Mitt is not going away, perhaps because the competitive field looks so bland (Daniels or Pawlenty) or crazy-ideological (the list is too long). So, folks, we need to see Mitt’s tax return. And since he won’t disclose it, I will attempt, as a CPA, to reconstruct it in plain English. If his wealth did NOT come from these basics, then his CPAs are incompetent (and my bet is they are not).
Let me first note that I grew up as a George Romney Republican, and I still remember him fondly. The scholarship programs he set up paid for my education, and his strong manufacturing policies got me a first-rung job in the auto industry. But George didn’t survive his truth-telling about Vietnam, and he certainly would be tea-partied out on a rail today.
So, back to Mitt, who has used several very profitable tax preferences to the personal benefit of hundreds of millions of dollars over the years. Some of these are available to the general public, but in forms that save most of us, by design, maybe hundreds of dollars. The best way to get these preferences through Congress historically has been to give many taxpayers a sop, while giving the big money contributors a far better return on their investment in campaign contributions.
In short, while his father George made his money the old-fashioned way, by making something (cars), Mitt has made the bulk of his money by arbitraging assets into forms with substantial tax preferences. Basically, that is what equity fund managers, like those of Romney’s Bain Capital, do for a living – move money around for tax reasons, leeching off the rest of the taxpaying public, and often creating havoc and job destruction in their wake.
These are the big four. I will flesh out two of these in this post, and I may add more in later posts:
1. Carried interest
2. Interest on debt
3. Capital gains
4. Tax loss carry-forwards
Carried Interest. While the equity fund managers like those with Romney’s Bain Capital claim that "carried interest" is some unique form of compensation deserving lower tax rates, it is really little different from the profit-sharing bonus that regular middle managers depend on annually, which gets taxed at the full wallop. For that matter, it is not all that different from the sales commission on which a car dealer struggles to survive, also taxed as normal income.
In short, if you can play accounting games to get your salary paid in the form of "carried interest," this is worth 15% of your income per year. And at the compensation levels of equity fund managers, that is a heap of change.
It is hard to find any tax expert or economist that will defend carried interest, because the honest ones know it is simply a bookkeeping dodge.
Interest on debt. We accept as a given that interest paid on debt is tax-deductible, and we hold it as a God-given right as we finance our homes with a tax break worth perhaps a couple thousand dollars to us, in the end. But the equity capital firms see debt in an entirely different way from how the general public sees it.
The groundbreaking finance theory developed by Modigliani and Miller in 1958 made the financial world realize that, except for tax reasons, the line between debt and equity in a business is fuzzy indeed. The entire right side of the corporate balance sheet is a mix of a variety sources of funds, and distributions of risk and return for that money. "Debt" is not as clear a category as it may seem.
When I studied Finance in graduate school thirty years ago, the tax deductibility of interest paid on debt was seen as an important, but limited, deduction. No one in their right mind, said the conventional wisdom at the time, would finance a normal company with 95+% in debt, because the risk of default would get too high.
But equity capital firms realized that, with the right legal protections (as we have seen with the recent government bailouts), an equity capital firm can take over a profitable, low-debt company with very little money in equity, leverage it to the hilt with debt, and basically pay back the debt on the tax savings from the interest payments alone.
If the acquired company can’t handle the debt, well, you just sell its once-profitable carcass, or let it go under, stiffing the debt-holders (and even the government).
So, we have likely accounted for a couple hundred million dollars of Romney "income" over the years in these two items alone. More to come.
Hey, when can we get some real journalists to cover this guy?