Wednesday, February 1, 2012

Mitt Romney: Lobbyists, Special Tax Rates & Tax Evasion

It has been simply outrageous that the more one makes, the less they are obligated to pay in income taxes; but yet at the same time, the more inclined they are also to evade paying what little they do owe for taxes. It's simply unbelievable! And in a time of budget cuts (food stamps for the poor and government layoffs), high unemployment, and declining wages, when the rich are still getting richer, tax cheating for the top 1% has only been getting worse!

I have always believed that it's been the bankers who have always caused our recessions, depressions, and all the other economic calamities in this country, by manipulating the markets. But I'm not going to rant on the bankers or discuss the history of banking in this post...but just point out how the wealthiest in this country have been lobbying our representatives in congress to enact an unfair tax code on average working Americans for almost the last 100 years.

Lately the discussion has been about how the "Mitt Romneys" in this country (and all those, up to and including everyone on the Forbes Fortune 400 list) have lobbied congress for a tax code that has put the greatest burden of the tax revenue and budget cuts on the middle-class, low income earners, and the poor for the past 40 years.

But I would say that actually, it has really been 90 years, if you consider that in 1921 the new Secretary of the Treasury and banker Andrew Mellon argued that significant tax reduction was necessary in order to spur economic expansion and restore prosperity. Mellon obtained repeal of the excess profits tax and the top marginal rate on individuals fell from 73 to 58 percent - - and a preferential treatment for capital gains was first introduced at a rate of only 12.5 percent.

But as Mother Jones points out today, since the 1970s when the capital gains tax rates were at their highest, Mitt Romney has benefited handsomely from capital gains and carried interest by the influence-peddling of Bain Capital, the private equity firm he co-founded in 1983. Though he's been gone from Bain for over a decade, Romney continues to rake in millions of dollars every year from accounts with the firm—and in 2007, he took Bain's side in a key lobbying battle with Washington—one that saved him millions of dollars.

2007 was something of a watershed for private equity lobbying: In that year, lobbying expenditures for the industry practically tripled. The spike was the result of an industry-wide effort to preserve a number of tax giveaways for the finance industry and its CEOs—including the carried interest rule, a tax loophole that allows Romney and other private equity mavens to reduce their taxes by millions of dollars.

Carried interest refers to the commission that private equity and hedge fund executives receive for managing investors' money. Although commissions may seem like ordinary income to the rest of us, the carried interest loophole allows some money managers to claim this income as long-term capital gains, which are taxed at a rate much lower (15 percent) than the top tax rate for normal income (35 percent).

After Democrats won control of both the House and the Senate in the 2006 midterm elections, they advanced several pieces of legislation that threatened to end this lucrative quirk of the tax code and other tax policies that favor the rich. Mitt Romney, who made just over $20 million in investment income in 2010 (and paid a 13.9% tax rate), wasn't having any of it.

During an August 2007 appearance on Kudlow & Company, Romney was asked what he thought of the effort to close the loophole. He wasn't happy. "I want people to be able to save their money and invest in America's economy tax-free," Romney said. "I want to lower taxes. I want to lower marginal rates across the board. I want to lower taxes for corporations," he told Kudlow. (Also read: 280 Corporations that are "Too Big to Tax", and how for the past 25 years, they've really only paid an average "effective" tax rate of 18%, less than China's 25% corporate tax rate.)

Bain Capital was doing its part to make Romney's vision a reality. The firm spent $300,000 between August of 2007 and April of 2008 lobbying the House and Senate on bills that threatened the carried interest (and capital gains) loopholes. Along with other private equity titans, Bain and its ilk paid lobbying shops, public relations firms, and trade groups an estimated $15 million between January 2009 and April 2010 to convince lawmakers to keep the loophole alive.

The force of those combined lobbying efforts kept the carried interest loophole wedged open, denying the federal government some $10 billion in revenues in the process. "Everyone who has looked at this boondoggle [carried interest] thinks it's an egregious giveaway," Jacob Hacker, the co-author of Winner-Take-All Politics, says. "It still lives because of the lobbying of the industry."

From 1998 to 2006, private equity and investment firms spent $3 million a year lobbying Congress, according to the Center for Responsive Politics. Bain got into the game in 2007, registering with prominent Washington lobbying firms Public Strategies, Inc. and Akin Gump Strauss Hauer & Feld. To date, Bain has paid some $3 million to these firms to make sure corporate taxes stay low and CEOs remain fat and happy.

As the New York Times reported several weeks ago, Bain was a member of the Private Equity Growth Capital Council (PEGCC) up until last year, when it abruptly ended its $1-million-a-year membership with the powerful trade group. Its reasons for doing so remain unclear. (PEGCC did not respond to a request for comment.)

Investment fund managers and former CEOs like Mitt Romney* suggest that taxing their carried interest as income would crimp investments, and, ultimately, kill jobs. But as Howard Gleckman, a tax policy expert at the Urban Institute, has found, there is little evidence to support that claim. "Losing a couple percentage points off your returns isn't going to change things very much," Gleckman says. "Taxing carried interest as if it were wages…wouldn't really affect these deals very much."

* Mitt Romney also made the false claims about "double taxation" on his capital gains because of corporate taxes, when this blogger recently suggested that businesses can easily avoid corporate taxes by un-incorporating.)

Now that a small sample of Romney's tax returns is out in the open, voters may be asking more questions about how policies like the carried interest and capital gains tax rules work. Josh Kosman, author of The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy, says that's terrifying for the private equity world. "The private equity industry exists because of tax gimmicks," Kosman argues. "They want to convince people they create value because if anyone started looking at it, the tax rates don't make any sense at all, and they cost the government a lot of money."

As Hacker explains, today's [most recent] favorable tax treatment towards capital gains dates back to the late 1970s, when the lobbying might of conservative business groups like the U.S. Chamber of Commerce* successfully sliced the tax on capital gains in half.

* The Republicans like to boast that the lobbying group, the U.S. Chamber of Commerce, has a 96% membership of small businesses with 100 employees or less. But what they also fail to mention is that only 11% of all small American businesses (according to the SBA) actually belongs to the U.S. Chamber of Commerce -- and that this conservative lobbying firm is mostly dominated by the other, much larger, multi-national corporations - - that also support and push for trade agreements that outsource American jobs. See a list at my post here. These lobbying firm are almost like another branch of our government. (Read my post: Lobbyists on K Street paid like CEOs on Wall Street.)

The Tax Reform Act of 1986* brought the income tax rate back into line with the rate on capital gains as ordinary income; but business lobbies spent the next decade knocking it back down. "For an industry that's held up as a paragon of individual entrepreneurship, private equity is strikingly dependent on favorable tax policies," Hacker said.

* The 1986 legislation also gave wealthier people and their heirs (e.g. Paris Hilton and Mitt Romney's children) an exemption that shielded a large part of their generation-skipping trust funds. Besides Mitt Romney's $100 million trust fund for his sons, there's also his wife, Ann Romney's blind trust fund.

The Heirs to the Romney Dynasty

Of course, private equity isn't the exclusive terrain of one party or the other. As Hacker and Pierson outlined in their book, Senator Charles Schumer (D-N.Y.) has been one of the carried interest loophole's most ardent defenders. And as Kosman points out, four of the past eight Treasury secretaries have direct ties to the private equity industry. (And let's not forget the 1921 Secretary of the Treasury and banker Andrew Mellon.)

All of this, of course, could pose a huge a problem for Mitt Romney—so much so that his campaign recently suggested that he "might be open" to reconsidering the carried interest loophole if he were to be elected president (but don't hold your breath).

Although Bain Capital did not start lobbying until some eight years after Romney left, his just-released tax records indicate that he still collects significant investment income from the firm. Bain's gain, then, has clearly been Romney's as well—and the candidate has publicly endorsed the same policies that his company has backed.

So when Bain's lobbyists have tried to sway the political system in Washington, Romney has gained. Maybe he ought to be careful when denigrating the influence peddlers in the nation's capital.

And then there's the matter of Mitt Romney's offshore bank accounts (e.g. Cayman Islands, Switzerland, and Luxemburg). Backed by court judges, federal prosecutors are now issuing grand subpoenas -- official papers which compel the recipients to provide potentially damning evidence -- to United States taxpayers suspected of holding hidden accounts at Swiss and other offshore banks, according to criminal defense lawyers whose clients have already received papers.

There's also the new documentary out called We're Not Broke, about tax-dodging corporations. Check out an example of what the CEOs are now earning in The $50 Million Club (Apple’s Tim Cook topped the list at $378 million). Meanwhile we have 50% of all U.S. workers who earn less than $26,364 a year - - and the government says the poverty level for a family of four is $22,350. This income disparity, unfair taxation, and wealth inequality has been in the making for the past 40 years, but the Republicans call this Obama's "Welfare State".

The very same people who have the most to gain from these tax loopholes (carried interest and capital gains), are also the most likely to evade paying their share of federally mandated income taxes. It seems that the more one earns, the more likely they are to dodge taxes. (Most of us have our taxes deducted from our paychecks and are limited as to our deductions that wouldn't also raise a red flag at the IRS.)

Five years ago, the last time the IRS released a major tax evasion analysis, two analysts — IRS economist Andrew Johns and the University of Michigan’s Joel Slemrod — went through the raw IRS data and found that Americans who make between $500,000 and $1 million a year under-report their incomes by a whopping 21 percent, triple the 7 percent “misreport” rate of taxpayers making between $30,000 and $50,000, and well over double the 8 percent cheating by taxpayers making $50,000 to $100,000.

Earlier this month, the IRS announced that audit rates on tax returns reporting over $1 million a year in income have doubled over recent years. In 2011, 12 percent of millionaires faced audits, up from only 6 percent in 2009.

Any tax system that subjects rich people to high taxes is asking for trouble...or so the politicians who cater to people of means incessantly argue. The higher the tax rate on high incomes, the argument goes, the greater the incentive the rich have to waste time and energy figuring out ways to evade paying taxes.

“Conservatives tend to talk about noncompliance as if it were solely a function of tax rates,” as former Reagan administration policy aide Bruce Bartlett noted last week, a perspective that makes tax evasion “yet another excuse to cut taxes.”

If the rich politicians (on BOTH sides of the aisle), bankers, and CEOs (like Mitt Romney) are going to evade taxes when tax rates for the rich are already historically low (especially with their tax loopholes, such as carried interest, capital gains, and investments in expensive art), then we might as well jack up the tax rates much higher. (Read: GOP Claims Tax Evasion as an Excuse to Cut Taxes)

Later this year average working-class Republican voters will nominate Mitt Romney for their presidential candidate to lift them out of poverty and low-income jobs. Mitt Romney, the poster child for corporate CEOs, Wall Street bankers, wealthy Republicans, K Street lobbyists, rich heirs, and unpatriotic tax dodgers.

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1 comment:

  1. The burden of Romney’s tax returns