WASHINGTON -- As the GOP presidential candidate faced pressure over the past year to release more financial information, it was widely presumed that at some point he would buckle and follow a tradition started by his father, who released 12 years of tax returns. People who knew him, however, warned that there was no chance he'd release the returns.
They were right. Mitt Romney made it. But the journey has left him broken and battered.
For the first time in presidential politics, the words "Cayman Islands" and "Swiss Bank account" became campaign catch-phrases. President Barack Obama's team produced a blistering ad featuring tropical locations and press clippings of stories about Romney’s aggressive tax avoidance. Did Romney receive amnesty under an IRS program for UBS tax cheats? Did he illegally manipulate foreign tax credits? Senate Majority Leader Harry Reid claimed to have been told by a source who invests with Bain Capital that Romney did not pay federal income taxes for a decade. Bain Capital executives told HuffPost that Romney never would have run for president if he'd thought he'd have to release his tax returns. As the pummeling continued, Haley Barbour, Michael Steele, Rick Perry, Rep. Walter Jones (R-N.C.), and other prominent conservatives said Romney should just release some earlier tax returns and end the abuse.
"The cost of not releasing the returns are clear,” conservative columnist George Will said on ABC’s "This Week" in July. “Therefore, he must've calculated that there are higher costs in releasing them.”
The public never learned what those higher costs may have been caused by. In the final days of the race, Romney's pre-2010 tax returns are still nowhere to be seen. But while he escaped releasing them, the still-secret tax returns haunt Romney on the eve of the election. The Obama campaign, bucking the advice of the pundit class, bludgeoned Romney for his secrecy and for his offshore investments. Top Obama aide Stephanie Cutter even floated the possibility that Romney had committed a felony by giving false information on a previous disclosure (a charge that was deemed silly by reporters and dismissed by the Romney campaign, but which was based on the plain fact that his returns and his disclosure differed in meaningful ways).
The focus on Romney's offshore investments and his missing tax returns -- heightened by Reid's incendiary charge -- drove the former private equity executive into the ground, defining him at a crucial period before Romney had a chance to redefine himself after the primary.
"Romney's refusal during his campaign to release his past tax returns betrayed a contempt for the electorate and for the democratic process, which relies on voters having the requisite information to make informed decisions," said University of Southern California law professor Ed Kleinbard. "The reason for the tradition of releasing past tax returns -- not returns prepared in the years an individual is running for the presidency -- is to demonstrate that the candidate fully and fairly complied with the tax laws when the spotlight of the election was not already on him."
What little tax information Romney actually released has critical implications for his campaign’s most fundamental argument: anti-business tax policy is crippling the economy, and Romney’s Bain experience makes him uniquely qualified to fix it. Romney’s taxes not only serve as a window into his own personal finances, they’re a record of his own active tax avoidance on behalf of others. Many of the offshore corporations on Romney’s 2010 tax return were not simply personal investment preferences –- they were shell companies established by Bain Capital.
“The thing that bothered me the most about his offshoring investments was not that he or his partners at Bain avoided paying taxes, but that they made it really easy for investors to cheat on their taxes,” said Rebecca Wilkins, senior counsel for federal tax policy at Citizens for Tax Justice. “If you wanted to cheat, Bain Capital just made it really easy for you.”
Both Bain and Romney flirted with the edge of legality by using sham derivative transactions to mask investments in U.S. stocks, lowering their American tax burden. The IRS has been cracking down on this activity since 2010, as HuffPost reported in August. Thousands of pages of Bain documents released by Gawker also reveal that Bain gamed its management fees in order to help its investors avoid paying taxes –- a tactic that is straightforwardly illegal, according to Victor Fleisher, a tax expert and professor of law at the University of Colorado.
To the extent that Romney has offered a coherent vision of a just American tax code, he has largely defended the very policies that he profits from. Romney acknowledged Wilkins' point in a July interview with National Review's Robert Costa.
"The so-called offshore account in the Cayman Islands, for instance, is an account established by a U.S. firm to allow foreign investors to invest in U.S. enterprises and not be subject to taxes outside of their own jurisdiction," Romney said.
Marc Wolpow, former managing director for Bain Capital, said that if the company set up offshore accounts as Romney indicated in the National Review story, it was to help investors minimize their tax burden. "We are paid by our investors to optimize our investments," Wolpow wrote in an email to HuffPost.
At least as an individual, Wolpow wrote that he thought the rich could pay more in taxes. "I am willing to pay more taxes to create a better sense of fairness in the tax system; i.e., I agree with Warren Buffet," he wrote. Of Romney's own unknown tax records, he added "I'd be shocked if Mitt did anything that wasn't 100% legal and legitimate."
In an interview with "60 Minutes"’ Scott Pelley shortly after Romney released his 2011 return, the GOP candidate said that it was fair for him to pay a lower tax rate than middle-class earners, because his tax perk encourages investment.
"You paid 14 percent in federal taxes. That's the capital gains rate. Is that fair to the guy who makes $50,000 and paid a higher rate than you did?" Pelley asked.
"It's the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work," Romney responded.
The sheer scope of Romney’s personal tax avoidance efforts also shed light on iniquities in the tax code. Very wealthy Americans have many perfectly legal options to reduce their tax burden -– tactics not available to poor and middle-class taxpayers. "This garbage is finally floating to the surface where it can be seen in the light of day," Thomas Krouse, a portfolio manager and former hedge fund chief financial officer, told HuffPost. "America needs to know how we are going to stop it. No matter who wins this election -- how is this going to be stopped? It must be stopped. It's worse than Chinese manufacturers stealing American jobs. ... With the speed of paperwork, you can bleed America dry through tax evasion practically overnight."
"The most interesting thing he disclosed was what we saw initially on the 2010 return -– the vast array of offshore investment vehicles that plainly reflected a lot of aggressive tax planning," said New York University Law School professor Daniel Shaviro.
The Huffington Post detailed those efforts for much of the year. Romney recognized $787,455 in foreign tax credits in 2010 -– an option only available to the global investor class, and an amount high enough to raise eyebrows among some tax experts who questioned the validity of the credits, which had been a hotbed for abuse by other taxpayers. Legal tax deductions Romney took in 2010 assumed an "active" role for Romney at Bain Capital, where he had repeatedly stated that he has not been making managerial decisions for years.
A full 267 pages of Romney’s 379-page 2011 tax return are devoted to listing investments in 34 offshore corporations and partnerships, including 15 in the Cayman Islands. Of the 34 offshore companies, 30 are located in countries considered to be offshore tax havens by the U.S. Government Accountability Office. The same year, Romney shifted $111,081 offshore to a Bain Capital affiliate based in the Cayman Islands during 2011, and an additional $296,471 to a Golden Gate Capital fund, also organized in the Caymans.
"Governor Romney's limited disclosures revealed hints of troubling issues, and his stonewalling of the electorate therefore left many troubled by the unknown breadth of the gulf between the carefully cultivated image of the candidate, on the one hand, and the authentic man, on the other," Kleinbard said.
Even Romney's charitable giving pushed the tax avoidance limits. He was grandfathered into a tax scheme that is no longer allowed. It allows him to receive tax-free investment income from a designated charity, as Bloomberg uncovered. He also claimed a roughly $1 million tax break in 2010 and 2011 by transferring stock from his own account to one controlled by a 501(c)3 that he set up and ultimately controls. The company is Sensata Technologies, owned by Bain Capital. Bain is in the process of shutting down a factory in Illinois and shipping the jobs to China.
Bain Capital evaded about €80 million (or $102 million) in taxes by using a financial loophole in the Netherlands, according to a HuffPost translation of an article in the Dutch newspaper De Volkskrant Monday.
De Volkskrant and the website Follow the Money claim that by routing its 2004 investments in the Irish pharmaceutical company Warner Chilcott through the Netherlands, Bain was able to dodge dividends and capital gains taxes. Financial adviser Jos Peters estimates that the loophole allowed Bain to save about $102 million.
The questions raised by this information -- and lack of information -- gain importance with Romney’s vague tax reform proposal. In August, the nonpartisan Tax Policy Center published a study indicating that the tax rate reductions Romney had been promising wealthy Americans simply are not mathematically possible without either raising taxes on the middle class or expanding the federal budget deficit. Romney responded not with a more narrowly tailored plan, but by insisting that other studies showed that his math did work. Most of those studies, however, were actually blog posts. And all of them indicated that Romney would have to eliminate a host of popular tax preferences, including the mortgage interest deduction, for people making as little as $100,000 a year –- an income level often considered to be middle-class.
In the closing days of the campaign, University of Texas law professor Calvin Johnson penned an op-ed for Tax Notes suggesting that Romney illegally undervalued his investments in order to dodge taxes on two enormous trust funds. Bloomberg detailed Romney's use of a bogus charity to reduce his tax burden, a tactic which the IRS banned just months after Romney had set up his own, which he continues to profit from.