Missing the Key Issue?


TPM Reader MB says we’re missing a key part of the Romney tax story …

I think you’re missing a key nuance from Romney’s denials and indignation here. Note that the response always appears to be “I paid a lot of taxes” and not “I paid a lot of income taxes.”

Anyone making $10 to $20 million per year will pay a lot of taxes in absolute dollars — state taxes, property taxes, city taxes, sales taxes, etc. But the distinction you’re missing is whether or not these taxes were income taxes.

From my initial understanding (and I am no tax professional, but have 10 years experience in private equity and am familiar with how the senior professionals manage their finances), there’s a possibility that Romney paid very little (i.e. less than 10%) income taxes during the 2002 to 2009 period in many of those years. It is quite possible that some of those years could have approached zero. There’s a lot of different ways to make that happen, through standard structuring/gifting, offshore planning, charitable contributions, and favorable recent tax laws for carried interest and capital gains. I think you should try and pivot the discussion around “were these income taxes that Romney paid” and not “did Romney pay taxes.”

Just a thought from looking at the nuances behind Romney’s replies to Reid — he appears to be very careful not to say “income taxes even when the initial claim by Reid was specifically around income taxes.”

Here I responded (edited to remove iPhone abbreviations)…

Well even his ‘base’, as it were, shld be 15%, right? Wouldn’t almost all the income be structured as capital gains?

To which MB replied …

Yes, but you’re missing the piece on the timeline where Romney cut a retirement deal with his partners to buy out his shares in the Bain Capital management company. Where it could be zero is if Romney had previously contributed his shares of the Bain Capital management company that he controlled 100% of into his IRA over the years.

The corporate structure of most private equity firms is such that there is a management company (holding company) above a set of LLCs or limited partnerships which are the actual funds investing the capital and collecting the fees/distributing the profits. Romney was both a general partner in the funds and the sole shareholder of the management company.

The management company shares are generally considered to have relatively nominal value (i.e. you can conceivably put them into an IRA) as there generally isn’t a lot of (or any) income/revenue associated with them — however, since the management company owns the brand name and controls the funds and all hiring/firing/compensation decisions (within Bain Capital), if Romney’s partners wanted to continue using the name “Bain Capital” and take over control of the private equity firm and funds in the future, they would have to buy back Romney’s shares over a period of several years for hundred+ of millions of dollars. This is not uncommon in private equity firms undergoing an ownership transition. Since these shares (could) have been contributed to an IRA over the years, the Romney’s income 2002 to 2009 would largely be from his partners at Bain buying back shares that he’s already contributed to his IRA, and just like any trading you do in your IRA, the sale of these shares would be tax free until after he turns 65 (and/or withdraws from said IRA) and he’d pay zero income taxes on that. So, if he had transferred 50% of his Bain management co. shares to an IRA, if he was being paid $20M per year to have those shares bought back, his tax rate would be a blended 7.5%. If the management company shares were held overseas or had overseas blocker entities, it is conceivable it could be even lower than that. Also, he could use his taxable shares as charitable gifts and his non-taxable IRA shares as tax free income.

This is pure speculation — but I think you if you and your team worked a little harder talking to estate planning lawyers and trust experts who work with senior private equity partners and professionals (good luck getting them on the record, but it is really much more nuanced for private equity than your everyday run of the mill wealthy individual), you could sketch out a number of hypothetical situations and I think add more credibility to Reid’s position.

It’s entirely possible Romney paid zero income taxes, and possibly nominal capital gains taxes (i.e. less than 15 percent). In fact, since he wasn’t being paid income but presumably was liquidating his stake in Bain Capital, in the perspective of the IRS, he wasn’t earning any income — just selling assets (Bain management company back to his other partners).


Josh Marshall is editor and publisher of TalkingPointsMemo.com.