“Big business is doing fine in many places – they get the loans they need, they can deal with all the regulation. They know how to find ways to get through the tax code, save money by putting various things in the places where there are low tax havens around the world for their businesses.”
– Mitt Romney
And as we’re confirming through leaked internal Bain documents, Romney’s statement this week to a group of wealthy donors amounts to expert testimony. When it comes to “find(ing) ways to get through the tax code, sav(ing) money by putting various things in the places where there are low tax havens around the world,” such as Switzerland, Luxembourg and the Caymans, Romney knows his stuff.
Those leaked documents also have cast light on a highly controversial and perhaps illegal strategy used by Bain Capital to slash the tax burden of Romney and its other partners.
It works like this:
Private equity partners such as Romney are traditionally paid a fee of 2 percent of the capital that investors give them to manage. It is, by any definition, earned income identical in nature if not in amount to the income that most American workers collect in their paycheck. And by law, it also ought to be taxed as earned income.
At Bain, however, they have managed to wave a magic wand over that management fee, utter some arcane tax-lawyer mumbo-jumbo and convert earned income into capital gains, which is then taxed at 15 percent instead of the 35 percent that people in top tax brackets are by law supposed to pay on earned income. (The process is explained here in more technical language by the Wall Street Journal.)
In 2008, a study of the technique by Gregg Polsky, a tax-law professor at the University of North Carolina, concluded that it is “extremely aggressive and subject to serious challenge by the IRS…. The tax result, if this technique is successful, is the conversion of current ordinary income into deferred capital gains. ”
Victor Fleischer, a tax-law professor at the University of Colorado, is even more blunt:
“Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal. If challenged in court, Bain would lose. The Bain partners, in my opinion, misreported their income if they reported these converted fees as capital gain instead of ordinary income… Bottom line: Mitt Romney has not paid all the taxes required under law.”
(H/T to poster Common Sense)
– Jay Bookman