry after the front-runner.

Not deigning to talk to the press to explain bad decisions to voters seemed more like Queen Hillary than Uncle Joe. Even David Axelrod, who favored Biden as Barack Obama’s running mate, has said that it is “not a tenable strategy” to meet the press only when you are rolled out to try to explain some embarrassing gaffe.

It was also a bad sign, after Biden got in trouble for bragging at a fund-raiser about working with segregationist senators, that the candidate’s advisers trash-talked him to The Washington Post, saying they had warned him to use a less toxic example of bipartisanship.

In my experience, candidates with advisers who belittle them on background do not win elections.

The aloofness and arrogance of the Biden operation came spilling out for all to see under the bright lights of the debate stage.

The 76-year-old seemed irritated and unprepared to address inevitable jabs from his younger, more nimble rivals. What did he think would happen — that they would strew rose petals along his path to the podium and beg for selfies? In the 2008 race, he was a more vivid and genial debater than Obama. Now he seems simultaneously drained and entitled.

Kamala Harris, who had been trying to appease the progressives on Twitter who berate her for her law enforcement record, suddenly found her inner cop.

Rather than asking Biden to pass the torch, she took a blowtorch to him.

“I do not believe you are a racist,” she allowed about the man who was the partner of the first black president, had a good civil rights record and claimed (unconvincingly) that he was inspired to run by his disgust at Charlottesville.

Harris snapped the cuffs on: “It was hurtful to hear you talk about the reputations of two United States senators who built their reputations and career on segregation of race in this country. And it was not only that, but you also worked with them to oppose busing. And you know, there was a little girl in California who was part of the second class to integrate her public schools, and she was bused to school every day. And that little girl was me.”

Harris was grinding her stiletto on a vulnerable part of Biden’s record. The reason Hill was eviscerated and a lying Clarence Thomas ascended to the Supreme Court is that Biden, as chairman of the Senate Judiciary Committee, was bending over backward to appease uncompromising Republicans on the panel — the same men who were falsely accusing Hill of perversity, erotomania and perjury.

A Times story revealed how Biden went to Michigan before the midterms last year to reclaim the Midwest for Democrats but ended up praising Republican Fred Upton during a paid speech to a Republican-leaning audience. Apoplectic Democrats said Biden helped Upton win re-election to the House.

After Harris dressed down Biden, Michael Bennet snapped back at the front-runner. Biden was boasting that, when they were negotiating a deal in 2012 to end a government showdown, he got Mitch McConnell to allow the top individual income tax rate to rise, generating about $600 billion in revenue.

“The deal that he talked about with Mitch McConnell was a complete victory for the Tea Party,” the Colorado senator said. “It extended the Bush tax cuts permanently. The Democratic Party had been running against that for 10 years.”

Biden is selling himself as someone who can work with a Republican Party that everyone but Biden realizes doesn’t exist anymore.

Adding injury to insult, his handlers overcoached him on his signature trait of runaway verbosity. It was weird watching Biden cutting himself off midsentence — “My time is up. I’m sorry” — while all the others were talking well over their allotment. It was like the sheriff in “Blazing Saddles” holding the gun to his own head.

Biden may have been trying to limit what he said — just as he limits press exposure — to keep out of trouble. But it looked as if he lacked confidence.

After his poor debate showing, Biden tried to recover Friday in Chicago but stepped in it again, saying during a labor luncheon, “We’ve got to recognize that kid wearing a hoodie may very well be the next poet laureate and not a gangbanger.”

He argued that “the discussion in this race today shouldn’t be about the past.” But the problem at the moment is that Biden has too much past and not enough presence.

How to Beat Joe Biden

Can his rivals fracture or overwhelm his coalition?

But the approach has a certain strategic logic. It assumes that activists can be appeased with specific promises, while the moderation of many older Democrats manifests itself more in general cultural attitudes (the kids these days with their political correctness, grumble grumble) than detailed policy preferences. It assumes that absorbing a certain kind of attack from the left — Biden’s too nostalgic for the bad old days, Biden’s a chump if he thinks he can cut deals with Republicans helps with voters who are nostalgic for the days of dealmaking themselves, without making it impossible to eventually unite the party in the way that staking out heretical positions might.

These assumptions are by no means crazy. But it is also very easy to see how they might fail. Biden is hardly the most formidable of front-runners, and if any piece of the current coalition breaks off, he’ll be in deep trouble. And his rivals have obvious plays that might make that breakup happen.

The first play is to split off some of Biden’s African-American support by linking his nostalgia for dealmaking to his less-than-progressive record on race. This is the play Cory Booker is trying to execute, and Booker’s campaign probably depends on its success — which is by no means foreordained, since the African-American vote is more conservative and Biden-friendly than the median white liberal. But nobody before his years as Obama’s V.P. would have regarded Biden as a natural destination for the black vote, and enough sustained tone-deafness in the present could make that past matter once again.

The second play is to make the broader “Uncle Joe” persona, not just its unwoke element, a liability for Biden’s elect-me-to-beat-Trump case. This is probably the Pete Buttigieg play, though it’s available to any younger candidate: Without saying so directly, establish contrasts that make Biden look old, confused, a man out of time, even Trump-y in his own right. Don’t challenge his record, don’t call him a troglodyte — just challenge the conceit that a likable but past-his-prime uncle makes the right contrast with Trump.

The third play is to attack Biden from the center when he flip-flops, and try to break off his more conservative supporters by arguing that the former V.P. isn’t the moderate he used to be. This should be an obvious move for the legion of candidates (Amy Klobuchar, Tim Ryan, Seth Moulton, Michael Bennet, etc.) lining up to inherit the moderate torch if Biden’s campaign fails. But I suspect it will be hard for them to execute, because none of them seem eager to fight the activist left either. (The once pro-life Ryan, for instance, has flipped on the Hyde Amendment as well.) Still, every time Biden decides to check an ideological box, he leaves this flank exposed.

And the fourth play — well, the fourth play doesn’t actually require breaking up Biden’s current coalition; it just requires uniting a slightly-larger portion of the party against him.

We have an example of how not to do this in the failed attempts by Ted Cruz and Marco Rubio to unite Republican primary voters against Donald Trump. But in the rising line of Elizabeth Warren’s polling support, and the flat or falling lines of all the other non-Biden candidates, you can see at least the beginning of how NeverBiden might unite, and win.