To understand Novak’s point, look at your own pay stub. Deductions from your gross pay include federal & state taxes as well as Medicare tax on every dollar you earn. Forget about social security taxes because they stop after about $80,000.
So, if you collect $10,000,000 in ordinary income you pay federal, state AND Medicare taxes on the entire amount. However, if you pass the income through a Subchapter S corporation and pay yourself $100,000 in ordinary income and $9,900,000 in dividends you avoid paying Medicare taxes on the dividends because dividends are not subject to Medicare taxes.
The issue here is: is that legal? It sure isn’t ethical.
I believe that you are missing MY point. Novak is on a false trail. Dividends are not a deductible corporate expense. Consequently they constitute taxable income to the stockholder, at a higher rate than they would pay for the Medicare tax. Yes, they avoid the Medicare tax but in the end pay more in income taxes. And yes, it is legal. Ethical - no more or less than all other tax avoidance approaches.