Why Does Mitt Romney Want to Keep His Tax Returns From the Bain Years Under Wraps?
Before Republican presidential candidate Mitt Romney was, as he describes it, "unemployed," he used to get up in the morning and go to work, like the rest of us. Did he pay taxes, like the rest of us have to? He doesn't seem to want us to know.
If you are lucky enough to still have a job, you get dressed, go to work, sit in a noisy cubicle, pound a nail, teach a class, take care of someone, or any of the other things we do most days. You get your paycheck, you pay your taxes. Let's say you do pretty well, making ...wow ... more than $379,150 (after all deductions). According to the IRS your federal income tax should be 35 percent on every dollar that is above that amount. But maybe not, if you are as wealthy as Mitt Romney.
Mitt Romney has released his most recent tax returns. They tell us some eye-popping things about Romney and about the wealthy 1 percent and the low taxes they pay on the gains from invested wealth. But they only raise questions about Romney's controversial years "working" at Bain Capital. What would we learn from seeing his tax returns from the Bain Capital years, and what would that tell us about the transformation of our economy into a playground for the 1 percent and a sweatshop for the rest of us?
What We Did Learn From Romney's Tax Forms?
Romney has released an "in-progress" estimate of his 2011 taxes, and the tax returns for 2010. It is not yet known why he did not release tax returns from earlier years before he was running for president, but it could be that returns from earlier, pre-candidate years might provide details he would not want the public to see. Since even these returns show he has foreign holdings, including a Swiss bank account, the failure to release earlier returns is likely to raise concerns.
Romney's 2011 estimate is 104 pages. The 2010 tax returns consist of Mitt & Ann Romney Return, 203 pages; Mitt Romney Blind Trust, 37 pages; Ann Romney Trust, 83 pages; Romney Family Trust, 81 pages; and Tyler Charitable Foundation, 39 pages.
These documents tell us that the Romneys received more than $42 million in income for the two years of self-described "unemployment." In 2010 $7.4 million of Romney's income was "carried interest" from Bain Capital. Most of the rest was also capital gains income. ("Not very much" -- about $374,000 -- was from speaking fees. This was seven times the country's median household income of all wage-earners in a household the same year.)
In 2010 with income of $21.6 million, he gave $3 million to charity (including $1.5 million to the Mormon Church) and paid about $3 million in taxes. And, finally, the Romneys paid an effective tax rate of 13.9 percent in 2010 and estimate they will pay a 15.4 percent effective tax rate in 2011. This compares to the top federal income tax rate of 35 percent the rest of us are supposed to pay.
From these tax returns we have learned a few things about Romney, but also about the divide between the vastly wealthy -- "the 1 percent" -- and the rest of us -- "the 99 percent." We learned why he thinks making $374,000 from "speaking fees" is, as he put it, "not very much." We learned why he can casually say to Rick Perry, "I'll bet you $10,000." We learned that he has investments in Bermuda and the Cayman Islands and a Swiss bank account. And, of course, we learned the big one: The tax rate on his enormous income is only 14 percent, which is almost certainly "less than his secretary."
But we did not learn what tax rate Romney paid when he "worked" at Bain Capital.
What About When Romney Was "Working"?
We go to work, and we pay our taxes. Mitt Romney went to work at the private-equity firm Bain Capital from 1984 until 1999. We have heard the stories of Romney's company Bain Capital, and how it "earned" its millions. According to the Christian Science Monitor, this is the story of what happened when a Bain-owned company "came to town":
The new owner, American Pad & Paper, owned in turn by Bain Capital, told all 258 union workers they were fired, in a cost-cutting move. Security guards hustled them out of the building. They would be able to reapply for their jobs, at lesser wages and benefits, but not all would be rehired.
This is how "job-creators" like Romney make their money. But Republicans claim that their tax rates are much too high. So why won't Romney release tax records that show what tax rate Romney paid when he was "working" and raking in millions upon millions at Bain Capital by buying companies, laying people off, cutting wages and benefits, getting rid of unions, selling off pieces and closing down others?
Clues to the Mystery
Since we don't have access to Mitt's past tax returns, we don't know how much Mitt claimed as salary and paid in taxes on that salary when he showed up at the office and "worked" at Bain Capital. But we can gather clues from the taxes we do know were paid by those in similar positions. Recently the infamous private-equity firm, the Carlyle Group, decided to "go public" (sell stock to the public) and had to disclose the income made by its partners. Forbes magazine looked through the disclosure documents, and tells us:
"Carlyle's disclosure opens a small window into how this works. In 2011, its three founders were each paid about $140 million. But they received just $275,000 in salary and another $3.5 million in the form of a bonus (also taxable at ordinary income rates). But each also got $134 million -- or 96 percent of their compensation -- from investment profits."
This is the key. While "working" at the Carlyle Group the key players took very low "salaries" but received very high compensation -- 96 percent -- as "investment profits." Since "investment profits" are taxed at a much, much lower rate than salary, this means they paid very low taxes while they "worked" there.
Romney's Bain Capital was a private equity firm very much like the Carlyle Group, and this disclosure tells us that Mitt's earlier returns would almost certainly show that he also took a modest salary and tens of millions in "carried interest."
By deferring much of their compensation into "investment profits," Carlyle's partners paid only a 15 percent tax rate on this income. This is because of a tax loophole known as "carried interest." This loophole lets the managers of a fund like Carlyle -- and Bain Capital -- arrange compensation to look like a share of profits, which are taxed as long-term capital gains, instead of as standard compensation for services, which would be taxed as normal income from work. Long-term capital gains have a maximum tax rate of 15 percent.
So the question for Romney is, what tax rate did he pay when he worked at Bain Capital? Did he pay income taxes like the rest of us who work for a living? Or did he take advantage of this special loophole that is only for the wealthy 1 percenters when they engage in "job creation" activities like Bain Capital did.
Today Romney claims that much of this income is from "investments" (much as continued income from Bain Capital) and not from working. This means that he is receiving money from "capital gains," which are taxed at a very low maximum rate of 15 percent. A lot of this is gains from Bain Capital, indicating that he may have used the carried interest loophole to keep from paying the taxes the rest of us have to pay.
Why Special Low Taxes For Investments?
Corporate/conservatives say that we need a special low tax rate for gains from investing capital to provide an incentive to invest. They say this incentive to invest is necessary because the usual reason to invest, making a bundle of cash, is considered insufficient motivation. But many economists say that this addition of a special "incentive" on top of making a bundle of cash creates what they call "market distortions" which cause investors to pursue various tax-reduction schemes instead of investing based on the value and merits of a given investment.
People don't understand taxes and brackets. For example, American Public Media's Marketplace carried a segment Tuesday titled, "Americans' feelings on the tax code," in which they talked about "little old ladies" who make $40,000 off of investments who would have to pay more taxes if the capital gains tax rate was changed. The thing is, such a person would almost certainly have deductions, and the tax rate on taxable income of $34,500 is ... still 15 percent. This is not a tax break that "little old ladies" need.
The necessary precondition for investing capital is having capital. So a tax break on the return from investing capital is by definition a break for the well-off. It means the kind of income that you get from already having a lot of money is taxed at a much lower rate than the income from having a job. Instead of rewarding work, this tax structure rewards wealth.
In other words, Romney and other 1 percenters get a lot of their income from already having a lot of money. You and I can't do that. This chart shows who in our economy owns the kinds of investments that generate this kind of income:
As you can see from the chart, the top 1 percent own 50 percent of the capital-gains-generating investments, and the top 10 percent own 90.3 percent. The bottom 50 percent of us own 0.5 percent of the kinds of investments that generate these kind of low-tax gains. Here is the simple reality: capital gains are taxed at a lower rate because most of the income of the 1 percent is from capital gains, and most of the income of the 1 percent is from capital gains because the tax rate is lower.
You and I do not have the wealth needed to buy into the special tax loopholes that allow people like Mitt Romney to pay only about 15 percent on income in the tens of millions. Mitt Romney and Newt Gingrich and the rest of the Republicans should stop claiming that taxes are too high, and start paying them so we can repair our aging infrastructure, have good schools that pay teachers well, good courts that serve all of us, sufficient police and fire protection for us to feel secure and safe, and start paying off that Reagan/Bush tax-cut debt.
Republicans claim that taxes on wealthy "job creators" like Romney are too high. According to the New York Times, Romney's own tax proposals would cut his federal income taxes by 40 percent, and Newt Gingrich's proposal to eliminate capital gains taxes entirely would mean Romney pays almost no federal taxes. Yet so many of the wealthy 1 percenters have access to tax loopholes like special capital gains tax rates in investments and the special carried interest deduction used by Romney and others. Are the taxes on these self-proclaimed "job creators" really all that high?
If Mitt would release his tax returns from the Bain Capital years, we might have some answers.