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Thread: Romney's 15% Problem

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    Romney's 15% Problem

    Romney's 15-Percent Problem
    Alec MacGillisJanuary 17, 2012 | 3:09 pm

    Would it be possible for Mitt Romney to handle the problem of his tax returns any worse than he has? By withholding them as he has, he has built up anticipation among political reporters who could generally care less about such matters. Romney's equivocating answer in the debate last night about whether he would release the returns sent Fox News' audience-response "hedge-ometer" machine literally off the charts. Then this morning he went ahead and confirmed the most salient fact in the returns: that he pays a rate of only about 15 percent. And in the process, he managed to suggest that the money he makes in speaking fees -- more than $370,000 last year alone -- is "not very much." *

    I'll leave for another day the question of how Romney's violation of the "Buffett rule" will play with the electorate. For now, let me focus on what could come of all this in terms of the country's discussion of tax policy. In general, it seems immensely useful that the country will be confronted with a concrete reminder that many of the very wealthiest pay a federal income tax rate that is equal to or below what many middle-income Americans pay. I just hope that that discussion takes in the whole picture and does not get focused on one slice of it: the "carried interest loophole" that Romney benefits from. I've done my best the past couple years to draw attention to this egregious section of the tax code, which allows private equity managers to declare as capital gains their compensation for managing others' investments -- typically, a 20-percent cut of profits -- and thereby have it taxed at the 15-percent capital gains rate rather than the top-bracket 35-percent rate for ordinary income. Among other things, I wrote this past summer about Eric Cantor's successful attempts to shield the loophole during the debt-ceiling debate, after years of his having received more campaign cash from the affected financial and real estate sectors than just about anyone else in Congress. And so it's been gratifying to see good reporting laying out the fact that Romney is in all likelihood still benefiting from the loophole -- because he still gets a cut of Bain's profits -- and even some admissions in unusual places, such as today'sWall Street Journal, that the loophole needs to go.

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    What Mitt Romney’s father could teach him about economic fairness
    By Matt Miller, Wednesday, January 18, 7:25 AM

    Suddenly pertinent fact: When George Romney, Mitt’s father, was chairman and CEO of American Motors, he voluntarily turned down $268,000 in pay over five years, which represented about 20 percent of his earnings over that period. “In 1960, for example,” David Leonhardt reported in a 2007 New York Times article, “he refused a $100,000 bonus. Mr. Romney had previously told the company’s board that no executive needed to make more than $225,000 (about $1.4 million in today’s dollars), a spokesman for American Motors explained at the time, and the bonus would have put him above that threshold.”

    George Romney, in other words, exemplified a lost species of American business leader: He led in an era when CEOs and boards of directors felt some sense of restraint when it came to compensation. These men (they were all men) lived very well, but they also acted as though there were some relationship between the sums they were paid and broader social cohesion.

    On Tuesday, Mitt Romney confirmed that he exemplifies a new breed of business leader. Romney said his effective federal tax rate is about 15 percent, lower than the rate paid by millions of middle-class families. We’ll learn more details soon enough, but it’s a safe bet that a chunk of his income comes via payouts from Bain Capital that are inexplicably treated as capital gains, not as ordinary income.

    If Romney were not running for president, his taxes would obviously be his own business. He’d be just a citizen seeking to minimize his tax liability under the law, as all of us do. But because Romney is running for president, and thus proposing specific plans for the nation’s future taxes and spending, his status as a beneficiary and defender of the carried interest loophole (and perhaps others) offers a window into his public values.

    Here’s what a senior partner at a private equity firm told me last year about the tax treatment of “carried interest.” “Of course it should be taxed as ordinary income,” he said. “I’m amazed we’ve been able to have this as long as we have. It’s been a wonderful gift all these years, but all of us know it’s going to go away one day.”

    I wouldn’t say such sentiments make this investor a statesman. But it does make him different from Mitt Romney.

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    01-18-2012 2:48 PM ∞ t witter
    Romney's Tax Plan Would Significantly Lower His Own Taxes
    Greg Sargent asked the key follow-up question to Tuesday’s news that Mitt Romney has an effective tax rate of about 15%: what would Romney’s taxes be under his own tax plan?

    The answer, according to the liberal-leaning Citizens for Tax Justice, is that Romney’s plan would almost halve his own tax rate:

    If Romney, whose wealth is estimated at as much as $250 million, is elected president and gets his way on tax policy, he would pay barely more than half as much in taxes than he would if Obama is reelected and gets his way — and the Bush tax cuts on the wealthy expire and an additional Medicare tax as part of the Affordable Care Act kicks in.
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    Click on the video when you open the page.

    New York Times business columnist Joe Nocera appeared on "The Daily Show" to discuss what appears to be a bump in the road for Mitt Romney's campaign.

    On Tuesday, the GOP candidate admitted that his tax rate is probably less than that of middle-class workers. He said that most of his income comes from investments, which are taxed at a lower rate, and that his speaking fees amounted to "not very much" (they totaled $374,327.62 from February 2010 to February 2011).

    Speaking to Jon Stewart, Nocera praised the Republican primary and the infighting between the candidates for inadvertently shining light on the tax rate disparity, and how Wall Street makes its money. Nocera, the author of "All the Devils Are Here," lamented the work of private equity firms like Romney's Bain Capital, which he described as buying companies, laying people off and bringing the company back to market.

    When Stewart pointed out that questioning Wall Street is often considered anti-capitalist, Nocera turned to what he believes is "so great" about the 2012 election. "It's not the Obama administration saying Mitt Romney destroys companies, it's his brethren in the Republican party," he said. Watch his critique of Wall Street in the clip above.

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    Taxes at the Top
    Published: January 19, 2012

    Call me peculiar, but I’m actually enjoying the spectacle of Mitt Romney doing the Dance of the Seven Veils — partly out of voyeurism, of course, but also because it’s about time that we had this discussion.

    The theme of his dance, for those who haven’t been paying attention, is taxes — his own taxes. Although disclosure of tax returns is standard practice for political candidates, Mr. Romney has never done so, and, at first, he tried to stonewall the issue even in a presidential race. Then he said that he probably pays only about 15 percent of his income in taxes, and he hinted that he might release his 2011 return.

    Even then, however, he will face pressure to release previous returns, too — like his father, who released 12 years of returns back when he made his presidential run. (The elder Romney, by the way, paid 37 percent of his income in taxes).

    And the public has a right to see the back years: By 2011, with the campaign looming, Mr. Romney may have rearranged his portfolio to minimize awkward issues like his accounts in the Cayman Islands or his use of the justly reviled “carried interest” tax break.

    But the larger question isn’t what Mitt Romney’s tax returns have to say about Mitt Romney; it’s what they have to say about U.S. tax policy. Is there a good reason why the rich should bear a startlingly light tax burden?

    For they do. If Mr. Romney is telling the truth about his taxes, he’s actually more or less typical of the very wealthy. Since 1992, the I.R.S. has been releasing income and tax data for the 400 highest-income filers. In 2008, the most recent year available, these filers paid only 18.1 percent of their income in federal income taxes; in 2007, they paid only 16.6 percent. When you bear in mind that the rich pay little either in payroll taxes or in state and local taxes — major burdens on middle-class families — this implies that the top 400 filers faced lower taxes than many ordinary workers.

    The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains — three-quarters of which go to the top 1 percent of the income distribution — warrant such special treatment.

    Defenders of low taxes on the rich mainly make two arguments: that low taxes on capital gains are a time-honored principle, and that they are needed to promote economic growth and job creation. Both claims are false.

    When you hear about the low, low taxes of people like Mr. Romney, what you need to know is that it wasn’t always thus — and the days when the superrich paid much higher taxes weren’t that long ago. Back in 1986, Ronald Reagan — yes, Ronald Reagan — signed a tax reform equalizing top rates on earned income and capital gains at 28 percent. The rate rose further, to more than 29 percent, during Bill Clinton’s first term.

    Low capital gains taxes date only from 1997, when Mr. Clinton struck a deal with Republicans in Congress in which he cut taxes on the rich in return for creation of the Children’s Health Insurance Program. And today’s ultralow rates — the lowest since the days of Herbert Hoover — date only from 2003, when former President George W. Bush rammed both a tax cut on capital gains and a tax cut on dividends through Congress, something he achieved by exploiting the illusion of triumph in Iraq.

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    The Wall Street Journal reports today in its story entitled 'Romney's Unorthodox IRA' that Mitt Romney has between $20.7 million and $101.6 million parked in his IRA.

    IRA's were created by Congress as a means of encouraging Americans to save for their retirement. It appears given the magnitude of the amounts involved that Mitt Romney is using his IRA in a complex tax avoidance scheme.

    As the WSJ reports;

    Under federal law, Mr. Romney isn't required to pay annual taxes on the account's investment gains, and the bulk of his contributions to the fund are likely to have been pretax dollars, IRA experts say. As such, the Romney IRA has enabled the current Republican front-runner to defer paying taxes on a sizable portion of his wealth -- although he could face high tax bills when he eventually withdraws the money.
    IRAs do allow individuals to avoid paying taxes on their current income and deferring all additional taxes until the funds are withdrawn from the IRA in retirement. For this reason, Congress saw fit to put a maximum contribution limit on the IRAs of $2,000 a year. Any amounts contributed to an IRA beyond this maximum must be contributed after the paying of all required taxes.

    For Mitt Romney to have accumulated $20 to $100 million in his IRA suggests that somehow he had found a way around this $2,000 a year limit to contributions as there is no way contributing $2,000 a year could ever grow to $20 million in one's lifetime, much less $100 million, regardless of how good an investor one is.

    One method Mitt Romney may have employed is to have made his initial investments in a 401(k) plan on a pre-tax basis because 401(k) plans allowed up to $30,000 a year in annual contributions back in the 1980's without the payment of ordinary income taxes. But even with making $30,000 contributions each year, it is hard to see how a $20 to $100 million fortune could be amassed in such a short time.

    This suggests, and the Wall Street Journal article hints at this, that Romney was not making cash contributions to his IRA but rather parking equity shares of his companies' investment funds there, or quite possibly putting shares of private companies that his firm bought into his 401(k).

    If this happened, we need to know at what valuation Romney made these contributions as it is very easy to claim a low stated value for shares of private companies or investment funds that have no publicly available market price. If Romney purposely understated the true value of the shares he contributed to his retirement plan he could be held criminally liable.

    But Romney did not stop there with his tax avoidance scheme. It appears (and appearances are all we have at this point since Romney refuses to release his tax returns until the Republican nominating process is effectively over in mid-April) that Romney then at some time, possibly at his retirement, converted his 401(k) plan into an IRA and thus permanently avoided the contribution limits on IRAs.

    But, as the WSJ reports, "Under current tax law, anybody investing an IRA in a private-equity fund, as Mr. Romney did, would likely incur a hefty special tax on 'unrelated business income,' also known as UBIT. This tax, (is) assessed at a maximum 35% rate..." There is no indication that Romney paid this tax.

    And, according to the WSJ, Romney also may have made use of offshore tax havens like the Cayman Islands to further avoid paying his taxes. Romney's company, Bain Capital, made liberal use of offshore vehicles and one way to avoid paying the UBIT tax referenced above is to claim that Romney was not investing in a private equity fund, but rather in an off-shore corporation that itself invested in the private equity fund. ABC News reports that Bain Capital has set up over 138 secretive offshore funds in the Cayman Islands..

    John R. Talbott, previously a Goldman Sachs investment banker, is a best selling author and economic consultant to families whose books predicted the economic crisis. You can read more about his books, the accuracy of his predictions and his financial consulting activities at

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    by James Surowiecki
    Private-Equity Funds; Mitt Romney; Presidential Candidates; Bain Capital; Business; Harry and David; Jobs
    At this point, the people who run America’s private-equity funds must be ruing the day Mitt Romney decided to run for President. His fellow Republican candidates, of all people, have painted a vivid picture of private-equity firms—including Bain Capital, where he worked for fifteen years—as job-destroying vultures, who scavenge the meat from American companies and leave their carcasses by the side of the road. Not since the days of “Wall Street” and “Barbarians at the Gate” have the masters of leveraged buyouts looked quite so bad.

    Given the weak job market, it makes sense that the attacks have focussed on layoffs. But the real problem with leveraged-buyout firms isn’t their impact on jobs, which studies suggest isn’t that substantial one way or the other. A 2008 study of companies bought by private-equity firms found that their job growth was only about one per cent slower than at similar, public companies; there was more job destruction but also more job creation. And, while private-equity firms are not great employers in terms of wage growth, there’s not much evidence that they’re significantly worse than the rest of corporate America, which has been treating workers more stingily for about three decades.

    The real reason that we should be concerned about private equity’s expanding power lies in the way these firms have become increasingly adept at using financial gimmicks to line their pockets, deriving enormous wealth not from management or investing skills but, rather, from the way the U.S. tax system works. Indeed, for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits. Financial engineering has always been central to leveraged buyouts. In a typical deal, a private-equity firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it or taking it public. The key to this strategy is debt: the model encourages firms to borrow as much as possible, since, just as with a mortgage, the less money you put down, the bigger your potential return on investment. The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust.

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