Financial Transparency Coalition

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There’s been a lot of speculation about what secrets Mitt Romney is hiding in his tax returns. The economist in me feels fairly certain that, given the immense damage this issue has done to his presidential bid and assuming the campaign has done a cost-benefit analysis, there must be something pretty shocking lurking below the surface.

We already know Mitt Romney has as much as $8 million invested in at least 12 Cayman Island funds and another investment, worth between $5 million and $25 million, shows up on securities records as domiciled in the Caymans.

Some have argued we should ignore Romney’s personal finances because they lie in the hands of “competent experts,” not Romney himself. As Daniel Foster argues: “who cares if Romney has clever accountants?” To say that Romney is not responsible for his personal finances because underlings runs the show is akin to saying the President is not responsible for the Treasury department for the same reason. At the end of the day, the buck must stop somewhere.

Richard Cohen says Romney has stuck to principle on not releasing his returns. To which I respond: which principle is that, exactly? He vowed never to release any of his tax forms. And then he released one, which as his own father once said when he ran his own campaign: “One year could be a fluke, perhaps done for show.”

Actually it’s the fact that he did release one year’s worth of tax returns makes his insistence on this point even more troubling. It shows that it is not a matter of principle. And that, more than likely, it was for show.

The conventional wisdom seems to be that Romney is hiding something other than tax avoidance via offshore entity by withholding his tax returns. There’s compelling evidence otherwise, but at the end of the day, I say it doesn’t matter.

The question is not whether or not Mitt Romney is paying enough taxes. The question is what would Mitt Romney, as President of the United States, do to fixAmerica’s tax problem?

It is this dysfunctional system that allows Warren Buffet to pay a lower tax rate than his secretary. It’s what facilitates our nation’s massive income disparity. It’s what allows corporations to pay an average rate of 12%, even though the statutory rate is 35%. And it’s the way the 100 largest U.S. multinational corporations were able to pay about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings in 2004 – an effective tax rate of about 2.3%.

It’s not just Romney’s offshore record that indicates he wouldn’t do much to fix the problem. Citizens for Tax Justice (CTJ), a friend of the Task Force, has already estimated Romney would cut his own tax burden in half under his proposed plan if he were President. But Romney has also pledged that he would move the United States to a territorial tax system.

What does that mean?

Right now the United Statestaxes its corporations on the basis of residency, not the country in which profits are earned. While they are allowed to defer paying taxes on foreign-earned profits for many years—or even indefinitely—they must pay the tax when they bring money back to America. And if they’ve paid any foreign tax on those profits, they get a credit against their U.S. tax.* Under a territorial system, the government would exempt overseas profits of American companies from U.S. taxes entirely.

Proponents argue moving to a territorial system would reform our outdated tax system and remove a penalty for remitting profits back to the United States, which would jumpstart economic growth.

The first argument is incomplete. Yes, our tax system needs a complete overhaul. But moving from a residential system to a territorial one does little to solve this problem. It is the plethora of corporate tax loopholes, including deductions, credits, and other tax expenditures that benefit certain activities, that skew marginal tax rates. We must close these loopholes to align the effective corporate tax rate with the official one. Moving to a territorial system, but ignoring these problems, is like using a pair of tweezers when what we need is a knife.

Moving to a territorial system would not suddenly open a flood gate of money back into the United States and boost the economy, either. It is the same argument people use in favor of tax holidays for repatriation, which incidentally don’t work either.

As ITG Investment Research Chief Economist Steve Blitz told CNN: “Do you really believe in your heart of hearts that large businesses overseas—IMB, Intel, Apple, Nike—somehow or another have this huge stash of cash over there that they can’t use domestically if they want to?” (His question is rhetorical. The answer is no.)

Even if the policy did somehow encourage American corporations to repatriate a significant sum of money, it would be unlikely to provide any economic stimulus. U.S. firms are already sitting on close to $2 trillion in cash; the problem with our lackluster economic growth is a lack of demand, not a lack of liquidity.

What a territorial tax system would provide is a tax cut for multinational corporations of $130 billion over ten years.

Romney says that Obama’s pressure on his offshore accounts and his territorial tax system are distractions from the debate about the economy. While the Obama campaign is certainly trying to win political points—as all campaigns do, including Mr. Romney’s—nothing could be further from the truth. The question of tax lies at the heart of the economic discussion. Fiscal policy is fundamental to our budget deficit, unemployment, and economic growth—three of the most pressing issues of this campaign. We must understand Romney’s principles on this issue to understand what kind of a president he would be.

So far, I’d say his record doesn’t look good.

Image:  Some rights reserved by davelawrence8

*Edited to add: I didn’t include this statement in the original post, but as Rebecca Wilkins of Citizens for Tax Justice noted, it’s a point that is often overlooked in this conversation. The United States does not double tax income that is earned abroad.