Unless you've been in a coma, you have certainly heard about Mitt Romney's release of his 2011 tax returns last Friday. You no doubt know that he and his wife did not claim all the charitable tax deductions they were due, so their tax rate would not go below 13% of adjusted gross income. If you read Bloomberg or a newspaper that picked up the Bloomberg story, you know that Rafalca, the Romneys' dressage horse, has disappeared from their 2011 tax deductions. This, of course, raises the question of whether it was a legitimate deduction in 2010 (or earlier?). After all, being in the Olympics probably raised the mare's value, making the profit motive necessary for an allowable business deduction more plausible. So why would Rafalca not be eligible to deduct in 2011 if she were eligible in 2010 and probably gained value?

But have you read the Frequently Asked Questions page the Romney campaign put up about the 2011 returns and the PricewaterhouseCoopers (PwC) summary of the Romneys' 1990-2009 taxes? You should, for the humor value, if nothing else.

In question 9, we learn how PwC calculated the average effective tax rate: they added the tax rate for each year, then divided by 20. This tells us almost nothing, as many observers (here's one, h/t Think Progress) have pointed out: \$50 million taxed at 10% (though the campaign claims it was never less than 13.7%) and \$5 million taxed at 30% would yield an average tax rate of 20%, using the PwC method, when the true tax rate would be 11.8% (\$6.5/\$55) in this example.

In the very next question, however, we learn that for the total of federal taxes, state taxes, and charitable contributions (38.49%), PwC used the proper averaging methodology! In other words, adding up all the payment dollars and dividing by the total adjusted gross income (though we don't know what tricks he used before adjusted gross income). Why didn't they do that for tax alone?

In 2011, the Romneys' charitable contributions came to just over twice their federal income tax (\$4 million vs. \$1.9 million). If that ratio applied for the entire 1990-2009 period, that would make the federal tax portion less than 13% (even lower because I have ignored state taxes). Of course, we have no way of knowing the real rate for federal or state taxes, or charitable deductions, without seeing the actual tax returns.

But wait, there's more! Don't forget all the offshore accounts! To do this question and answer justice, I'll have to quote it in full:

12. There are some investments that seem to be established in offshore accounts, like the Cayman Islands and Bermuda. Are these investments evading taxes?

Note the misdirection in the question, "evading" rather than "avoiding" taxes, which describe illegal and legal maneuvers respectively. Few people think Romney has broken the law, though Nicholas Shaxson considers it to be a possibility.

No, the investments by the blind trusts in funds established in the Cayman Islands or other jurisdictions 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 evaded or reduced.  These funds are all registered with the IRS and report all income to investors and the IRS, just like domestic funds.  Whether in Bermuda or Boston or elsewhere, there is no difference in how they are taxed.

If this were true, why would the funds need to be organized in the Cayman Islands? Boston would be a lot more convenient. No, as Richard Murphy of Tax Research UK told me, these funds are set up to allow round tripping by U.S. investors to avoid U.S. taxes, though some foreigners may also take advantage of them. Moreover, if foreigners are exempt from U.S. taxes like the Unrelated Business Income Tax, what need do they have to invest through the Caymans except to avoid taxes at home? Finally, we know from the Gawker revelations that at least two Cayman funds the Romneys invested in created five blocker corporations, which are set up precisely to allow round-tripping by Americans. How can these funds be established in the Cayman Islands, etc., for any reason other than tax avoidance?

In addition, it is important to note that there are no offshore accounts.  These are investments in funds that are organized outside the US.

A fund organized in a secrecy jurisdiction like the Caymans, Bermuda, or Luxembourg is offshore by definition.

Further, it is important to note that Governor Romney did not make these investments.  Governor and Mrs. Romney's assets are managed on a blind basis.  They do not control the investment of these assets. The assets are under the control and overall management of an independent trustee.

We've known since 1994 what Romney thinks of blind trusts, calling Senator Ted Kennedy's "a ruse."

Finally, the trustee did not choose where the investments were located any more than a stockholder in a Fortune 500 company chooses where that company is organized.  Only the sponsor of the fund decides where it is organized. That responsibility is totally outside the control of a passive investor like Gov. Romney or the trustee of his blind trust.

And a stockholder can sell his shares. Has trustee Brad Malt never heard of "divestment"? I was one of thousands of people active in the late 1970s to get our universities to sell stock in companies doing business in South Africa, the "divestment movement." While we weren't very successful at Princeton, students and faculty at many other universities were, and some major local government funds divested from such firms, too, leading companies like Citicorp to end their South African operations. Malt could sell if he wanted to.

The bottom line is the "same as it ever was," one tax system for the 1% and another one for the rest of us.

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#### Comment Preferences

• ##### What is not funny is the amount of time left for(45+ / 0-)

him to file a revised return to claim all those deductions he did not take thinking that would fool us.  What a Randian jerk.  He clearly did not fool you.  You have added to the reasons to vote against Rmoney.

Never promote men who seek after a state-established religion; it is spiritual tyranny--the worst of despotism. It is turnpiking the way to heaven by human law, in order to establish ministerial gates to collect toll. John Leland

• ##### You can't round-trip under the(9+ / 0-)

US tax code, unlike w/ systems like UK or India, which are probably those that Shaxson is familiar with.  There's no advantage: it just transforms low-tax income like capital gains into higher taxed ordinary income.

• ##### shaxson, ftr, is a dipshit.(1+ / 0-)
Recommended by:
VClib
• ##### What about UBIT?(3+ / 0-)
Recommended by:
Julia Grey, Amber6541, svboston

I've seen several tax law professors saying that the Caymans funds allows not-for-profits to avoid UBIT. Why would you not consider that round-tripping, if it's correct?

Second, someone is benefiting from the Cayman structure. Who? Maybe not Romney personally, as I saw in your July 4 diary, but the structure has to be a part of strategy that benefits someone or there wouldn't be any point to it.

• ##### Stiffing the church(9+ / 0-)

Romney's returns will show that he didn't give to his church as much as he said he did.

• ##### Usually, yes. Always, no way.(0+ / 0-)

Skipping on windfall money coming out of Bain -- you betcha !!

Romney got a huge windfall when his settlement went through in 2002 before the Massachusetts governor race.

• ##### How does Price Waterhouse have ANY creds?(39+ / 0-)

I rolled my eyes when I learned that ROMNEY'S ACCOUNTING FIRM is the infamous Price Waterhouse.

Has the media forgotten ENRON?  AIG?  SATYAM? etc?

I have a good memory.  I remember Price Waterhouse scandals from the 1980s.

WHERE IS THE MEDIA?

Enron, AIG, Price Waterhouse Coopers and today’s Barbados Offshore Companies

Mitt and Enron have something else in common:

The recent disclosure that the Enron Corporation used nearly 700 partnerships registered in the Cayman Islands to avoid paying federal taxes has revived suspicions. A recently signed treaty to exchange tax information with American authorities has been derided by some American prosecutors as a sham because it would not take effect for a few years, which they said would give tax cheats ample time to find another haven.
And then there's Price Waterhouse and AIG
May 31, 2005 (washingtonpost.com) -- For years, PricewaterhouseCoopers LLP gave a clean bill of financial health to American International Group Inc., only to watch the insurance giant disclose a long list of accounting problems this spring.
And Price Waterhouse and CLICO
“No one is questioning the role of Pricewaterhouse Coopers in this Clico fiasco. PwC consistently signed clean Audit reports for Clico and CIB despite knowing about the inaccurate and fraudulent accounting.

CIB’s accounts for the 2007 year end were signed off on December 3rd 2009, less that 45 days before the company crashed. There was no going concern qualification, or subsequent events note that should have been in the audit report.

Surely PwC knew of the company’s predicament when they signed the accounts!”

Price Waterhouse and Satyam
Price Waterhouse India must now submit to intensive oversight by an outside monitor and leadership from outside India as a result of its settlement with the SEC and PCAOB.

Both agencies have reserved the right to bring additional charges if Indian courts find that the firm and its partners, as alleged, colluded with company executives in the fraud.

And this

Tax Shelter of Rich and Famous Has Final Date in Court

And PwC and AM International

NEW YORK — The Securities and Exchange Commission on Thursday charged the accounting firm of Price Waterhouse and three of its partners with fraud in connection with accounting abuses at AM International, the Chicago-based maker of duplicating, word-processing and graphics equipment.

It's difficult to be happy knowing so many suffer. We must unite.

• ##### Going to the same cocktail parties as the PWC(6+ / 0-)

people.  Hanging out at the same Caribbean islands.

That's one more thing to add to my long list of small problems. --my son, age 10

[ Parent ]

• ##### Giving the customer what they want(10+ / 0-)

PWC could use your post as a marketing presentation -

"Why you should hire PWC"

No wonder why they're so popular.

The Fail will continue until actual torches and pitchforks are set in motion. - Pangolin@kunstler.com

[ Parent ]

• ##### Not sure about PwC's connection to Enron(4+ / 0-)
Recommended by:
weneedahero, sfbob, litoralis, Amber6541

Enron destroyed Arthur Anderson but I don't remember  PwC being a culprit to that specific problem.   I followed the links and it wasn't clear either.  I found that PwC was investigated for a potential problem but it apparently was resolved.

Just clarifying the situation, not defending PwC.

• ##### I think this is correct(2+ / 0-)
Recommended by:
sfbob, happymisanthropy

Enron was Arthur Anderson's baby and, as you say, it destroyed the accounting firm. Of course, it was reborn as Accenture, IIRC.

• ##### Expand this with a few more details and (3+ / 0-)
Recommended by:
sfbob, Amber6541, War on Error

it would make a good diary, WoE.

Renewable energy brings national global security.

[ Parent ]

• ##### I'll get back to this, thanks.(1+ / 0-)
Recommended by:
Calamity Jean

It was a 1/2 hour post.  Will have some free time tomorrow.

Any suggestions?

It's difficult to be happy knowing so many suffer. We must unite.

[ Parent ]

• ##### What(14+ / 0-)

really amazed me was the sheer size of his return..750 + pages..I've heard of Philadelphia lawyers, and accountants, but I've always thought that was a myth..but to actually see their work was a once in a lifetime event..750 + pages...WOW..

• ##### What an incredibly cynical and dishonest(11+ / 0-)

contrivance at disclosure. Manufactured information that really tells the public precious little, but enough of a fig leaf for his dishonesty to just barely glide by.

• ##### All true, but it's also very(3+ / 0-)
Recommended by:
Calamity Jean, sfbob, bontemps2012

long and very complicated.  Do they actually imagine that the average voter is gonna wade through this word salad of legalese?
So in addition to cynical and dishonest, it's also pretty stupid and pointless.  Kinda like everything else they've done.

• ##### Thank you for the idea...(3+ / 0-)
Recommended by:
gramofsam1, sfbob, bontemps2012

...they should get Palin, the expert on word chopping and obfuscation through blind ignorance.

She could read the 750 pages, digest it, and regurgitate it for us all.

It will probably take her longer than it did for her to get her four-year bachelors degree, however....and that is WITH A TEAM OF READERS reading for her.

Aldus Shrugged : The Antidote to Ayn Rand. Buy ALDUS SHRUGGED on amazon, and ALL royalties will be donated directly to barackobama.com HELP ME TO HELP THE BIG O!!! And follow the fun: @floydbluealdus1

[ Parent ]

• ##### In a current diary (on George Bush's upcoming(15+ / 0-)

http://www.dailykos.com/...

In which s/he notes that it is a group specializing in selling "alternative investments" to the super-rich.

What are "alternative investments"?  Isn't that a euphemism for "alternative to paying US taxes or being subject to US taxation"?

That's one more thing to add to my long list of small problems. --my son, age 10

• ##### Or investments in countries that the USA isn't(0+ / 0-)

exactly friendly with?

Things that make you go hmmmmmm.
Perhaps investments in companies that wouldn't mind the USA starting a war with Country X so they could obtain mineral or other rights?

Everybody got to elevate from the norm....

[ Parent ]

• ##### Mitt's tax return is 750 pages(22+ / 0-)

but his tax plan is 5 words: cut taxes on the rich.

• ##### Top Comment. eom(1+ / 0-)
Recommended by:
Kenneth Thomas

"It's not enough to be right. You still have to use your nice voice." -said by my then six-year-old daughter; "Love binds us all."-willb48

[ Parent ]

• ##### He would rather lose the election(5+ / 0-)
Recommended by:
venger, mungley, sawgrass727, entrelac, sfbob

than lose a penny of the money he "earned" by all his "hard work."  That's almost as sad as his pandering to the rich at the expense of the common man.

I think Wall Street is finally going to pay for the implosion they caused when they got drunk on greed back in '08.

If you starve the middle class, whose gonna pay for your crap?

• ##### "same as it ever was"(10+ / 0-)

Mittster is a shameless liar.  Really - think about it.

SHAMELESS.  He doesn't give a shit.  He'll say anything.

Perhaps his poor showing in the polls is due to the fact that enough people have been smacked in the face by this that they're finally noticing it.

The Fail will continue until actual torches and pitchforks are set in motion. - Pangolin@kunstler.com

• ##### PWC- Simply awful.(4+ / 0-)

average of the rates- not average rates.  I agree that it is astounding and disgraceful.  PWC knows exactly what they are doing- thery are intentionally disingenuous.

But we all know the old saw- when you ask an accountant "how much is two plus two?" the answer is "How much do you want it to be?"

As my father used to say,"We have the best government money can buy."

• ##### His father was right(8+ / 0-)
One year could be a fluke, perhaps done for show, and what mattered in personal finance was how a man conducted himself over the long haul.
It's very easy to confuse income with net worth.  Two things are not reported in his tax returns.

First, his return on his \$100,000,000 IRA.  Those returns are not reported or listed in tax returns.  I still have no idea how he got that much money into an account that I can only contribute \$6,000 per year into.  It would take me over 16,000 years to contribute that much.

Second, his tax returns only show capital gains and losses from completed transactions.  He well have made another 20 or 30 million dollars in investments, but if he hasn't sold those investments, he doesn't have to report it as income.

And one more thing I haven't heard anyone bring up.  Mitt has 3 years within which to file an amended return.  There's nothing to stop him from claiming the entire \$4,020,722 of charitable contributions and claiming an overpayment of \$619,482 in 2011 taxes.  Gee, what do you think the odds of that happening are?

• ##### If he does that he is risking(0+ / 0-)

being slapped by the IRS over filing a fraudulent return.

• ##### He'll say(2+ / 0-)
Recommended by:
sfbob, Catte Nappe

" it wasn't fraudulent; I simply changed my mind..."

Fear doesn't just breed incomprehension. It also breeds a spiteful, resentful hate of anyone and everyone who is in any way different from you.

[ Parent ]

• ##### Not really. 1040X is a legitimate form.(2+ / 0-)
Recommended by:
Catte Nappe, svboston

People file them to "correct" their original filings

You might, in fact, file one to AVOID being charged with filing a fraudulent return.

• ##### The Bloomberg story I linked(3+ / 0-)

Quotes a campaign spokesman saying Romney would not amend the return for the foregone charitable contribution deductions, but there's nothing to hold him to that after the election.

• ##### Right. Who's to know?(2+ / 0-)
Recommended by:
Amber6541, svboston

He's not going to run for president again, and even if he did, he wouldn't be showing returns on THAT run, either.

• ##### Are you serious?(3+ / 0-)
Recommended by:
sfbob, Catte Nappe, Catskill Julie
In question 9, we learn how PwC calculated the average effective tax rate: they added the tax rate for each year, then divided by 20. This tells us almost nothing, as many observers (here's one, h/t Think Progress) have pointed out: \$50 million taxed at 10% (though the campaign claims it was never less than 13.7%) and \$5 million taxed at 30% would yield an average tax rate of 20%, using the PwC method, when the true tax rate would be 11.8% (\$6.5/\$55) in this example.
And these guys are accountants?  With math skills that bad, no wonder our economy is a mess.  Problem with our businesses is that htey are run by businessmen, apparently.

Seriously, I used to teach GMAT prep classes, and this is a common misconception that would cost you points big time in trying to get into biz school.  That's really sad.

• ##### There are legit reasons for off-shore investments(3+ / 0-)
Recommended by:
sfbob, Catte Nappe, Wee Mama

I used to work for an investment company that managed hedge funds, and we frequently set up both domestic and off-shore versions of the same strategy. The idea was to allow non-US investors to invest without having to pay taxes to the US on the earnings; they still had to pay whatever their own country would charge (assuming they declared it), so they were really just avoiding taxes they shouldn't have owed in the first place.

However, none of that holds true for a US tax-payer, since you are required to pay taxes on all of your earnings, regardless of where you live, where the earnings were made, or whether or not you choose to re-patriate them to the US (again, assuming you declare them).

So, the existence of the off-shore accounts in places like the Caymans makes sense for some entirely legit investors (as well as the shady ones), but not for Mitt, as far as I can see.

Dude is FUBAR.

• ##### Foreign investors are already foreign(0+ / 0-)

Why do they need to come in through the Caymans rather than their home country to avoid U.S. taxes? Or if you need a fund with a specific structure, it's not like you couldn't set up an investment fund in Canada, Australia, or any non-haven jurisdiction. What am I missing?

• ##### I'm surprised that i haven't heard much about(2+ / 0-)
Recommended by:
svboston, Kenneth Thomas

what the 'Tyler Charitable Foundation' does...especially when I looked them up and it took about 30 seconds to find something about them donating to 'cure the gays' groups and groups that liken homosexuals to Al Qaeda.

Whose interest does ignorance serve? - Carl Sagan

• ##### This is a great catch(0+ / 0-)

You should write it up.

• ##### Typical Reason for Cayman Island Accounts ...(0+ / 0-)

Is to avoid regulation by the Investment Company Act of 1940.

By being outside of the jurisdiction of the United States, you can have something that is essentially like a mutual fund, but is not regulated by the US Government.    Of course if you think that having your fund manager subject to some government regulation and required disclosure is a good idea, than you would probably not want to invest in off-shore accounts.  If you really trust the manger, a lot, and you think that the cost of the disclosure and regulation is greater than the benefit, than investing your money outside of the United States could be a good idea.