Lid Blowing Off Romney Tax Secrecy
by Kenneth Thomas
Lid Blowing Off Romney Tax Secrecy
Gawker (via Eman at Daily Kos) dropped a bombshell yesterday when it released over 950 pages of confidential documents from 21 Bain Capital-related investment vehicles, all of which Mitt or Ann Romney invested in. It made all 48 documents into a single searchable one here so that others could take a look and see what nuggets it might contain.
Romney previously claimed that his Cayman Island funds had to be located there in order to attract foreign investors, who invested via the Caymans so they would not be subject to U.S. taxes on their earnings, and that he did not reduce his tax bill as a result of his Cayman holdings. The newly released documents confirm that among these 21 funds, two set up a total of five so-called “blocker corporations” which allow U.S. non-profit entities to legally pretend to be foreign (i.e., Cayman) corporations in order to avoid the 35% “unrelated business income tax, which was created to prevent nonprofit groups from undertaking profit-making ventures that compete with taxpaying companies,” as the New York Times reports. The still-unanswered question is whether Romney’s huge 401-k, valued between $20 million and $102 million on financial disclosure forms, is one of the entities that invested in a blocker corporation, which would then refute Romney’s assertion that his Cayman investments had not reduced his tax.
The two Bain funds with blocker corporations are Bain Capital Asia Fund LP (mentioned in the Times article; 3blockers) and Bain Capital IX Coinvestment Fund (2 blockers).
A second issue that has been raised is that various Bain entities converted management fees to carried interest (via Ryan Grim).
While people know that the carried interest loophole (which makes management compensation into capital gains) exists and is legal, the issue raised by Professor Victor Fleischer of University of Colorado Law School is that private equity firms have come up with a way to make fees that are unarguably management fees subject to ordinary income (35% tax) into capital gains (15% tax) by “waiving” the fees in exchange for virtually certain future profit, so that the extremely slight economic risk is disproportionately small compared to the tax gain. Fleischer argues that this is flat out illegal and concludes: “Mitt Romney has not paid all the taxes required under law.” Not all experts agree. We can look forward to more argument on this issue in coming days. Even if it is legal, it is morally even less defensible than the carried interest loophole.
In the end, we are still left with the fact that the tax system for the 1% is different from that for the rest of us. Whether Romney releases more tax returns or not, that issue is not going away. And the drip, drip, drip of new information makes me think he will eventually cave in.
cross posted with Middle Class Political Economist
What is the single issue on which Mr. Romney has never flip-flopped? He stands doggedly firm on never ever releasing his tax returns.
With so many questions swirling around Romney’s byzanatine financial dealings, voters are left with very little real information about this very secretive man, who is running for the most important elected position in the world
Obama has released 12 years of tax returns
GW Bush10 years
Clinton 12 years
GHW Bush 14 years
and George Romney 12 years.
It is not just liberals who want to see Romney’s tax returns.
It is 63% of American voters who do.
The longer Mr. Romney delays, the more suspicious it appears.
What is the problem, Mr. Romney? Release your tax returns.
Romney would not send his body to serve in the US military during the “dust up” in Vietnam (Mormon mission first, now and then) why should he let the US government have any of his money?
His money is no more or less patriotic than Romney is.
You are an idiot! If he invested his 401k, then that does not affect his tax ability one whit. The 401k as you know earns everything tax free until it is paid out. For this reason, most intelligent investors will not use their 401k to invest into tax sheltered choices. Come on, get a better reason to be righteous!
To Anonymous who claims Ken is an idiot – Why the name calling? Do you know anything about UBIT? Do you know that certain investments in an IRA or 401(k) that trigger this? Do you know that as fast as congress writes the tax code to restrict certain things from escaping taxes, the .1% hire bigger lawyers to find a work-around?
I’m sure Ken knows exactly what he was writing about.
And Ken – last weekend I asked Romney to “show 5 year’s returns.” He paid as much attention to me as he does to POTUS.
Putting a 401-k offshore may affect the availability of a paper trail from original, deductible contributions to today’s fund holdings–or is that wrong? The question is whether Romney undervalued the original contributions, as opposed to being incredibly brilliant and lucky in managing the fund’s investments.
JoeTaxpayer, PJR – the author makes the following conclusion based on investments of a 401k – “which would then refute Romney’s assertion that his Cayman investments had not reduced his tax”. My point is a 401k invested anywhere in the world does not change the tax ability of the proceeds of the investment. The 401k is only taxable when it is paid out, and then as taxable income. Therefore one does not reduce ones taxes by investing a 401k one place or the other! The paper trail also does not matter. All the proceeds are taxable as ordinary income, as all the deposits into the 401k were ordinary per tax income. The is no need to track how much was deposited as there is no variation for long term cap, etc.
The authors assertion of proof is wrong!
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Joe Taxpayer, that’s not exactly accurate because the reason to defer income taxes is to reduce them. (Or do you have an alternative reason for Romney to contribute to a 401-k?) Now, in Romney’s case of a huge 401-k held overseas, nobody knows what he’ll eventually do with the funds so we don’t know how much income tax he’ll eventually pay on them. Maybe his kids will inherit the bulk of the money, or he’ll give it to charity (like the Romney Presidential Library or The Refalka Memorial Olympic Dressage Training Center).
Anyone can legitimately defer taxes to reduce them–that’s not the concern here. The concern is that he probably/maybe undervalued the assets placed into the account, deferring huge amounts of taxes to thereby reduce them.
@Anonymous, if he used his 401-k to avoid the unrelated business income tax, that would be reducing his taxes and would indeed refute his claims. But we won’t know that unless he releases some more tax returns.
@PJR, you are right, that is probably an even bigger issue regarding his 401-k.
And let us not forget that, among the many changes to income tax law in 2003, we saw entirely new types of “retirement” accounts created for high-income earners: the 401k ROTH and the 403b ROTH. I don’t remember the details, but after maxing out contributions to an individual’s regular/Roth IRAs ($5-6K), one could pay taxes on a much larger chunk of income (variously characterized, as cited at the end of this blog) and sock it into one of these employer ROTHs, free to soar and never to be taxed again.
I think Romney is hiding money offshore and that’s why he doesn’t want to release his tax returns… I read about it here: http://mozzie.me/romney-taxes