The New York Times is reporting that Bain Capital, the private equity firm founded by GOP presidential nominee Mitt Romney, is among a number of firms being investigated by New York Attorney General, Eric Schneiderman, for failing to pay taxes.
The New York AG’s Taxpayer Protection Bureau has issued subpoenas to at least twelve financial firms, including Bain, looking into whether the companies converted management fees (taxed as ordinary income) paid by investors into fund investments which are taxed at a dramatically lower rate.
The controversial tax avoidance scheme came to light last month when Bain Capital internal financial information was published online by Gawker.com , however the investigation had reportedly commenced prior to the publication and is not believed to be tied to the document dump.
The tax strategy — which is viewed as perfectly legal by some tax experts, aggressive by others and potentially illegal by some — came to light last month when hundreds of pages of Bain’s internal financial documents were made available online. The financial statements show that at least $1 billion in accumulated fees that otherwise would have been taxed as ordinary income for Bain executives had been converted into investments producing capital gains, which are subject to a federal tax of 15 percent, versus a top rate of 35 percent for ordinary income. That means the Bain partners saved more than $200 million in federal income taxes and more than $20 million in Medicare taxes.
While Governor Romney has not been active at Bain Capital for quite some time, he does continue to receive profits from the company and held investments in some of the funds that utilized the tax avoidance strategy.
The Romney campaign issued a statement indicating that the Governor had not benefited from the practice.
R. Bradford Malt, an attorney for Governor Romney who manages the Governor’s investments and trusts, argued that investing fee income is a common, accepted and totally legal practice. “However, Governor Romney’s retirement agreement did not give the blind trust or him the right to do this, and I can confirm that neither he nor the trust has ever done this, whether before or after he retired from Bain Capital.”
According to Jack S. Levin, a finance lawyer who has represented Bain Capital, the practice has been in use by investment firms for twenty years and is something the IRS knows about.
The investigation will, inevitably, raise questions as to whether or not Attorney General Schneiderman, who has strong contacts to the Obama Administration, is attempting to embarrass Romney as we head towards the November election.
Still, prominent investment firms, including Blackstone Group and The Carlyle Group, have noted in regulatory filings that they have not participated in diverting management fees into investments in their funds.
By: Rick Ungar, Contributor, Forbes, September 1, 2012
“Delusional Supporters”: Mitt Romney Has Almost Certainly Not “Already Paid Taxes On His Ordinary Income”
You can’t write about tax rates these days without getting shelled by those who feel their favorite Presidential candidate is being attacked by whatever you say.
That’s too bad, because it hinders the ability to have a reasoned discussion about taxes, which is a discussion this country desperately needs to have.
(Almost no non-partisan economist thinks our budget deficit can be solved by cutting spending alone. Taxes will almost certainly eventually have to go up. The question is by how much and on who and when. And that’s a debate we need to have in as cool-headed a way as possible.)
Anyway, anytime one points out that Mitt Romney pays a very low tax rate for a citizen who makes as much money has he does, one quickly hears from Romney supporters who say, effectively, the following:
You idiot. Don’t you understand the difference between taxes on “ordinary income” and taxes on “capital gains”? Mitt Romney already paid taxes on his ordinary income–at normal ordinary income rates! Now you want to tax him twice–by making him pay the same taxes on his capital gains!!!
(Some Mitt Romney supporters are much more polite when making this argument, which is much appreciated.)
To answer the question, yes, I do understand the difference between taxes on ordinary income and taxes on capital gains. And I understand the rationale for having the two tax rates be different (to provide an incentive for investors to risk their capital and thus help build businesses that employ people). And I actually agree with that rationale. I don’t think we can afford to have the difference between the two tax rates be as big as it is, but I agree with the rationale.
But here’s the thing…
Romney’s supporters are almost certainly wrong when they assert that Romney “already paid taxes on his ordinary income” and that now he’s just risking his “capital.”
This is because Mitt Romney has almost certainly taken advantage of one of the most outrageous tax loopholes in our entire tax code: The “carried interest” tax exemption.
This loophole allows money managers to structure the performance fees they are paid as “capital gains” instead of as ordinary income.
The loophole therefore allows money managers to avoid paying ordinary income taxes on their performance fees and then make much bigger bets than they would be able to make if they actually had to pay taxes on their earnings. When the money managers use very sophisticated tax shelters, it also allows them to defer paying taxes for years (if not decades)–and then only pay low long-term capital gains rates instead of ordinary income rates.
Although we don’t know for certain that that’s what Mitt Romney has done (because he won’t release his tax returns), it seems highly likely that this is what he has done. And, in fact, the obvious unfairness of this tax loophole seems like one big reason he won’t release his returns.
To be clear:
Taking advantage of the “carried interest” tax loophole is not illegal or wrong. Romney has done what any smart tax-minimizing person in his position would have done.
But the loophole itself is outrageous.
And the existence of the loophole means that Mitt Romney has almost certainly not “already paid taxes on his ordinary income.”
Rather, Mitt Romney has probably figured out ways to make sure that many of the fees he was paid for managing clients’ money at Bain were directed into future Bain investments before he paid taxes on them. These Bain investment then presumably did extraordinarily well, and Romney’s pre-tax ordinary income compounded tax free. And now, presumably, Romney is paying himself “dividends” or “long-term capital gains distributions” out of these Bain funds, which means that not only his original fee income but his pre-tax investment gains are being taxed at vastly lower long-term capital gains tax rates.
If Mitt Romney had actually paid ordinary income taxes on his fee income and then bet his after-tax income on future Bain investments, those who support today’s low rates on long-term capital gains would be justified in saying this is perfectly defensible, fair, and acceptable.
But Romney almost certainly didn’t.
Rather, Romney almost certainly took advantage of an outrageous tax loophole to take home tens or hundreds of millions more dollars than he would have if he had paid ordinary income tax rates.
So the Mitt Romney supporters who suggest that he paid these rates, unfortunately, appear to be delusional.
By: Henry Blodgett, Business Insider, August 17, 2012
I have no idea who is advising Mitt Romney on how to handle questions about his history of paying or not paying taxes. But whoever it is should probably get fired.
Perhaps Harry Reid’s taunts about hearing from a reliable source that Romney stiffed Uncle Sam entirely over the last decade had an impact after all. Otherwise why would he go out of his way to let it be known he paid “no less” than a 13% tax rate during the years for which he is refusing to release his returns?
I mean, 13% is not a high rate for a guy with Mitt’s wealth; certainly nothing approaching the allegedly confiscatory rates the poor job-creators of America are toiling under, making them wonder each and every day if it’s time to Go Gault. And the number raises the rather obvious question: 13% of what? Total income? Adjusted Gross Income? Taxable income? Ezra Klein suggests it may be that last measurement, which may be the only one under which he can claim a double-digit tax burden.
If he intends to gut it out and never release his tax returns, he might be better off just saying “It’s none of your damn business, and if I’d done anything wrong, the IRS would have locked me in leg-irons by now.” This drip-drip-drip of undocumented assertions raises a lot more questions than it answers.
Mitt reminds me of a guy I once knew who was asked in a job interview about his religious practices, which were somewhere between non-existent and hey-I-listen-to-Christmas-music! Instead of admitting that, he kept making excuses to the interviewer (who pretty much thought everyone should be forced to go to church weekly) about his busy schedule and good intentions and so on and so forth. He didn’t get the job, but talked about the interview, and soon gained the nickname of “Digger.” Mitt’s a “digger,” too.
By: Ed Kilgore, Contributing Writer, Washington Monthly Political Animal, August 16, 2012
As a rule, family members of candidates shouldn’t be considered political players, but once those family members become campaign surrogates and enter the political sphere making partisan arguments, there’s nothing inappropriate about scrutinizing their comments.
Take Ann Romney’s latest defense of her husband’s secrecy, for example.
Ann Romney sat down with NBC’s Natalie Morales and when the subject turned to the still-hidden tax returns, the Republican became quite agitated. Romney insisted that her husband’s campaign has done “what’s legally required of us,” which is true, but fails to meet accepted norms, standards, and expectations.
She added, “There’s going to be no more tax releases given.” I assume that means outside of the 2011 returns Mitt Romney has promised to release, but has not yet disclosed, though Ann Romney didn’t elaborate.
She went on to say, “There’s nothing we’re hiding.” Except the tax returns, the tax rates paid, and the explanation for the Swiss bank account, the shell corporation in Bermuda, and the cash in the Cayman Islands. Other than hiding all of that, they’re not hiding anything.
And why will the Romneys refuse all additional calls for disclosure, even from Republicans? According to Ann Romney, it’s because Democrats might use the materials to make Mitt Romney look bad.
I continue to marvel at this deeply odd argument. As Dahlia Lithwick and Raymond Vasvari recently explained, “[Romney] isn’t actually claiming that his opponents will lie. He’s claiming he’s entitled to hide the truth because it could be used against him…. These are tax returns. Factual documents. No different than, say, a birth certificate. But the GOP’s argument that inconvenient facts can be withheld from public scrutiny simply because they can be used for mean purposes is a radical idea in a democracy.”
And yet, this radical idea is now the Romneys’ only talking point on the issue.
By: Steve Benen, The Maddow Blog, August 15, 2012
Democratic Sen. Harry Reid of Nevada alleged, both in an interview with the Huffington Post and then later on the Senate floor, that Mitt Romney had not paid taxes in 10 years. The battle continues.
Romney called on Reid to reveal the source for his claim that he has not paid taxes for 10 years, stepping up pressure as two major fact-check sites ruled Reid had no basis for the “incendiary” allegation. (Sidebar: Those fact check sites also ruled that Romney’s claim of creating 100,000 plus jobs had no basis in truth.) Romney said he doesn’t believe Reid has a credible source but urged the Senate Democratic leader to reveal who it is.
“I don’t really believe that he’s got any kind of a credible source,” Romney said. “I don’t know who gave him this line of reasoning, whether it came from the White House or the DNC or a staffer, but he ought to say where it came from, and then we can find out whether that person has any credibility. I know they don’t.”
Reid said this is not about him; it is about Romney and his unwillingness to share his tax returns with the American people. Republicans got on the president and press secretary Jay Carney for not pushing Reid to back off or reveal his source, as if Reid were a child in a daycare center that the Obama administration runs. When I debated my usual sparring partner on the right, talk host Lar Larson, he alleged that Reid was doing this to help the president, calling it “sleazy.”
Reid’s remarks are his remarks. He’s an adult, and is not controlled by some imaginary string between the White House and the Senate, regardless of the right wing’s perception. Romney said that Reid “lost a lot of credibility.” And if that’s the case, Romney should be thanking Reid, not chastising him.
So which is it? A sleazy tactic by Reid to help the president? An unsubstantiated remark by an angry Democratic senator who refuses to leak his source?!
I’ll tell you what it is. It is Romney, continuing to look down his nose at the American people with the elitist snobbery that gets him the low likeability in poll after poll after poll. The same attitude that got both the Brits and the Palestinians angry with him on his world tour. But it goes beyond that.
This goes back to 1973 when then Vice President Spiro Agnew plead no contest to tax evasion. It was then that the American people demanded to see the tax returns of candidates for president and vice president. And although this practice is not a law and is not in our Constitution, it has been a tradition that has been agreed to by all presidential candidates on both sides of the aisle.
We all know Romney’s father provided numerous years of tax returns. We know that Ronald Reagan provided six, Sen. John Kerry 20, Sen. Bob Dole 29, and President Obama 12! And Mitt Romney? One. Republican Sen. John McCain of Arizona, when running for president, provided two years of tax returns, the lowest provided by any presidential candidate left or right. (The only exception was Gerald Ford, who was sworn in as president after the resignation of Richard Nixon—and he even provided a summary of years of returns.) And McCain has provided other tax returns for Senate campaigns throughout his career. Romney has provided the American people with one year (2010) and a summary for 2011.
So, this is not about Reid’s source as Romney wants you to believe. Romney should thank Reid for the diversion. This is about what voters, both left and right, have asked Romney to do, which has been to do exactly what presidential candidates have been doing for decades: provide their tax returns.
For a man who says he wants to run this country like he ran his companies, we need to know: How much did you make? Give to charity? Pay in taxes?
Last week Romney said that Reid should “put up or shut up,” Romney needs to heed his own advice. And in doing so, would prove if Reid’s comments are true or false. Romney, America’s waiting.
By: Leslie Marshall, U. S. News and World Report, August 8, 2012