Medicare is the government-run health insurance program for people over 65 years of age. It is a very well-run program and funded by a tax on income that is automatically deducted from people’s paychecks. The Medicare tax is not huge. It is 2.9% for most people and 3.8% for high earners. If you are self-employed, or get any income that is not a salary or wage, you are still obliged to pay that tax when you file your annual income tax. I have done so routinely with any outside income I got from giving talks or from my writings. You fill in a separate form to report self-employment income and another form to pay the tax on it. It is pretty straightforward.

ProPublica has gone through the tax records and found that very wealthy people have exploited a loophole that enables them to avoid paying any Medicare taxes on their income. The article focuses on three of the most egregious tax avoiders.

The trove of tax records behind ProPublica’s “Secret IRS Files” series contains plenty of examples of billionaire financiers who avoided Medicare tax despite earning huge amounts from their companies. In 2016, Steve Cohen, the owner of the New York Mets, paid $0. So did Stephen Schwarzman, head of the investment behemoth Blackstone. Bill Ackman, the headline-grabbing hedge fund manager, was able to shield almost all his income from the tax.
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But these maneuvers by the rich hasten 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.

The article goes on to describe precisely the way that these wealthy but greedy people, who could easily afford to pay the tax, use their high-powered tax lawyers to create something called a ‘limited partnership’ that enables them to pay hardly anything.

To take advantage of the loophole, Cohen needed to channel his firm’s profits through a limited partner before the money reached him.

One obstacle, it might seem, was that Cohen was one person. How could he partner with himself? That part was simple. A partnership requires at least two partners, but they can be companies or people. Cohen created two business entities, each wholly owned by him. One became the limited partner, the other the general partner.

Over 2015 and 2016, Point72 Asset Management earned $344 million in profits; 99.98% of that went to the limited partner and was declared exempt from Medicare tax. While those profits were subject to the 40% income tax rate (as much as $136 million in tax), Cohen’s returns showed $0 in self-employment income both years, helping him avoid up to $11 million in Medicare tax.
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ProPublica’s database of IRS data includes the tax returns of thousands of wealthy business owners through 2018. These titans of capitalism, despite huge flows of ordinary income, often reported remarkably little self-employment income in the 2010s. The LP appears to have been their favored variety of partnership.

In 2017, Bill Ackman earned $413 million in income through an LP operated by the hedge fund he manages, Pershing Square, famous for taking activist stances in companies. As was typical in other years, Ackman reported self-employment income of $4.7 million, a small fraction of his total business earnings. The difference meant he paid $142,000 in self-employment tax instead of more than $13 million.
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In 2018, at least $143 million flowed via a Blackstone LP to Stephen Schwarzman, the firm’s CEO. As in years past, he exempted the income from Medicare tax. Schwarzman, who sits atop an investment firm with over $1 trillion in assets, reported no self-employment income at all in five of the seven years between 2012 and 2018.

The easiest way to plug the loophole is to change the law. But as we all know, Congress, especially Republicans are in the deep pockets of these people and thus have not made the change.

As an alternative, the IRS has started suing some of these people, claiming the the loophole they have been exploiting is not meant for to be used in this manner.

Soroban Capital, a hedge fund, was audited after converting to an LP from an LLC. Demonstrating the gulf between owners and employees, Soroban’s three partners collected $142 million in income over the two years of the audit, while paying a total of $74 million in salaries and wages (subject to Medicare tax) to the fund’s staff.

Soroban’s founder, Eric Mandelblatt, was once an employee. His compensation from Goldman Sachs cost him $128,000 in Medicare tax one year, according to ProPublica’s IRS database. After he started his own hedge fund and began earning tens of millions more, his Medicare tax bill never exceeded a third of that, the records show. Soroban did not respond to requests for comment.

In 2023, the IRS won a major tax court decision against Soroban. The “limited partner exception of I.R.C. § 1402(a)(13) does not apply to a partner who is limited in name only,” the court said, because Congress had only intended to “exclude earnings from a mere investment.” A “functional analysis,” the court said, was needed to determine whether a partner was really “limited.”

One of the Republican goals is to gut the IRS so that they would not have the resources to go after these greedy people.

You can be absolutely certain that Trump and his minions will attack the IRS as being part of the deep state that oppresses people and will then cut its budget deeply so as to gut the staff of the agency so that they will not be able to audit and go after the wealthy. That is the standard bait-and-switch that they keep pulling over and over again, using populist messaging to serve the wealthy.

We know from the celebratory reaction to the killing of the Unitedhealthcare CEO that there is deep anger against the health insurance companies. If people were more aware of how these greedy people are starving the Medicare program of the money it needs to serve the health care needs of people, one might expect similar rage.