Mitt Romney, Serving the Private Interest

Governor Mitt Romney released his taxes for the last two years today. He refused to release earlier records. These two years of records are from the years when he knew he was running for President for the second time.

We can assume they are to some degree cleansed of the most egregious of offenses. That said: Wow!

As my friend John Drabinski just wrote:

Romney has Cayman Island, Luxembourg, and Swiss bank accounts (I'm sure that's patriotic), made over $20 million and paid a 13.9% rate (wtf?!), and I'm telling you, if folks don't flip out over this, then we deserve what we get in this country.

Romney's tax rate is below 15%! That is even below the capital gains rate and the unjustifiable carried interest rate for hedge fund investors. Why? Because he has tax havens and secret Swiss bank accounts that he uses to reduce his taxes. He just closed a Swiss bank account (not fast enough I guess).

This is disgrace. Someone who uses the gray zone of tax haven law to hide his income is not simply playing by the rules. Money in tax havens is protected from taxes, but also from regulations and disclosure rules. I am not saying Romney broke laws. But he wants to be President, the personification of the public spiritedness of the nation. To hide money around the world in tax dodges and secret accounts sends a clear message: protecting my money is more important than paying my fair share to the country. While this may be legal, it is hardly a recommendation for public service.

Unfortunately, Romney's approach to financial secrecy is all too common amongst the people in his elite circle. It is one thing to have a low capital gains rate tax for investment in equipment and factories. That does spur investment. I would favor a low 5% or so capital gains tax—but only if it were limited to actual capital investment. However, to tax investment in stocks at that low rate makes no economic sense. And the idea that carried interest (the profit a hedge fund manager or private equity manager makes on their investments) should be taxed at 15% is ludicrous, as every hedge fund manager I know admits in private.

Tax havens and tax policies are not simply economic questions. A just system of taxation is essential to preserve our democracy. You simply cannot have a country that puts the common interest above the private interests of its members when the wealthiest of its citizens are employing armies of lawyers and consultants to hide their money and assets.

The best account of these tax havens is found in Nicholas  Shaxson's book Treasure Island: Uncovering the Damage of Offshore Banking and Tax Havens.  Here are a few key quotes:

It is essential to understand from the outset that the offshore system is ultimately not about celebrity tax exiles and mobsters.... The offshore system is also about a more generalized subversion of democracy by our increasingly unaccountable elites. "Taxes are for the little people," The New York millionaire Leona Helmsley once famously said.

Much of what happens offshore is technically legal. A lot of it is plainly illegal and often criminal. And there is a vast gray area in between. All of it is profoundly dangerous, corrosive to democracy, and morally indefensible.

The Offshore World is All Around Us. Over half of world trade passes, at least on paper, through tax havens. Over half of all bank assets, and a third of foreign direct investment by multinational corporations, are routed offshore. Some 85 percent of international banking and bond issuance takes place in the so-called Euromarkets, a stateless offshore zone that we shall soon explore. Nearly every multinational corporation uses tax havens, and their largest users—by far—are on Wall Street.

Tax havens don't just offer an escape from tax. They also provide wealthy and powerful elites with secrecy and all manner of ways to shrug off the laws and duties that come along with living in and obtaining benefits from society—taxes, prudent financial regulation, criminal laws, inheritance rules, and many others. offering these escape routes is the tax havens' core line of business. It is what they do.

Just last week, the watchdog Global Financial Integrity revealed that the developing world suffered nearly $1 trillion in illicit financial outflows in 2009, "a number that is almost 10 times larger than the official development assistance they receive each year from Western economies like the United States, United Kingdom and Norway." As Raymond Baker writes:

A shadow financial system consisting of tax havens, secrecy jurisdictions and anonymous corporate vehicles makes it easy for corrupt dictators, terrorists, drug traffickers and tax evaders to quietly shepherd their funds out of the developing world and around the planet without notice.

 Again, I don't know if Governor Romney broke laws. I imagine he stayed just this side of illegality.

But we have a moral and ethical problem in this country. A republic, as Montesquieu saw, runs on the fuel of the virtue of its citizens, which Montesquieu defined as their willingness to put the public interest above their private interests. We are a nation in need of renewal, and that demands leadership that inspires us to re-commit ourselves to the American dream and the American story. It is a great story, one worthy of being re-imagined. But how can someone lead us to that promised land when he has, by his actions, shown himself to care more about protecting his money in offshore tax havens than doing his duty as a citizen? He can't.

-RB

------Quick update-------

Andrew Sullivan calls for President Obama to go big and make tax reform a central priority in the State of the Union tonight. I agree. He also says:

It seems to me that this is not about Romney and shouldn't be about Romney. He broke no laws; he seems admirably charitable; his massive wealth is not a marker against him. The issue is the system. My basic view has long been for a flat, simple tax code, in which everyone pays either the same rate, or two or three clear rates, and all deductions are removed. You tax income and dividends at the same rate. You get government out of the way of an economy's market decisions, by not tilting the playing field.

I agree that Romney's tax write is not a marker against him. It is one thing to play by the rules and pay the required capital gains tax rate. And yes, he did give $7.1 Million to charity which comes to something like 17% of his income. But the issue is that he also seems to have taken aggressive measures to hide and protect that money offshore. While this is not technically illegal, it is not simply playing by the rules of the tax system. It is employing accountants and lawyers to seek loopholes and avoid the intent of those rules. And that is wrong, even it is not illegal.

Sullivan gets the main point right on:

To put it more bluntly: The president and the Democrats should not be piling on Romney because he's rich. They should be piling on the tax code because it is so insane. This issue is populist and good economics. With a full-scale Bowles-Simpson attack on deductions, reform could keep taxation simple and low and easier to understand. And that restrains lobbyists, who suddenly have far less to lobby for; and it restrains taxation. If you have three simple rates - say, 10, 20, 30 - then any increase in them is very, very visible. You want a government that can be monitored and controlled by the people? Simplify the tax code!

Read Andrew Sullivan here