Paul L. Caron

Tuesday, October 2, 2012

NY Times: Offshore Tax Tactics Helped Increase Romneys’ Wealth

Buried deep in the tax returns released by Mitt Romney’s presidential campaign are references to dozens of offshore holdings with names like Ursa Funding (Luxembourg) S.à.r.l. and Sankaty Credit Opportunities Investors (Offshore) IV, based in the Cayman Islands.

Mr. Romney, responding to opponents’ barbs about his use of overseas tax havens, has offered a narrow defense, saying only that the investments, many made through the private equity firm he founded, Bain Capital, have yielded him “not one dollar of reduction in taxes.”

A review of thousands of pages of financial documents and interviews with tax lawyers found that in some cases, the offshore arrangements enabled his individual retirement account to avoid taxes on its investments and may well have reduced Mr. Romney’s personal income tax bills.

But perhaps a more significant impact of Mr. Romney’s offshore investments has been on the profit side of the ledger — in the way Bain’s tax-avoidance strategies have enhanced his income.

Some of the offshore entities enabled Bain-owned companies to sidestep certain taxes, increasing returns for Mr. Romney and other investors. Others helped Bain attract foreign investors and nonprofit institutions by insulating them from taxes, again augmenting Mr. Romney’s bottom line, since he shared in management fees based on the size of each Bain fund.

The documents — which include confidential Bain prospectuses and foreign regulatory filings, many previously unreported — illustrate how these tax-avoidance strategies are woven into the fabric of Bain’s deal making. While hardly a novel concept and not unique to Bain, the inevitable result is that elite investors like Mr. Romney are able to increase their fortunes in ways unavailable to most taxpayers.

The biggest beneficiaries of government largess are not those who struggle along on Social Security payments, Medicare or Medicaid benefits, or earned-income tax credits, despite what Mitt Romney has told his donors. Rather, they are those at the highest end of the income scale: government contractors, corporate farmers and very rich individuals who have figured out how to exploit the country’s poorly written tax code for their benefit.  

The latter group’s most prominent member is Mr. Romney himself, whose astonishingly low tax rates are made possible by finding and using every loophole and flaw in the code. What his tax practices show is not illegal or unethical behavior, but rather the unfairness of a tax system that provides its most outlandish benefits only for the very, very rich and savvy. What is worse is that Mr. Romney has proposed making this profoundly dysfunctional system even more unfair.

(Hat Tip: Mike Talbert.)

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I agree that hyperbole like "every loophole and flaw" has no place in journalism. Morever, even in Mr. Romney's case, it's simply not true.

Nevertheless, what is true is that investors with resources like Mr. Romney are able to take advantage of tax strategies that more typical investors cannot. This sets him apart from the vast majority of American voters in a way that does and should make the voters a little suspicious of his ability to represent them. Without even getting into the foreign investments or the carried interest trick (not the usual carried interest, but the legally suspect scheme that transforms management fees into capital gains), someone with no tax experience at all who looks at the Romneys' return will see that he earned no salary or wage income during 2011 and paid no mortgage interest. Those two minor points alone will make the average American voter scratch his head and wonder whether a President Romney can represent him.

If I were as rich as Romney, I probably wouldn't have any salary income or mortgage income, either. Why would I? Salary income is a very inefficient way to earn income, after all, and the limitations on the mortgage interest deduction will just not justify my continuing to carry that debt when I don't have to. Still, would it be right that a voter question whether I can appreciate his circumstances given that mine are so wildly different? I think it would.

Posted by: Robert K. Morrow | Oct 4, 2012 8:25:15 AM

In keeping with its usual penchant for understatement, the N.Y. Times states that Mitt Romney not only found, but then also actually availed himself of, "...every loophole and flaw in the code." Why would anyone pay attention to the N.Y. Times?

Posted by: Joseph W. Mooney | Oct 3, 2012 6:58:56 AM

Let me get this straight: well-advised foreign investors and nonprofits insist on investing in Bain funds through foreign corporations. Yet according to this article this is somehow BAIN's and ROMNEY's tax-avoidance strategy because it attracts those investors and thereby increases their management fees? (Those fees are subject to tax, of course). Like so many news articles written by people who have no understanding of the tax law (and by some who feign outrage but know better) this article reflects ignorance and confusion.

Romney is right, of course, that he has not personally saved one dollar of tax from offshore investments. It is the foreign and non-profit investors who are responsible for all the tax-sensitive structuring. Individual U.S. investors do not typically invest through foreign entities. That is because individual taxpayers are generally penalized, rather than benefitted, upon making investments in foreign corporations.

Posted by: tax guy | Oct 2, 2012 2:37:54 PM