Mitt's Tax Problem (and What It Means for His Presidency)

January 20th, 2012

As you probably are already aware, it seems Mitt Romney can’t make up his mind on a lot of issues. He has been able to make his mind on one thing, though—quite clearly and quite decisively, mind you. That one thing is that Mitt Romney doesn’t like is paying taxes.

After much several months hemming, hawing, and waffling on the issue, Mitt finally bowed to mounting pressure on Monday to release his tax returns. But Mitt isn’t going to keep us waiting in suspense he finally decides to hand over his returns. While talking to reporters, he gave us a sneak peek of what’s to come: 15 percent. That’s his approximate effective tax rate. By the way, Romney has assessed his own net worth around $190 to $250 million (other estimates put it at the higher end of those figures). So I’d say he’s getting a pretty good deal.

The rules that allow Mitt to pay such a low rate are the same that allow Warren Buffet to pay a lower rate than his secretary. The majority of Mitt’s (and Buffet’s) income comes from capital gains (these are profits from the sale of stocks, bonds and real estate) and the tax rate on that kind of income is 15%. It’s not illegal, but that doesn’t mean it’s not wrong.

The controversy has inspired Citizens for Tax Justice (CTJ), a friend of the Task Force, to estimate how much Romney would pay in taxes under his proposed plan if he were President. The answer is that, under his own plan, his taxes would be just about cut in half. Robert McIntyre, the director of Citizens for Tax Justice, added “this doesn’t even include Romney’s proposal to cut corporate taxes from 35 percent to 25 percent, which would primarily benefit wealthy shareholders.” Wealthy shareholders…like Romney.

Since Mitt was so forthcoming with the whole “15 percent tax rate” confession, we are left to wonder what secrets he’s been trying to hide behind those unveiled tax returns. Some experts believe he doesn’t want to reveal how much he benefits from the “carried interest” loophole as a private equity manager. Other experts speculated that it might have something to do with pesky little tax havens, since “his vast fortune is invested in dozens of funds linked to Bain Capital LLC, the powerhouse private equity firm he co-founded and led for 15 years. Several Bain funds have offshore connections and take advantage of tax breaks used only by the U.S. financial elite.”

And then, as if in answer, these speculations turn out to be true. As originally revealed by ABC and now re-reported all over the internet:

Romney has as much as $8 million invested in at least 12 funds listed on a Cayman Islands registry. Another investment, which Romney reports as being worth between $5 million and $25 million, shows up on securities records as having been domiciled in the Caymans…Official documents reviewed by ABC News show that Bain Capital, the private equity partnership Romney once ran, has set up some 138 secretive offshore funds in the Caymans.

Again, there’s (most likely) nothing illegal being done here. But as Rebecca Wilkins, a tax policy expert for CTJ, notes: the “primary advantage to setting those funds up in an offshore jurisdiction like the Cayman Islands orBermuda is it helps the investors avoid tax.”

Neither Mitt’s 15% tax rate on his immense income nor his use of offshore accounts is illegal. But both are emblematic of a greater problem—the dysfunctional the American tax system. It is this dysfunctional system that allows Warren Buffet to pay a lower tax rate than his secretary and that allows the average American to earn 1/10,800th of the average Forbes 400 earner.

The question is not whether Mitt Romney is paying enough taxes. The question is whether Mitt Romney, as President of the United States, would be willing to fix the dysfunctional system. From his tax plan, we’ve already seen that Romney has no problem with his income bracket’s low rate. And my hunch is that from his offshore accounts, we can guess that he sees no problem with the shadow financial system.

That’s too bad. But at least the odds seem pretty good that, at some point, Mitt Romney will change his position.

Written by Ann Hollingshead

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