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Wisconsin has been abuzz the last few days with news that its Republican U.S. Senator, Ron Johnson, avoided paying taxes by basing a company that he partly owns in Ireland.
It turns out this isn't RoJo's first rodeo.
In 2004, Johnson was the sole owner of Pacur LLC. As such, he decided to write a check to himself between $1 million and $5 million—we only know the range because of the loose format of the Senate Financial Disclosure Form.
In 2007, Johnson got out the checkbook again and wrote another seven-figure check to himself in the $1 million to $5 million range.
There was one caveat, though. These two seven-figure checks were actually loans from Pacur the corporation (of which Johnson was 100 percent owner), to Ron Johnson the individual, with an interest rate of .69 percent a year.
Now, why would he do this?
Iowa State University professor Dr. Dave Sly, who specializes in manufacturing corporations and corporate tax structures makes it nice and clear:
"Because, if he took out 10 million, he'd rather pay $69,000 a year in interest, instead of paying $3.5 million in taxes."
Sly explains that drawing out millions from your LLC would be treated as income and taxed at 35 percent (the income rate in 2004 and 2007 for income over $319,100). So if Johnson loaned himself $5 million in each of those years ($10 million total), he avoided a potential tax bill of $3.5 million for those two cash withdrawals.
However, because the $10 million was actually classified by Johnson as a loan from Pacur to Ron Johnson the individual, he only had to pay .69% interest or $69,000 a year-- and those interest payments went right back to Johnson-owned Pacur.
In this scenario, using the ten million number, Johnson's tax bill went from $3.5 million to zero.
It's all legal and a "very common practice," according to Sly.
Johnson will still have to pay $69,000 a year in interest to Pacur, but he's obviously been able to get a far better rate of return on investing in things like the stock market, which usually has a return rate of around seven percent.
Now, in fairness, Ron Johnson does pay some taxes. In 2007, for example, Johnson purportedly paid $267,006 in federal incomes taxes. (We have to take his word for it, because he hasn’t ever released his tax returns.) But using his numbers and factoring in his $5 million loan payout that year, add in his yearly $650,000 salary and approximately $1 million annual investment income—he had a tax rate of well below five percent!
All this from a guy who suggested to George Will in 2010 that he paid taxes at the 35 percent income tax rate, when he wistfully looked back at the Reagan years and said, "for a brief moment we were 72 percent free."
This was referring to the Reagan-era top tax rate of 28 percent and also was telling everyone just how long the self-described "working man," who married into considerable wealth, has been in the top income bracket.
In Will’s column, he cast Johnson as the John Galt character in Atlas Shrugged—an entrepreneur that built a manufacturing empire with the product he invented, who represented those “producers” who became "weary of carrying on their shoulders the burden of dependent people” . . . via over-taxation.
Jud Lounsbury is a political reporter based in Madison, Wisconsni, and a regular contributor to The Progressive.