The media’s fixation with Mitt Romney’s personal finances recently crescendoed with ABC News’s much trumpeted revelation that the ex-CEO of Bain Capital has millions of dollars parked in Cayman Islands and other offshore investments. And in its typical fashion, this has led to a barrage of questions: “How big were Romney’s investments and profits?” “Did he pay the taxes on his gains and at what rate?” But these are all the wrong questions, bereft of relevance and intended merely for spectacle. Romney’s investments in these funds were a matter of public record before the story even broke. Evading taxes on these investments would have been politically suicidal and criminally reckless behavior that is clearly foreign to Romney’s genetic makeup.
There are, however, some very relevant and potentially troubling issues that the Cayman Islands funds do raise, and they have virtually nothing to do with Romney’s personal finances, but everything to do with his integrity and honesty vis-à-vis the people whose votes he is seeking. These investments were in a subset of the one hundred and thirty-eight limited partnership private equity funds that Bain Capital had registered in the Cayman Islands. So Romney wasn’t just an after-the-fact, passive investor in the latest and hottest funds commanding bragging rights around the cocktail circuit. As its co-founder and CEO, Romney would have been the one responsible for siting these Bain Capital funds in the Cayman Islands in the first place. And although this decision was perfectly legal, and not uncommon for a hedge fund chief, it contrasts sharply with the image Candidate Romney is trying to project of himself as a businessman who worked to help the US economy.
In fact, by siting his funds in the Cayman Islands, rather than, say, Massachusetts, where Bain Capital is headquartered, Romney was potentially enabling foreign investors, like the Chinese, to avoid paying any US taxes on their Bain Capital investments, and was also making it a whole lot easier for investors who would have owed US taxes on these investments to engage in tax evasion if they so chose. This is because the primary reason why private equity firms and other hedge fund managers use the Cayman Islands is that it does not charge any taxes on investment funds that are registered there. This fact, combined with the shroud of secrecy such offshore havens provide regarding investor information, attracts investors who are not interested in paying US taxes. And this all happens at the expense of American taxpayers and the US economy.
First, to better understand how the Bain Capital funds provided tax-exempt foreign investors with an advantage, we need to take a look at how the foreign investor is taxed versus how the US investor is. For the American investor, as Romney’s defenders correctly assured us was the case for his personal situation, an investment in a Cayman Islands fund is taxed in the exact same way as an investment in a US based fund. So the investor is required to pay the appropriate capital gains tax, usually the 15% long-term rate. A tax-exempt foreign investor, however, is only taxed on investments based in the US. So there is no tax obligation to the US for offshore investments. Neither is there a tax obligation to the Cayman Islands, with their zero tax rate. So even though these funds were created and managed by Bain Capital, a US based firm, and even though their investments were in US based companies and assets, these foreign investors would be able to avoid all US taxes, a very valuable perk unavailable to US taxpayers.
In essence, to the extent that Bain Capital was creating wealth through their investments, much of it was probably exported to investors in other countries who could repatriate their gains without any obligation whatsoever to the US Treasury. This came at the expense of Americans, who would benefit much more if these investment gains had been reinvested in the US economy, creating new jobs, and if these profits had provided tax revenues. It also came at the expense of the employees and shareholders of the companies that were targeted for investment by Bain Capital. The companies themselves did not have the same access to these tax loopholes in raising capital to expand, and would instead need to rely on traditional sources of financing like stock or debt issues, investment vehicles that do not offer foreign investors a free lunch. Therefore, offshore private equity funds, even those controlled by US firms, are able to leverage their unfair financing cost advantage to essentially outbid the company itself in the capital markets and buy it out.
Now while there is nothing wrong with a firm legally taking advantage of existing loopholes in the US tax regime for the sake of its shareholders, it is time for Romney to stop pretending that the US public good was anywhere in his thoughts when he ran Bain Capital. Plus it is hypocritical of him to publicly rail against Chinese ‘cheating’ at every turn without acknowledging that he took full advantage of opportunities that might enable foreign investors, including the Chinese, to game the US tax system.
Therefore, in the interest of full disclosure regarding controversial matters, which he is continually demanding from his opponents, it would be appropriate for Romney to reveal how much money Bain Capital raised from the Chinese and other foreign investors to finance their buyout efforts in the US. And in the same way that Romney demanded that Speaker Gingrich disclose his consulting contracts, which Gingrich cheerfully and quickly furnished, it would be very helpful to see any Bain Capital marketing documents geared toward foreign investors.
And then there’s the issue of whether or not funds like Bain Capital’s enable tax evasion. In contrast to legal tax avoidance by investors who are exempt from US taxes, as described above, tax evasion involves the failure of investors to pay taxes that they legally owe to the US. Now suppose you entrust your car to your neighbor while you are away, and it is stolen. If he had taken care to keep the doors locked and had parked the car in the garage then the only person to blame is the car thief. But if your neighbor had left the car in the worst part of town, with doors unlocked and the keys in the ignition, he would bear at least some of the responsibility. Well, the fact of the matter is that offshore tax havens like the Cayman Islands make it infinitely easier for those who are required to pay US taxes to evade their responsibility, primarily because of the almost complete secrecy these locales offer to investors. So while a fund manager like Romney was technically not doing anything illegal himself, he would be helping those looking for a dark place to hide from the US tax authorities.
Independent groups have estimated that the US Treasury suffers billions of dollars in losses from tax evasion enabled by offshore tax havens. If this were of any real concern to Romney, he could have taken the simple step of forming his funds in the US, where investors would be subject to the light of day and it would be nearly impossible to conceal gains and evade taxes. But of course he did not. What Romney did do, in the debate a couple of weeks ago, was wag his finger at the audience and remind us that we should pay all our taxes. One must wonder if he took such care to admonish all of his investors in the same way, or opted for the more convenient “don’t ask, don’t tell” approach .
Finally, it should be noted that Romney has promised to use the insights from his business experience to help the US economy and the American taxpayer. So even if our interests were not a priority while he was a businessman, the least he could do as a presidential candidate is suggest that these loopholes be closed and that the playing field be leveled for American taxpayers, shareholders and workers. But in spite of his intimate knowledge of this potentially multi-billion dollar problem, he hasn’t uttered a word about it. Romney continues to demonstrate how American interests are secondary to his own self-interest. Exposing these practices would mean exposing himself and his cronies, something he is unwilling to do, even if it’s the right thing. It’s up to us to hold him to account in the ballot booth.