The Corner

Vanity Fair‘s Romney Exposé Exposes Little

The Obama campaign and the media at large have seized with delight on an article about Mitt Romney, “Where the Money Lives,” in the August 2012 issue of Vanity Fair. It’s a helpful digest of all the things liberals love to hate about Mitt, presented in a highly deceptive way, from a tremendously biased source, Nicholas Shaxson. The author is an erstwhile associate of Occupy London and a leader of the U.K.’s Tax Justice Network, which campaigns explicitly against the kind of legitimate tax advantages Romney has used.

For one, Shaxson recycles a lot of old material, including the Washington Post’s unfair smears about the relative opacity of Romney’s investments — which is only thanks to industry-standard confidentiality agreements, as I explained back in April, that he cannot break. He also presents a tired, highly biased account of one Bain Capital investment, Florida’s Dade-Behring, making it sound as if Bain destroyed a healthy company and deprived hard-working employees of their just deserts, when almost the opposite appears to have been the case.

Shaxson does happen upon some new material, but, as the media have done all along, takes an innocuous fact and attempts to spin it as shady and unethical:

To give but one example, there is a Bermuda-based entity called Sankaty High Yield Asset Investors Ltd., which has been described in securities filings as “a Bermuda corporation wholly owned by W. Mitt Romney.” It could be that Sankaty is an old vehicle with little importance, but Romney appears to have treated it rather carefully. He set it up in 1997, then transferred it to his wife’s newly created blind trust on January 1, 2003, the day before he was inaugurated as Massachusetts’s governor. The director and president of this entity is R. Bradford Malt, the trustee of the blind trust and Romney’s personal lawyer. Romney failed to list this entity on several financial disclosures, even though such a closely held entity would not qualify as an “excepted investment fund” that would not need to be on his disclosure forms. He finally included it on his 2010 tax return. Even after examining that return, we have no idea what is in this company, but it could be valuable, meaning that it is possible Romney’s wealth is even greater than previous estimates.

Shaxson doesn’t even bother to offer an explanation for his claim that “Romney appears to have treated it rather carefully.” Because he set it up and then transferred it to a blind trust at the same time he did all his other assets? Moreover, it simply isn’t accurate to say that “we have no idea what is in this company” — it’s, as the name clearly suggests, a high-yield-debt fund managed by Bain Capital’s credit affiliate, Sankaty Advisors. The suggestion that Romney’s share of the fund might be so great as to significantly alter his net worth is ludicrous.

On the topic of Romney’s Swiss bank accounts, Shaxson couldn’t even find an expert who was willing to suggest that Romney has done something wrong or unethical. He quotes a tax-law professor:

Ed Kleinbard, a professor of tax law at the University of Southern California, says the Swiss account “has political but not tax-policy resonance,” since it—like many other Romney investments—constituted a bet against the U.S. dollar, an odd thing for a presidential candidate to do.

That’s right — the Obama campaign’s attacks on Romney’s Swiss holdings are legitimate because the accounts indicate that he might not be a big King Dollar guy. (And, besides, Shaxson probably isn’t right here, anyway: Romney’s managers might well hedge the currency risk of his Swiss-franc-denominated accounts with positions that would benefit from a strong dollar.)

#more#Another expert Shaxson consults, Lee Sheppard, also doesn’t find anything objectionable about Romney’s records, except for the devastating charge that his returns look tacky. She explains, “When you are running for president, you might want to err on the side of overpaying your taxes, and not chase every tax gimmick that comes down the pike” — as if Romney were sitting at his kitchen table and picking which tax deductions to take.

It’s also worth noting that a New York Times profile of Sheppard reveals that other tax experts consider her opinions to be controversially pro-government, and remarkably anti-private-equity. One analyst explained, “A lot of people would tell you that [Sheppard’s analyses] are skewed toward the government’s way of looking at things and that she frequently does not give the taxpayer’s side” — and again, the best she can come up with is calling Romney’s personal finances “tacky.”

Worse, Shaxson later cites Sheppard on another issue where she has a clear bias, writing that “Romney can get away with [his taxes] because of excessive ‘administrative indulgences’ that have allowed a ‘perversion of the law in favor of a small class of overcompensated investment managers.’” Sheppard admits that she takes particular issue, prima with laws that favor investment managers, telling the Times that “I’ve been screaming about carried interest for years. . . . Over the past two decades, this country has let hedge funds opt out” of ordinary tax laws. Thus, tax experts consider Romney’s tax treatment to be appallingly unfair, if they already think the U.S. tax code is appallingly unfair.

Further, Shaxson’s most troubling accusation, that Romney’s offshore Bain accounts allowed him to avoid paying his fair share of taxes, turns out to be false — instead, they’re used to avoid a particular kind of tax that is inconsistently leveled on a tax-deferred retirement account. Shaxson is correct to argue that the bulk of Romney’s assets, an I.R.A. worth as much $100 million, “appears to have invested in so-called blocker corporations in the Cayman Islands and elsewhere.” According to Shaxson, if he’s done so, “the Romney camp’s claim that Mitt’s tax consequences of investing via the Cayman Islands is ‘the very same’ as it would have been had he invested directly at home is simply not true.”

But it is accurate: Romney invests in offshore blocker corporations so that his investments are treated like any other tax-advantaged retirement savings. Shaxson is correct to suggest that a blocker corporation would have reduced Romney’s tax liability — but only in so much as it allows him to avoid an unfair level of taxation. Certain debt-financed profits and dividends from Bain investments count as unrelated-business taxable income (UBTI) and are incidentally subject to tax in a way retirement savings are not (such problems befall other pension funds, university endowments, etc., and they deal with them in similar ways). That’s what he’s avoiding with a blocker corporation, an unfair level of taxation on his retirement accounts. Thus, contra the narrative, his use of blocker corporations actually allows him to “play by the same rules as the rest of us,” and receive the same tax treatment anyone else investing in an I.R.A. at home would have gotten, a fair tax deferral. (The blocker corporation has to be offshore in a low- or zero-tax jurisdiction such as the Caymans so that the blocker itself isn’t taxed; if it were at home, Romney would still be paying excessive income tax on his accounts.)

Finally, and most important, Romney’s use of the I.R.A. may look like an exceptionally favorable tax treatment, but it actually isn’t, necessarily. With an I.R.A., he avoids taxes on his income now, presumably almost all of which would be subject to the preferential carried-interest rate, 15 percent, but he’ll eventually have to pay tax on withdrawals from his account at ordinary income rates.

Toward the end of his piece, Shaxson veers off on a strange tangent about the financialization of the U.S. economy, how that means we might be 16th-century Genoa, and why, apparently, the tax haven we should be worried about is actually the U.S., since our government has actively solicited foreign investors for firms like Bain Capital. Needless to say, the piece does nothing more than intimate Romney has evaded taxes, while admitting occasionally that, of course, there is no evidence that he did so. Such a piece, given the misleading impression it might give voters, hardly seems worthy of being branded as a ground-breaking investigative piece by Vanity Fair — especially when that magazine does any number of profiles of the rich and famous without portraying their similar personal finances as grounds for genuine scandal.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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