On principle, I really have no problem with private individuals paying as low a tax rate as they possibly can, personally I think taxes should be as close to 0% as possible. What I do have a problem with is someone who, as Governor, raised the tax burden of the citizens of his state (including taxing the blind and volunteer firefighters!) and then may have used complicated schemes to avoid taxes. If true, this pretty much nixes the electability argument for Romney which is pretty much the only argument for Romney.
For Mitt Romney to have accumulated $20 to $100 million in his IRA suggests that somehow he had found a way around this $2,000 a year limit to contributions as there is no way contributing $2,000 a year could ever grow to $20 million in one's lifetime, much less $100 million, regardless of how good an investor one is.
One method Mitt Romney may have employed is to have made his initial investments in a 401(k) plan on a pre-tax basis because 401(k) plans allowed up to $30,000 a year in annual contributions back in the 1980's without the payment of ordinary income taxes. But even with making $30,000 contributions each year, it is hard to see how a $20 to $100 million fortune could be amassed in such a short time.
This suggests, and the Wall Street Journal article hints at this, that Romney was not making cash contributions to his IRA but rather parking equity shares of his companies' investment funds there, or quite possibly putting shares of private companies that his firm bought into his 401(k).
If this happened, we need to know at what valuation Romney made these contributions as it is very easy to claim a low stated value for shares of private companies or investment funds that have no publicly available market price. If Romney purposely understated the true value of the shares he contributed to his retirement plan he could be held criminally liable.
But Romney did not stop there with his tax avoidance scheme. It appears (and appearances are all we have at this point since Romney refuses to release his tax returns until the Republican nominating process is effectively over in mid-April) that Romney then at some time, possibly at his retirement, converted his 401(k) plan into an IRA and thus permanently avoided the contribution limits on IRAs.
But, as the WSJ reports, "Under current tax law, anybody investing an IRA in a private-equity fund, as Mr. Romney did, would likely incur a hefty special tax on 'unrelated business income,' also known as UBIT. This tax, (is) assessed at a maximum 35% rate..." There is no indication that Romney paid this tax.
And, according to the WSJ, Romney also may have made use of offshore tax havens like the Cayman Islands to further avoid paying his taxes. Romney's company, Bain Capital, made liberal use of offshore vehicles and one way to avoid paying the UBIT tax referenced above is to claim that Romney was not investing in a private equity fund, but rather in an off-shore corporation that itself invested in the private equity fund. ABC News reports that Bain Capital has set up over 138 secretive offshore funds in the Cayman Islands.
Friday, January 20, 2012
How Romney May Be Evading Taxes
A former Goldman Sachs investment banker highlights how Romney may have evaded taxes: