Mitt Romney, “Hero of Finance”
Romney’s backers say he did the tough work needed to restructure the economy. Actually, he seized opportunities that the tax, securities, and bankruptcy laws should never have given him.
“Creative destruction” is Mitt Romney’s best defense for his career in private equity and the trail of displaced workers some of his ventures left behind. The idea comes from the economist Joseph Schumpeter, who argued that capitalism generates economic growth through “gales of creative destruction” that sweep away obsolete technologies and products. As Romney’s advocates have it, that’s what his firm, Bain Capital, has advanced—painful economic changes that are essential to a rising standard of living.
If Romney made his fortune that way, he deserves the praise that some conservatives have lavished on him for contributing to American competitiveness. But that isn’t the whole story. Much of the work of Bain and other private—equity firms has little to do with the kind of wrenching Schumpeterian change that contributes to growth, still less to the job creation for which Romney claims credit.
Technological innovation was at the heart of Schumpeter’s vision, and no one today objects to the role of venture capital in financing tech start-ups or to the re-engineering of businesses to take advantage of new technology. Reorganizing firms to exploit special provisions in tax, securities, and bankruptcy laws is a different proposition. That kind of restructuring can be immensely profitable, transferring wealth to investors while making no positive contribution to growth and employment.
The standard operating procedure for private equity has been to buy firms, take them private, and load them up with debt. By taking them private, the new owners escape from the securities laws, which apply only to publicly traded companies. By loading them with debt, they cut the companies’ taxes because the interest is fully deductible from profits, and they use those tax savings to pay themselves generous fees and dividends. If an overleveraged enterprise then fails, they take it into bankruptcy, firing workers and stiffing creditors even though their own firm has already pocketed large gains. And because private-equity partners can receive those gains as “carried interest” (taxed only at 15 percent), they benefit from special legal advantages in yet one more way.
This kind of restructuring doesn’t just siphon off wealth; it can also interfere with genuine innovation because debt-burdened companies are sometimes starved for capital to invest in new technologies and products. Private equity has generally sought a high return with a quick exit instead of providing patient capital for long-term gains. That’s great for those who are in on the deal, but not for the national economy.
Private equity has also contributed to a broader change related to rising economic inequality. Instead of corporations serving a complex of interests—owners, workers, and communities—they have increasingly become wholly dedicated to maximizing returns to owners. This “shareholder-value revolution” has helped to drive the overexpansion of the financial sector and to funnel the gains from economic growth into fewer hands—Romney’s, for example.
That Romney served investors well at Bain, no one doubts. That’s not a credential, however, for solving the nation’s problems. We ought to be reducing the incentives for the maneuvers that enriched Romney—for example, by cutting the deductibility of interest on debt incurred in acquiring companies and raising taxes on “carried interest” so that financiers pay no lower a tax rate than the rest of us. Good luck with that in a Romney presidency.
There is a larger point about Romney’s career and good public policy. The turmoil in the private economy, whether generated by creative destruction or financial manipulation, is a reason we need progressive government. Individual firms cannot be counted on to retrain workers for new jobs or to provide them with long-term security; the very instability of private employment is why workers need to be able to count on government when they get displaced to help them obtain the education and skills to adapt. The best “national innovation systems” minimize the harms to workers while advancing technological progress.
Schumpeter’s 1942 classic, Capitalism, Socialism and Democracy, was a dour book. A true believer in capitalism, Schumpeter nonetheless thought it was doomed because people wouldn’t put up with creative destruction, and businessmen lacked the heroic qualities to become effective political leaders. He was wrong on both counts. Instead of resisting innovation, we welcome it, and some business leaders, like Steve Jobs, have become popular heroes.
But Romney is no Jobs, and even his most successful investments—Domino’s Pizza, Staples, and Sports Authority—don’t quite make him a Schumpeterian hero. There is one good thing about his candidacy, though. It highlights the inequities that have helped make people like Romney so wealthy and powerful.
Romney Failed To Disclose Swiss Bank Account Income
Mitt Romney‘s campaign is amending the financial disclosure forms he filed in 2007 and 2011 to acknowledge that a Romney trust held a Swiss bank account, a detail that had been missing from both reports.
“An amendment is being filed to address this minor discrepancy,” a campaign official told ABC News in an email Thursday in response to questions about the apparent omission.
The discovery that the Romneys had $3 million in an account with the Swiss bank UBS came only after the Republican presidential candidate released his tax returns for 2010 on Tuesday. The campaign had maintained that it was not necessary to disclose the Swiss account because Romney’s money manager, Brad Malt, had shuttered it in early 2010.
Several Republican election lawyers told ABC News Thursday that the account still needed to be disclosed because a Romney trust earned about $1,700 in income on the account during 2010. The campaign’s decision to amend the forms was first reported by the Los Angeles Times.
At the same time, questions from ABC News about undisclosed income that appeared on Newt Gingrich‘s tax return have led Gingrich to announce that he, too, will be amending his financial disclosure report. Gingrich’s returns showed he received $252,500 in wages from Gingrich Holdings Inc. in 2010, but those wages do not appear anywhere on his presidential disclosure report.
“An internal account review found the need to amend the reporting,” said a Gingrich campaign official. “It was done immediately.”
Romney also decided to amend the report from his 2007 run for president, a decision first reported by the New York Times. Those who track the finances of presidential candidates said they found the failures to disclose these key financial details distressing. Bill Allison, editorial director of the non-profit watchdog group the Sunlight Foundation, said the whole purpose of the disclosure reports is for candidates to provide an honest look at their finances to voters.
“Obviously, if you don’t give them the information before the vote, it defeats the whole purpose of disclosure,” Allison said.
Melanie Sloan, executive director of the non-partisan group Citizens for Responsibility and Ethics in Washington said she, too, was dismayed — noting that while in Congress, Gingrich had been called out for failing to include information on his disclosure reports.
“You’d think someone once sanctioned by the House of Representatives … would be a little more careful with his financial disclosure forms,” she said.
The discovery that Romney’s vast holdings included an account in Switzerland, a country long notorious for helping the very wealthy hide their assets, came during his release of his tax return earlier this week. Malt, who oversees Romney’s blind trusts, acknowledged during a conference call with reporters that he decided to shut down the Swiss account because he worried it could create a headache for Romney’s campaign. “It might or might not be consistent with Governor Romney’s political views,” he said. “The taxes were all fully paid … it just wasn’t worth it. And I closed the account.”
That suggests, Allison said, that the campaign had a motivation to exclude any evidence of the Swiss account from the candidate’s forms. The Romney campaign called the omission an oversight.
Allison noted that there is generally no penalty for a candidate who leaves something off a disclosure report, and then goes back to amend the report if the missing information is discovered.
“Nobody is going to get into trouble for this,” he said. “That is the problem with the disclosure system.”
By: Matthew Mosk and Brian Ross, The Blotter, ABC News, January 26, 2012
Three Key Questions Raised By Romney’s Tax Revelations
Mitt Romney’s campaign has tried desperately to put a lid back on the can of worms that burst open weeks ago when the one-time GOP presidential front runner declined to release any of his tax returns.
But by actually releasing his 2010 return, and an estimation of his 2011 return, camp Romney has provided reporters with some, but not all, of the answers they’re looking for as they try to paint a complete picture of the finances of one of the wealthiest candidates for President in U.S. history.
Romney’s revelations confirm that his effective tax rates in the past couple years have been as low or lower than those of workers with truly modest means. They also confirm that he’s availed himself of truly complex tax strategies designed to boil his liability down to the lowest level allowed by the country’s heavily rigged, labyrinthine tax code. And we know, too, that these are things Romney didn’t want voters to know — at least not yet.
But they raise a series of new questions that will likely require Romney to disclose several years’ worth of additional tax returns if he wants to answer them satisfactorily. Here are three big ones that touch generally on the theme of Romney’s efforts to reduce his tax burden by taking advantage of areas of the law that simply aren’t available to most people.
How Low Do They REALLY Go
Romney’s effective tax rate was 13.9 percent of his adjusted gross income (AGI) in 2010, and is expected to be slightly higher in 2011. Set aside for now the fact that for a high net worth individual like Romney, AGI often understates what you might call “true” income — meaning these effective tax rates probably overstate Romney’s 2010 and 2011 tax liability. It turns out that in 2009, in the wake of the financial crisis, Romney very likely managed to get his effective tax rate much lower than 13.9 percent. In 2010, Romney carried over $4.9 million in capital losses from 2009. This is a consequence of the tax code’s leniency toward investors who take hits in bad years. But as tax lawyer Ed Kleinbard told reporters during a Tuesday conference call organized by the DNC, “that means he paid no tax on any of his capital gains in 2009, including tax on his carried interest in 2009.” That’s not necessarily because Romney actually lost money in 2009, either. As Kleinbard explained, a common tactic for Americans with capital gains is to “harvest” — by selling off certain investments that lose value investors can count the losses against gains elsewhere in their portfolios. If those losses exceed the gains by more than a certain amount, they roll over into the following tax cycle. Unless Romney had significant sources of non-investment income, that suggests his effective tax rate in 2009 was much lower than 13.9 percent. And remember, he jokes he’s been unemployed for years.
That UBIT Bit
One of camp Romney’s chief claims has been that his offshore investments haven’t been covers for deferring or avoiding U.S. taxation. But as described, here, there is one tax strategy that could have allowed Romney to avoid a big, 35 percent tax on unrelated business income, as it pertains to his massive individual retirement account — if that account is invested in an offshore entity. When asked Tuesday if Romney has ever benefited from this strategy, his trust adviser Brad Malt said, “I don’t know the answer to that — let us get back to you on that.” We haven’t received an answer yet, but we’ll pass it along when we get it.
Swiss Amiss?
Romney’s 2010 tax return reveals a Swiss bank account. “It is listed because I set that account up for diversification in 2003 when I became trustee of the blind trusts,” Malt said. “It is a bank account. Nothing more, nothing less. An ordinary bank account. It earns some income which is fully reported on the form 1040. In the 2010 tax return, you’ll see approximately $1,700 in interest earned by this account, which is reported. The tax is fully paid just as if this were a U.S. bank account. Nothing more complicated than that. By the way, I did close this account in early 2010. It no longer exists.”
Some reports suggest that the account was closed for political reasons, but Malt said “I regularly review Governor Romney’s investments just in connection with my periodic reviews, I decided that this account wasn’t serving any particular purpose….Again, taxes were all fully paid etc. But it just wasn’t worth it. And I closed the account.” Tax experts have noted to TPM in recent days that U.S. law changed shortly before then, to make it harder for U.S. persons to avail themselves of tax havens. Shortly thereafter the IRS gave people secreting their money abroad a time window for compliance. Taking camp Romney at its word, that wasn’t really their concern. Even if the account existed for purposes of diversification that could be politically embarrassing in and of itself, constituting a bet against U.S. currency. But to fully answer the question, we’d need to know if that bank account is declared in the years before the law changed. Camp Romney did not respond to a request for comment on this point Tuesday.
By: Brian Beutler, Talking Points Memo, January 25, 2012
“The Larger Debate Is Just Beginning”: What We’ve Learned From Romney’s Returns
Mitt Romney’s campaign, as promised, released the former governor’s 2010 tax returns, as well as an estimate for his 2011 returns, and we’re starting to get a sense of why the Republican candidate wasn’t eager to share these details.
Mitt Romney offered a partial snapshot of his vast personal fortune late Monday, disclosing income of $21.7 million in 2010 and $20.9 million last year — virtually all of it profits, dividends or interest from investments.
None came from wages, the primary source of income for most Americans. Instead, Romney and his wife, Ann, collected millions in capital gains from a profusion of investments, as well as stock dividends and interest payments.
By any fair estimate, over $42 million in income over two years isn’t bad for a guy who jokes about being “unemployed.” Indeed, Romney would be in the top 1% based solely on the income he makes in one week.
Romney said last week that his rate was “closer to 15%,” but as it turns out, despite his vast wealth, he actually only paid a 13.9% rate last year — lower than his political rivals who aren’t nearly as wealthy, and lower than most middle-class American workers.
And what about those overseas investments?
His 2010 return also showed that he had a financial account in Switzerland that was closed in 2010 and that he generated income from overseas investments. He also reported financial accounts in Bermuda and the Cayman Islands.
A Reuters report added that Romney’s Swiss bank account was closed in 2010 “after an investment adviser decided it could be politically embarrassing to Romney.”
I suspect those with far more expertise in this area will subject these materials to considerable scrutiny, but at first blush, the disclosure appears to raise at least as many questions as it answers.
Why did Romney set up $100 million trust funds for his sons without paying any gift taxes? Were his accounts in the Caymans and in Switzerland created to avoid paying taxes? Was the closing of the Swiss account related to this IRS investigation? And given all of the questions surrounding Romney’s Bain-era work, why does the Republican candidate continue to insist he won’t disclose returns from previous years?
What’s more, following up on a point from last week, even if Romney argues that he’s simply playing by the rules — taking advantage of existing tax loopholes to pay lower rates than much of the middle class — this doesn’t explain why Romney is eager to exacerbate issues on tax fairness with his tax plan that makes the problem worse.
In a debate over tax fairness and income inequality, Romney is practically a case study for What’s Gone Wrong, but he can at least plausibly argue that this is a mess he benefits from, but didn’t create. Romney, however, prefers to believe the problem doesn’t exist.
Greg Sargent did a nice job capturing the larger political context:
I’m not sure the Obama campaign could have scripted this more perfectly. In a remarkable bit of good timing, President Obama is set to deliver a State of the Union speech focused on income inequality and tax unfairness on exactly the same day that Mitt Romney will reveal that he made over $40 million in the last two years — all of it taxed at a lower rate than that paid by middle class taxpayers. […]
Romney doesn’t just disagree with Obama on these fundamental issues; he personally symbolizes virtually the entire 2012 Democratic message. He is the walking embodiment of everything Dems allege is wrong with our system and the ways it’s rigged in favor of the wealthy and against the middle class. Yet this is the standard bearer the GOP seems set to pick.
Romney and his aides believe these materials should end the discussion. That’s backwards — the larger debate is just beginning.
By: Steve Benen, Contributing Writer, Washington Monthly Political Animal, Janueary 24, 2012
Newt Gingrich Exploits Politics Of Class And Culture
Conservatives may denounce class warfare, yet by shrewdly combining the politics of class with the politics of culture, Newt Gingrich won his first election in 14 years, humbled Mitt Romney and upended the Republican Party.
He also exposed profound frailties in Romney as a candidate, throwing him badly off-balance on questions related to his personal wealth, business career and income taxes. Unless Romney finds a comfortable and genuine way of talking about his money, he will present President Obama’s team a weakness that they’ll exploit mercilessly. The country is thinking more skeptically about wealth and privilege in the wake of the Occupy Wall Street protests. Romney has not adjusted.
Gingrich skillfully set up his opponent to step on the landmine of class by transforming Romney from his self-cast role as a successful businessman into a heartless financier more interested in profits than in job creation.
The conventional view is that Gingrich’s critique of Bain Capital, Romney’s old company, didn’t work because Republicans dislike assaults on “free enterprise,” a phrase Romney still hopes to use as a self-protective mantra. But while Gingrich softened his attacks on Bain, he did so only after creating the context in which Romney was forced to answer query after query about his financial status, and he repeatedly fumbled questions about releasing his tax returns. Romney finally announced Sunday he’d make public his 2010 return and a 2011 estimate this week.
All this allowed Gingrich to draw a class line across South Carolina. Exit polls showed Romney carrying only one income group, voters earning more than $200,000 a year. Voters earning less than $100,000 a year went strongly for Gingrich.
Yet conservative class politics is always inflected by culture and ideology, the potent mix that Pat Buchanan brought to Richard Nixon’s attention four decades ago. South Carolina’s two debates offered Gingrich a showcase for his war on those elites whom the conservative rank-and-file despise.
There was also the matter of race. Gingrich is no racist, but neither is he naive about the meaning of words. When Fox News’ Juan Williams, an African-American journalist, directly challenged Gingrich about the racial overtones of Gingrich’s staple reference to Obama as “the food-stamp president,” the former House speaker verbally pummeled him, to raucous cheers. As if to remind everyone of the power of coded language, a supporter later praised Gingrich for putting Williams “in his place.”
Then came the rebuke to CNN’s John King, who asked about the claim from Gingrich’s second wife that her former husband had requested an “open marriage.” By exploding at King and the contemporary journalism, Gingrich turned a dangerous allegation into a rallying point. Past sexual conduct mattered far less to conservatives than a chance to admonish the supposedly liberal media. Gingrich won evangelicals by 2-1, suggesting, perhaps, a rather elastic definition of “family values” — or a touching faith in Gingrich’s repentance.
With unremitting attacks on Romney as a “Massachusetts moderate,” Gingrich created yet another link between his opponent and elite Yankees loathed by the Southern right. He reaped landslide margins among conservative groups, marginalizing the buttoned-down, less electric Rick Santorum.
There were also hints in exit polling that hostility to Romney’s Mormon’s faith may have added to his troubles, without help from Gingrich. About a quarter of South Carolina’s voters said a candidate’s religious beliefs mattered a “great deal” to them, and Romney secured a scant 10 percent of their ballots.
If there is solace for Romney, it is in the experience of an earlier front-runner. In late March 1992, the day before the Connecticut primary, I found myself standing with a colleague next to Bill Clinton in a coffee shop in Groton. Clinton surprised us by suggesting he would lose the next day to Jerry Brown, now California’s governor. Voters were in an ornery mood, he said, and many of them wanted to declare: “I don’t want this to be over.”
Clinton was right. He lost Connecticut. Yet two weeks later, he swept a series of primaries, including a decisive contest in New York.
Florida, which votes next on Jan. 31, is Romney’s New York. But there is a difference. Clinton was a master campaigner with what has quaintly been called the common touch. Romney has so far proved himself to be more a master of discomfort and unease, especially with his own wealth. Unless he learns how to navigate the country’s new etiquette about financial privilege, Romney will continue to be plagued by the now twice-resurrected Gingrich — and, if he survives Gingrich’s challenge, by a freshly minted populist named Barack Obama.
By: E. J. Dionne, Opinion Writer, The Washington Post, January 22, 2012
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