After the release of Mitt Romney’s tax returns, his opponents leveled some unfair accusations and insinuations about his personal finances. An e-mail from Gingrich’s campaign this morning is a good example of this: Its three “questions raised” make unfair implications about Romney’s foreign bank accounts, the services he provided to Bain Capital in exchange for his current income, and his associations with Goldman Sachs.
Then, last Wednesday, Newt Gingrich dismissed one part of Romney’s immigration policy as a fantasy “you [would] have to live in worlds of Swiss bank accounts and Cayman Island accounts” in order to support, implying that Romney engages in tax evasion — an utterly unsupported claim.
It is easy to deceive with vague accusations about “offshore accounts” or connections with Goldman Sachs. The rich, as F. Scott Fitzgerald said, are different than you and me, and so are their tax returns. Here are a few misconceptions about Romney’s finances, promoted by both liberals and Gingrich supporters:
Romney Pays a 14 Percent Tax Rate
The fact that Romney’s tax returns indicated an expected tax rate of just 14 percent in 2011 doesn’t reflect the actual federal tax burden he bears, which, with corporate taxes included, is probably more like 30 percent. The capital gains he earns on various investments and carried interest from Bain is subject to double taxation: The 15 percent capital-gains rate is paid after the earnings have already been taxed at a 35 percent corporate rate.
What one can’t do, however, is merely calculate — as many eager apologists have — that income taxed first at 35 percent and then at 15 percent is subject to a roughly 45 percent tax burden, since not all of the corporate-tax burden falls on shareholders. Conservatives often point out that tax burdens are almost always shared — it doesn’t really matter, for instance, whether an employer or an employee pays a payroll tax; the burden will fall on both of them regardless.
This question of who pays a tax, known as tax incidence, is particularly complicated in the realm of corporate taxation, but the accepted reality is essentially that a corporation’s shareholders, the providers of capital, bear most of the burden. This is because the tax doesn’t fall on all the corporation’s revenue but on its gross income — not its profits but, roughly, its revenues less most expenses. This number, obviously, is relevant to the valuation of a company, and how much it can pay in dividends, and therefore the tax will fall mostly on the owners of a company.
Tax incidence is subject to significant academic debate, but perhaps the clearest answer here is that the CBO estimates that the top .01 percent of Americans pay an effective federal tax rate, corporate taxes included, of 31 percent, so we might reasonably assume Romney’s effective tax rate is something like 30 percent. The average effective corporate-income-tax rate for a member of the top .01 percent is 17 percent, and Romney received almost all of his income from sources subject to the corporate tax, presumably more than even some members of the .01 percent.
Romney Hides Money in the Cayman Islands and Other Tax Havens
Romney does indeed have investments and bank accounts in the Cayman Islands, Luxembourg, and Switzerland. Think Progress notes ominously that these are “countries notorious for tax dodging.” TP’s implication, based on a similarly deceptive ABC News article, is that Romney is “parking millions” in “offshore accounts” in order to commit tax evasion. Despite these sly implications, Mitt’s investments don’t suggest that he’s dodging his taxes: As an American citizen, he’s liable to pay taxes on income earned anywhere in the world. If Romney were using these accounts to hide his assets and income from the U.S. Treasury, as ABC and Think Progress insinuate, one assumes he wouldn’t have listed them on his tax returns.
The Gingrich campaign’s asks, “What was he trying to hide? Why does Mitt Romney need foreign bank accounts anyway?” The answer is ease of investing — #more#in order to attract foreign investors, some of his Bain assets and other investment funds are located in nations with less onerous regulations and taxes than the United States (though such funds are still strictly regulated by the SEC). The funds are located offshore in order to allow foreign capital to be invested more easily with American managers and corporations (and to avoid American income taxes, to which foreign investors shouldn’t be liable). The international nature of the business is of no financial benefit to Romney. Romney also has some tax-deferred accounts abroad, including an IRA, but this is no different from a domestically available tax strategy. The Atlantic has a good explanation of this issue, as well.
Romney’s Profits from Investing in Fannie Mae and Freddie Mac Are Hypocritical
The Boston Globe recently reported that Romney has up to $500,000 invested in a mutual fund that itself invests in government debt, including Fannie and Freddie bonds. Some have charged hypocrisy, since Romney has roundly criticized Gingrich for his paid work as a consultant at Freddie Mac. Gingrich was, at best, profiting handsomely from the bloated federal housing-financial complex, and at worst, using his political influence among Republicans to shore up support in Washington for their irresponsible lending and investments. Romney, on the other hand, invested private capital in the government-sponsored enterprises — which is precisely what they need if the government is to get out of the mortgage business.
Fannie and Freddie needed a $160 billion government bailout because of excessively loose lending practices and poor management, aided by an army of lobbyists and a cooperative Congress. Without the private capital provided by funds like the ones Romney invested in, Fannie and Freddie might have needed more government assistance, and sooner.
Romney Provides Services to Bain, or Isn’t Eligible to Pay a Capital-Gains Rate
The Gingrich campaign has questioned why Romney’s earnings from Bain are listed as being in return for “services,” darkly questioning, “Is Mitt Romney still providing services to Bain Capital or not? If so, what services are they? And do they really justify him paying a mere 15% tax rate?”
But Romney’s tax treatment is entirely standard. The e-mail cites a report in the Wall Street Journal which essentially justifies, not disputes, the Romney’s tax situation. As part of his retirement agreement with Bain, Romney receives a cut of Bain’s carried-interest pool, which must be taxed, per Bain’s partnership agreement, as capital gains. This is, obviously, in return for the services which he provided to Bain. As the Journal explains, “lawyers . . . have generally treated this language as though it applies to retired partners, which may aid Mr. Romney’s argument. The question hasn’t been tested in court or administratively.”
If there’s anyone in this race is guilty of tax avoidance, it may be Newt Gingrich — USA Today reported that tax lawyers have said his own classification of his income is non-standard, avoids tens of thousands of dollars in Medicare taxes, and could merit an audit.
Romney’s Campaign Donations from Goldman Sachs Are Crony Capitalism
In the Gingrich campaign’s e-mail, they adopt a particularly cheap and vaguely leftist tactic when they demonize Romney for his association with Goldman Sachs. The suggestion: Romney gets more in donations from employees of Goldman Sachs than any other firm, a (dubious) honor accorded Barack Obama in 2008. Therefore, since Goldman received a small allocation in the Wall Street bailout, his “dishonest attack ads against Speaker Gingrich [are] being indirectly funded by the U.S. taxpayer.”
The Gingrich campaign calls Romney “Crony Capitalism’s #1 Candidate,” as if Goldman employees’ contributions are a kickback for a bailout that Mitt Romney had nothing to do with. Goldman Sachs paid back its Treasury loan in 2009 (with a healthy 23 percent return), and one might be glad to see employees of one of America’s most successful corporations switching their allegiance from Obama to Romney.
Romney’s Generous Donations to the Mormon Church Helped Fund the Church’s Political Campaigns
Some liberals have recoiled with horror at the idea that Romney gives millions to the Church of Latter Day Saints, because the church was prominent in its opposition to same-sex marriage in California and because the donations substantially reduce his tax liability.
According to tax returns, the church itself only spent $190,000 on Prop 8–related expenses; almost all of the funding came from individual Mormons who donated to oppose the law. Romney’s donations, most of which went through his and his wife’s foundation, are in accordance with the Mormon practice of tithing, and would have gone to the church’s general budget, much of which supports its massive mission program.