Tuesday, August 07, 2012

How Romney might have paid little or no 'income' taxes

Earlier I pointed out that Romney's denial of Harry Reid's accusation was a non-denial denial. Romney said, "I have paid a lot of taxes every year, and a lot of taxes." What exactly does that mean?  When he didn't say is that he paid a lot of income taxes.

TPM reader MB who has a background in private equity picked up on Romney's lack of a real denial and explains how Romney could have conceivably paid little to no income taxes from 2002 to 2009.

The key is Romney's hundred million dollar IRA and his 100% ownership of the Bain Capital 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.
MB concedes that he's speculating, but he's is on the right track.   This is why Reid's attack -- and that is what it is -- is so effective.  If Mitt were to produce his 2002 to 2009 tax returns and he did pay income taxes at an effective rate of 7%, the headlines won't be that Harry Reid was wrong.  This also explains Romney's odd statement today on Fox News.

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