There’s been lots of talk about Mitt Romney’s investments this week, kicked off by an article in Vanity Fair by a Nicholas Shaxson, a regular critic of offshore finance. Much of the talk uses vague adjectives like “shady” to describe his investments, but never quite gets down to the facts and the law. ThinkProgress Economy’s “5 Shady Financial Tactics Employed by Mitt Romney” summarizes the criticism at http://thinkprogress.org/economy/2012/07/03/510246/romney-financial-tactics/?mobile=nc , so let’s discuss them one by one:
1. Romney owns a corporation in Bermuda.
Filings describe Sankaty High Yield Asset Investors Ltd. as “a Bermuda corporation wholly owned by W. Mitt Romney.” The corporation was established by Romney in 1997, but was transferred into a blind trust under Ann Romney’s name the day before Mitt began his tenure as governor of Massachusetts. Bermuda is a famed tax shelter.
This implies that owning a corporation in Bermuda is somehow wrong, but fails for lack of facts. Based on the Vanity Fair site, it seems that Sankaty was set up for Bain to pay Romney his post-employment share of their profits for the work he did while at Bain. Because US citizens are taxed on a worldwide basis, siting it in Bermuda did not allow the Romneys to escape any taxes. It did allow Ann to invest the money internationally. She could pool the money with citizens of other countries without them being subject to tax in countries other than their home country. That’s what finance in Cayman is all about too. Our investors pay taxes in their home country under their home country’s rules, but don’t have to pay taxes in another investors’ home country.
2. Romney uses special, tax-free stocks to inflate his retirement account.
Romney’s independent retirement account set up during his time at Bain Capital could contain as much as $102 million — a staggering amount given limits on employee contributions. The Vanity Fair piece parses how Romney inflated his IRA so much: When Bain bought and sold companies, it gave employees select, high-risk, high-revenue shares of the business. These shares went straight into Romney’s IRA, so they were untaxed profits. And since they started off low, the shares were seen as being below contribution limits — despite the fact that they promptly grew into a large fortune.
ThinkProgress hasn’t been reading the news lately. Forbes reports that IRAs have been successfully used by a number of investors to achieve very high returns. Venture Capitalists in the technology industry put shares of new companies in their IRAs. Some have succeeded immensely – like Facebook – while others have gone nowhere. It’s only the successes like Facebook that we hear about in the news. ThinkProgress also fails to mention that when money is taken out of a traditional IRA, it is taxed at the ordinary income rates in effect at that time, rather than the lower capital gain rates. So it’s hardly tax free. The Romneys will have a comfortable retirement, but they will pay higher tax rates on this investment than if they had invested outside their IRA.
3. Romney’s blind trusts are not-so-blind.
Ann and Mitt Romney keep their investments in a “blind trust,” which means that they avoid making investment decisions that may impact their political work. But the Romney’s blind trust, which is run by their personal lawyer, includes investments in a company owned by their own son.
We’ll have to leave this one to the Romneys, it doesn’t have much to do with offshore finance or US international taxation. What was required by Massachusetts when he became governor is a local issue.
4. Romney uses a so-called “blocker corporation” to avoid taxes on his IRA.
Though Romney says his investments in the Cayman Islands do not help him lower his tax bill, Romney’s IRA appears to have invested in an offshore corporation which then invests in U.S. businesses, to avoid paying the U.S.’s Unrelated Business Income Tax.
ThinkProgress better check its Alumni News. No doubt it has a solicitation for the endowment campaign and boasts of a higher ranking in the U.S. News and World Report college guide if financial security for the Alma Mater can be achieved. Virtually every college endowment of any size in the US, and most public pension funds, do the same thing as discussed here. If the Romney’s used their IRA to partner with pension funds or endowments to invest internationally, they had to use this same form.
It’s due to a quirk in US tax law. Non-profit entities like endowment funds and pensions are taxed if they invest with leverage in the US. But if they invest with leverage through an offshore vehicle, the tax doesn’t apply.
The US Congress is aware of this, but if they change it, the college presidents and labor bosses will all call and complain.
5. Bain Capital helped financial fraudsters dodge taxes.
Bain received investments from “the newspaper tycoon, tax evader, and fraudster Robert Maxwell” (who has since died), as well as other financial oligarchs, which helps provide them “with additional ways to skip around tax, disclosure, and regulatory requirements that they might trigger if they invested directly.”
Hmm. This seems to make Romney responsible for the personal failures of anyone who invested in Bain. That’s a pretty broad standard. It’s like political campaigns being responsible for everyone who sends them a donation. US News reports regular turn up donors who are less than credible, but that doesn’t mean that Barack Obama or Mitt Romney engaged in or condoned their activities.
We’ll be back to set the record straight on offshore finance as the US Presidential campaign continues.