Mitt Romney's taxes are once again in the news thanks to Friday's release of his full 2011 tax return. As with his 2010 filings, the documents highlight the GOP candidate's extensive overseas holdings, which some tax experts believe has allowed him to lessen his tax liability. But the problem with Romney's reliance on offshore tax havens goes beyond his own tax bill.
The Internal Revenue Service and many members of Congress have sought for years to close some of the loopholes that are draining billions of dollars from the federal treasury and shifting the tax burden from wealthy corporations to average individuals. Yet through his work at Bain Capital and his personal investments, Romney has supported a shadowy financial system with far-reaching ramifications for the US and foreign governments.
To date, Romney has refused to answer questions about why, for instance, he needs to keep some of his money in places like Bermuda, rather than a bank in Belmont, Massachusetts, or in a US-based investment vehicle. When he dodges these types of questions, Romney's not just depriving voters of critical information about his own taxes. He's sidestepping a much larger policy question about this unaccountable financial system that has been a key driver of global inequality.
Offshore tax havens are better known for facilitating money laundering and tax evasion than legitimate business. They are jurisdictions that generally offer extremely low tax rates to foreign investors (zero in the case of the Cayman Islands). They also offer sanctuary to people or entities looking to avoid other rules and regulations or seeking to shield their assets from lawsuits in their home countries. And, of course, tax havens provide secrecy. They hide owners, partners, and investors from tax authorities or jilted spouses and often refuse to comply with criminal investigations by other countries, which is one reason they're popular with both drug kingpins and Americans tax evaders.
Romney has investments in a number of well known tax havens, including Ireland, Luxembourg, the Cayman Islands, and Bermuda. Until 2010, he held a few million in the Swiss bank UBS, which in 2009 was forced to pay the US $780 million in fines and penalties for helping more than 17,000 Americans commit tax fraud by hiding as much as $20 billion overseas. The total value of Romney's offshore investments is unknown, but his tax returns have revealed that he has at least $30 million invested in the Cayman Islands, in at least 12 different Bain Capital funds. When pressed about the relationship between his offshore investments and his low tax rate (he paid 14.1 percent on $13 million in income, according to his 2011 tax return), Romney has largely declined to answer questions about his overseas holdings other than to say, "I pay all the taxes that are legally required, not a dollar more." Romney has also denied getting tax benefits from his offshore accounts. He told Fox News, "[T]here was no reduction, not one dollar reduction in taxes by virtue of having an account in Switzerland or a Cayman Islands investment. The dollars of taxes remained exactly the same. There was no tax savings at all."
Similarly, a Romney campaign spokeswoman told Mother Jones that Romney's foreign investments "are taxed in the very same way they would be if the shares were held in the US rather than through a Cayman fund. No taxes are avoided or reduced. These funds are registered with the IRS and report all income to investors and the IRS, just like domestic funds."
Romney's assertion that his offshore investments have not reduced his tax bill has been met with skepticism by tax experts. But assuming he's telling the truth, his involvement in the offshore system and that of the company he started, Bain Capital, is still no less significant. That's because while Romney may have done everything by the book with his offshore accounts, Bain's other offshore investors may not have.
"The Cayman Islands jurisdiction for the Bain funds primarily makes it easy for their investors to cheat on their taxes."
Bain's has had investment funds located in the Cayman Islands since at least the 1990s, when Romney was still in charge. And the company has made clear that many of its funds there are designed to avoid US taxes. According to documents released by Gawker in August, one fund in which Romney still has money invested notes in a financial statement that it "intends to conduct its operations so it will…not be subject to United States federal income or withholding tax."*
"The Cayman Islands jurisdiction for the Bain funds primarily makes it easy for their investors to cheat on their taxes," says Rebecca Wilkins, the senior counsel for federal tax policy at the nonprofit Citizens for Tax Justice. "Because of that they can attract more investors and they can earn bigger management fees. "
Because of the secrecy laws in the Caymans and other offshore tax havens, Bain investors are hidden from tax authorities like the IRS. Unless they choose to report their holdings and income, as Romney has, there is no way for tax officials in the US or other countries to know that such holdings exist, much less find a way to tax them.
James Henry, a former chief economist at McKinsey & Co., describes offshore tax havens like the "bar scene in Star Wars." He explains, "Dictators and kleptocrats used them to conceal stolen loot. Arms dealers and drug dealers use them to launder their deals. Google and Apple and Pfizer use them to park their intellectual property and pay themselves tax-free royalties. Banks use them to park lousy loans and stash the offshore accounts and assets under management of their wealthy individual clients, many of which are paying zero taxes back home…And so on."
Some of those sorts of shady clients have been part of Romney's portfolio at Bain. Nicholas Shaxson has written one of the most comprehensive stories about Romney's offshore investments in a lengthy article in the August issue of Vanity Fair. It explored the nature of some of Romney's early Bain investors. They included the late Czech-born British media tycoon Robert Maxwell, a fraudster and notorious tax evader who put $2 million into one of Romney's first Bain funds, as well as a trio of anonymous corporations from another notorious tax haven, Panama. Other early investors, according to numerous news accounts, were members of the wealthy Salvadoran oligarchy with ties to right-wing death squads. Romney has credited Salvadoran investors for helping him get his company off the ground.