Biden Exploited Tax Loophole on Book Income

President Obama wanted to end it but his former VP used it to his advantage.

Macro view of 1040 US Tax Form, calculator and ballpoint pen

The WSJ (paywalled) and Fox Business think they’ve caught the Democratic front-runner in a bit of hypocrisy:

Former Vice President Joe Biden, who is running for president in 2020, used a tax strategy former President Barack Obama likely would not have approved of.

Biden released additional years’ worth of tax returns this week, revealing that he and his wife funneled profits from their books and speeches through S corporations, as first noted by The Wall Street Journal. The controversial tax savings strategy – which Obama had tried to close – saved the couple as much as $500,000.

The loophole is known as the Gingrich-Edwards loophole, and Obama had called for its end as part of one of his budgets. It essentially allows self-employed people to set up an S corporation in order to avoid payroll taxes – including Social Security and Medicare taxes.

It is legal, and allows people to treat income as company profits instead of a salary. According to research conducted in 2009, closing the loophole would raise $11.2 billion in revenue over the course of the decade.

The Treasury Department estimated that loopholes allowing people to evade Medicare and Social Security taxes have cost about $25 billion each year, as reported by The New York Times.

Former presidential candidates Newt Gingrich and John Edwards drew scrutiny for using the loophole, hence its name.

A spokesperson for Biden’s campaign did not immediately return FOX Business’ request for comment.

I don’t understand the loophole here well enough to have a strong opinion as to whether it should be closed, although I do tend to think we should stop treating Social Security and Medicare taxes as separate line items.

Regardless, the notion that Biden’s accountants shouldn’t use every legal tool available under the existing tax code to minimize their tax liability because, in a perfect world, Biden would prefer that said tool be eliminated for everyone is silly. And that’s assuming he agrees with his former boss on the issue.

FILED UNDER: Joe Biden, Taxes, US Politics
James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. JKB says:

    Regardless, the notion that Biden’s accountants shouldn’t use every legal tool available under the existing tax code to minimize their tax liability because, in a perfect world, Biden would prefer that said tool be eliminated for everyone is silly.

    You realize that is the same thing Trump has said. Basically, why should he not take advantage of something permitted under the tax laws even though he might advocate the law be changed. You’ll see it again when the Democrats in the House leak his NY tax returns.

    1
    8
  2. @JKB:

    As long as they’re abiding by the law there is nothing wrong with people seeking to pay the lowest tax possible.

  3. Mister Bluster says:

    You realize that is the same thing Trump has said. Basically, why should he not take advantage of something…

    Yeah. That’s what he meant when he said “…you can do anything…grab them by the pvssy…you can do anything…”

    Everyone knows that’s why he’s your hero!

    7
    2
  4. Daryl and his brother Darryl says:

    @JKB:

    You realize that is the same thing Trump has said.

    Yes…Individual-1 also said that his tax reform would not personally benefit him…and then proceeded to give himself, and his kids, a multi-million dollar tax cut.
    I think it is well established that what the fat orange blob says has no basis in reality.

    10
  5. An Interested Party says:

    You realize that is the same thing Trump has said.

    Than he should have no problem releasing his tax returns to the public like Biden has and yet he refuses to do that…I can’t imagine why…

    11
  6. gVOR08 says:

    I fail to see the hypocrisy of playing by the rules as they are. I don’t even mind Al Gore flying on airplanes. But GOPs will spend a lot of money over the next sixteen months trying out every bullshit scandal they can find or make up.

  7. Grumpy realist says:

    @JKB: except that the way Trump has acted throughout his life indicates anyone who takes Trump’s protestation of “having acted legally” at face value is a damfool. Put out all the data and evidence and let everyone take a look. It’s open kimono time!

  8. Bill says:

    James,

    I’m one of those people who have used the S corporation loophole. My book writing first took off in October 2014 and I formed a S corporation before the year ended. Since 2015 that’s how I’ve operated. The loophole is there and people big and small take advantage of it.

    BTW I believe at least one state, California, taxes these entities. Corporate expenses are minimal for me. Annually $150 for the Florida Annual Report, $49 to Taxact where I do the tax return for the S corp, $120 for a PO Box address. Other than that, my other expenses are a little bit of office supplies and maintenance of a laptop I use solely for my stories.

    Forming an S corp is not all that hard nor is incorporating in Florida. Like my pseudonym for writing, the name of my corporation comes from the name or term of endearment for my son who passed away shortly after birth. Dear wife approved of these names.

    Just this week I was contacted by a producer who wants to buy the rights to one work of mine. He’s legit but I have never done this before. Business is ok.

  9. DrDaveT says:

    I don’t understand the loophole here well enough to have a strong opinion as to whether it should be closed

    It’s income. If it isn’t getting taxed like W-2 wages, then of course the loophole should be closed. It’s way past time that we stopped privileging income that only wealthy people have.

    9
    1
  10. OzarkHillbilly says:

    @DrDaveT: Amen.

  11. James Joyner says:

    @DrDaveT:

    It’s income. If it isn’t getting taxed like W-2 wages, then of course the loophole should be closed. It’s way past time that we stopped privileging income that only wealthy people have.

    That’s not so much a “loophole” as the entire tax code.

    The general principle that all earned income be treated the same is reasonable enough. I’ve never had anyone provide an explanation for why carried interest should be taxed at a fraction of the rate of wage income, for example. The Warren Buffett vs. Warren Buffett’s secretary situation is highly problematic. (Although a lot of that is a function of Social Security and Medicare taxes being capped at a point that is a rounding error in Buffett’s annual income.)

    Still, it makes sense that aspiring writers like @Bill, highly successful ones like Michael Reynolds and his wife, and even celebrities like Biden be able to write off the expenses associated with their enterprise. They are, in effect, running a business. And a corporation makes more sense than a sole proprietorship sometimes, especially in terms of legal severability.

  12. Bill says:

    @DrDaveT:

    It’s income. If it isn’t getting taxed like W-2 wages, then of course the loophole should be closed. It’s way past time that we stopped privileging income that only wealthy people have.

    Emphasis added by me.

    You must consider someone wealthy whose wife takes home $945 every two weeks after deductions for taxes and health insurance (For her and her husband) a wealthy person. That is preposterous. I’m not the only non-wealthy writer (I make less money yearly than my wife does but if I sell the rights to the story of mine, I’ll top her this year) at Amazon who has a S corp. I drive (Around 2,000 miles a year) a car worth less than $500 that needs around $3000 worth of repairs. My wife ‘s car is actually owned by her sister. I’m wealthy to you. Not even close. I’m just using the tax code to preserve the little income I have.

  13. DrDaveT says:

    @Bill: You misunderstand me. Actual businesses run by actual entrepreneurs, including self-employed authors, are one thing. Hobby income for retired politicians is another. I have no problem with you or your wife filing as businesses; I’m not enough of a tax expert to know whether “S-corporation” or some other mechanisms is the appropriate one. Ideally, if it’s business income then the business pays corporate tax and the individual pays personal income tax on the income paid them by the corporation.

    What I object to is when the wealthy use mechanisms designed to protect the poor (e.g. family farm exemptions, or Earned Income Tax Credit) to cut their already-too-low tax bill. I sympathize with Elizabeth Warren’s desire to tax wealth rather than income, though I think such an attempt is probably both unconstitutional and impractical.

  14. DrDaveT says:

    @James Joyner:

    Still, it makes sense that aspiring writers like @Bill, highly successful ones like Michael Reynolds and his wife, and even celebrities like Biden be able to write off the expenses associated with their enterprise. They are, in effect, running a business.

    Why do you think that? In particular, why do you think that it “makes sense” equally for an actual business like @Bill and for a dilettante retiree like Biden? On what theory of equity should those individuals be treated identically by the tax code?

  15. James Joyner says:

    @DrDaveT:

    In particular, why do you think that it “makes sense” equally for an actual business like @Bill and for a dilettante retiree like Biden? On what theory of equity should those individuals be treated identically by the tax code?

    So, my strong preference would be some sort of consumption tax like a VAT vice taxing income at all. Since we’re stuck with an income tax, I think it should be progressive, mainly by generous deductions for the number of people in the household but also in terms of marginal rates.

    In the case of Bill vs Biden, to the extent that they’re both making money from writing books, they should be treated the same insofar as legitimate expenses in researching, promoting, and the like should be written off. Beyond that, I’m not sufficiently familiar with S-Corporations to understand what other advantages they confer. I’ve filed my side hustle income from writing projects (including the days when OTB and its subsidiaries were bringing in serious money) as a sole proprietor on my personal income taxes.

    Ideally, they’d be taxed differently in terms of rates above a certain level. That is, they should be treated the same on the first $100,000, first $1,000,000, etc. Since Biden’s sales are fueled by his celebrity, he’d be paying more because he’s making more.

  16. DrDaveT says:

    @James Joyner:

    So, my strong preference would be some sort of consumption tax like a VAT vice taxing income at all.

    The problems with VAT that spring to mind are that it generally doesn’t apply to services (which are a big piece of what the rich can afford that the poor can’t), that it incentivizes hoarding for your heirs rather than spending, and that it can be avoided by buying overseas. It also encourages black markets, with the corresponding inefficiencies and enforcement costs and such. I understand the theoretical preference for taxing the exercise of wealth rather than the accrual of wealth, but that’s a lot harder than it sounds in practice.

    Since we’re stuck with an income tax, I think it should be progressive, mainly by generous deductions for the number of people in the household but also in terms of marginal rates.

    Could you unpack the bit about deductions for number of people in the household a bit? I don’t see how that makes the tax progressive, or in general why that would be more socially useful than (say) deductions for being a single parent, or a public school teacher, or a civil servant…

  17. Bill says:

    @DrDaveT:

    You misunderstand me.

    No I didn’t you. You used the word only when referring to us who have s Corps. Only is a word without wiggle room.

    Up to 2007 I was doing good. I owned a house with a just modest mortgage on it, leased a new car every 3 years, was able to travel a little maybe every 2 to 3 years. That while only working odd jobs. My wife and I had some savings, I think around $7,500 not counting retirement stuff.

    Then my cancer metastasized in 2008. It has a median survival rate of less than a year for Stage IV patients. (My 11 years survival isn’t anywhere near a record. A person I knew from a cancer email list survived 27 years) I didn’t earn a penny of money from 2008 till spring 2014.

    Other than the retirement money, everything dear wife and I had was lost and we went heavily into debt because of my medical bills. At the height of my medical problems I was spending over 2,000 a month between doctor’s bills and prescriptions. We went into foreclosure but I was cleverly able to fight our lender till 2015 before losing a final appeal to the Florida 4th DCA. My leased car was repossessed. Our credit cards maxed out and DW and I sometimes dependent on church parishioners to help us out. I filed Chapter 7 bankruptcy on my own in 2011 but bills piled in for two more years after that till my cancer miraculously got semi under control. So bankruptcy was only temporary relief.

    My wife earns too much money, $945 every two weeks, to qualify for food stamps or the EITC. When we had to move out,we were just barely under the income limit (My business started in 14 but money didn’t really start rolling in till 2015. Thanks be to God my landlord only needed to know what I did in 14) to get a reduced rent apartment.

    Since business took off (My best selling books are with just one exception those that are negatively reviewed.) I have paid almost all my debt off. I have even managed to create a little bit of savings but this cancer still hangs over my head and DW and I could find ourselves back in a big hole again real fast. (Doctor co-pays are now $50 instead of $20 and my prescription deductible is much bigger. Cancer related medicines don’t come cheap) The book rights (The producer is from India. Bollywood here I come…) would earn me a small five figure total but I’d probably be wiser to stash the money than fix the wreck of a car I drive. Just the other day I loaned my key ring to a co-worker of my wife and jokingly said if they want to take the Maxima, go right ahead!)

    So I have a S corp to cut down on my tax bite and I’m not Joe Biden but am a registered Democrat. After taxes and expenses, I’m close to my wife’s gross income. Even without the book rights deal coming through, I will beat the wife’s money for the first time ever this year if things hold up the way they are now. Amazon royalties are paid about 90 days after a month ends. Book sales and kindle unlimited page reads for July get paid to me the end of September etc etc

  18. James Joyner says:

    @DrDaveT:

    Could you unpack the bit about deductions for number of people in the household a bit? I don’t see how that makes the tax progressive

    We’ve moved quite a bit in that direction already. The standard deduction amounts for 2019 were $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly and surviving spouses. (Unless it’s changed, the surviving spouses rate goes away three years after death and you have to file as a head of household. That’s what happened for me.) You get another $2000 per child. That’s fairly generous compared to even three or four years ago—but why not $5000 per child? Or, hell, $10,000. That’s a drop in the bucket if you’re a high earner but pretty much puts anyone in the lower middle class with a couple of kids out of range of Federal income taxes. That’s pretty progressive. You could still have tiered rates on top of that.

    , or in general why that would be more socially useful than (say) deductions for being a single parent, or a public school teacher, or a civil servant…

    I’ve been a single parent for 7-1/2 years although that’s about to change. I’m not sure why we want to incentivize that, to be honest.

    I’m not sure why we’d subsidize schoolteachers or civil servants, either—and I’d benefit from it. Most of us make a pretty decent living. I could see some sort of tuition assistance/waiver program for those going into particularly hard-to-fill jobs such as teaching in impoverished areas and lower-paying civil service gigs. But not teachers and government employees writ large.