Archive for July, 2012

Putting Tax Returns in Context

Thursday, July 19th, 2012

In Romney’s defense, he is not required to disclose his taxes in order to run for President. To some degree, however, he has created this problem himself by making his business success at Bain a campaign issue. He claims that he has experience that President Obama lacks and as a result will do a better job managing our economic recovery. That gives the Democrats and the American voters every right to request more information about both his business success and how that affected his admitted personal wealth.

Some conservatives have tried to make this a tit for tat sort of exchange. Some examples I’ve read include Obama releasing his college transcripts or the Obama administration releasing more information about the Justice Department’s failed “Fast and Furious” operation.

This isn’t, however, an “I’ll show you mine if you show me yours” exchange of information. Neither Obama nor Romney has made their college experiences an issue in this campaign. If they did, it would be appropriate to expect both of them to produce documents to support their claims.

Similarly, Romney hasn’t made the wrangle between Congressional Republicans and the Justice Department a campaign issue either. Mainly because you don’t have to get very deep into this particular issue before it starts to come apart. Where it starts to come apart is when you ask Congress what it is that they are expecting to find that they don’t already know in the additional documents that they have requested from the Justice Department. The range of answers goes from, “I don’t know” to “A covert government plan to restrict gun rights”. The reason why the Justice Department has refused to provide more documents is because the documents Congress already has provide more than sufficient support on how this operation went bad and who the people were in the Justice Department that initially attempted to cover it up. There is no suggestion that the cover up went any further in the agency of any other motivation or any deeper plot that reaches higher in the administration.

There ARE valid reasons, however, to request more information from Romney based on the small amount of information that he has already released.

Here are a few.

The Swiss Banks Account

The person managing Romney’s assets in a blind trust said that he put some of Romney’s money in a Swiss Bank account and used it to buy Swiss Francs in order to hedge against the possibility that the US dollar would lose value. Tax experts say this is a weak justification for a Swiss Bank account. Why would someone making a run for the Presidency admit to betting against the US dollar and if they did, why use a Swiss Bank account to do it? There are many easier ways to speculate in foreign currencies that don’t require the secrecy and expense associated with a Swiss Bank account.

The account was closed in 2010. Earlier returns should reflect income earned from that account. Those using foreign bank accounts are also required to file a form with the government. As part of an effort to curtail money laundering, the Justice Department offered an anonymous amnesty program in 2009 for those who had not properly reported on foreign bank accounts. So there is also the possibility that Romney participated in that program. Earlier tax returns would reveal more detail about this account and how it was used.

The $100M IRA

During the time that Romney worked at Bain, he started an IRA which is now worth $100M. The problem is that the maximum tax free contribution that Romney could make to that IRA on an annual basis is $30K. At that rate, it would take 3,000 years to get to $100M. Since the only value of an IRA is to shelter current income from tax, that leaves a very reasonable question regarding the remarkable rate of growth seen in this IRA, particularly given the damage many other IRA’s suffered during the financial meltdown.

One possible explanation is that he just made some remarkable investment choices.

Another possible explanation is that he sheltered much more than the allowed $30K/year in his IRA by using Bain stock that was valued from a contribution perspective at far less than it was actually worth. He could have done that using an obscure “safe harbor” rule which covers taxation of service partner income in the sorts of deals Bain did, but the “safe harbor” taxation rules specifically exclude contributions to retirement plans. Retirement plan contributions must be measured at fair market value. More tax returns covering periods of time when these retirement plan contributions were made would answer that question.

Family Trusts

There are also huge amounts of money in Romney family trusts. There are gift taxes associated with funding these trusts. That raises the question of how much tax he paid to setup these trusts. If he used similar sorts of “safe harbor” valuations for contributing Bain stock to these trusts in an effort to reduce his tax exposure, he could be liable for serious penalties.

Complex Tax Returns

The one complete tax return that Romney has released for 2010 raises more questions than it answers about Romney’s finances. If the purpose here is to be transparent and provide the American public a clear understanding of the candidate’s finances so they can assess whether this candidate would have any conflicts of interest if they were elected, Romney has not provided enough information. His assertion that he has paid all of the taxes due does not address the issues of conflict of interest.

Low Tax Rate

The bulk of Romney’s income these days comes from fees that Bain earns for managing other people’s money (carried interest). He and his family enjoy a remarkably low tax rate because of a loophole inserted to benefit this one particular form of income. The vast majority of tax scholars and policy experts agree that there is no policy justification to single out one particular form of income for this special treatment. Romney hasn’t addressed this issue, but he has said that he plans to close tax loopholes are part of his plan to lower tax rates across the board. Since he happens to benefit directly from one of these tax loopholes that costs taxpayers billions of dollars every year, he has to state whether this one in on his list. Otherwise voters have a right to question how he plans to deal with this conflict of interest. Obama, in comparison, has said that he WANTS to raise his own taxes because he falls into the group that makes more than $250K a year.


The American people need to know if a presidential candidate has financial interests that create a conflict of interest. Romney clearly DOES have a conflict of interest regarding the special tax rate that “carried interest” has. The American people also need to know that the success that Romney has enjoyed is the result of his business savvy rather than his ability to hire smart tax attorneys and “game” the tax code. Romney also claims that he has paid all of the taxes that he owed. There is some evidence, particularly with his $100M IRA, that he may have some tax liabilities.

The only way to resolve these issues is for Romney to release more tax returns dating back to his days at Bain AND to declare whether or not he plans to close the tax loophole on “carried interest”.

There is nothing wrong with wealthy people hiring experts to minimize their tax burden. There is also nothing wrong with wealthy people taking advantage of tax loopholes that they themselves didn’t lobby to get inserted into the system.

When you run for President, however, you represent everyone – not just your economic and social peers. Since he is using his wealth as a qualification for the office, I think he also owes more detail to the rest of the country that isn’t wealthy. If the detail shows that he has aggressively “gamed” the tax system, he should be prepared to defend those actions. If it raises issues of potential conflicts of interest, he should explain how he is going to resolve them. If he has in fact cut some corners that put him at some personal risk regarding the legality of his past tax activities, the American people should know that before they cast their vote.

That’s why he has to release more information and declare what specific tax loopholes he plans to close.


Tale of Two Campaigns

Tuesday, July 17th, 2012

The Romney campaign is losing the narration battle. He has allowed himself to be painted as a corporate raider, a tax dodger, a flip flopper on healthcare, and a rich guy out of touch with the working man.

He is aloof on the campaign trail. He doesn’t mix well with people or the press. The people he does mix well with appear to be self-described VIP’s. He is willing to wildly distort the facts about the Obama administration but whines and asks for apologies when his Obama does the same thing to him.

The sum is a portrait of an insincere privileged wimpy rich guy who can dish it out, but can’t take it.

While I’m not a Romney fan, I have the sense that there is more to this guy than that.

Unfortunately his campaign has failed numerous times to take advantage of every opening they have had so far to control the conversation. Less than a week after the most recent disappointing job numbers, the press is talking about Bain and Romney’s tax returns. When the Supreme Court announced their decision, Romney is caught flat footed talking about tax versus penalty. He should have been prepared to release the details of HIS healthcare plan regardless of the Supreme Court decision was. Before that Romney had a little good news in poll gains and fundraising success. Obama quickly issued an executive order benefiting illegal immigrants, and again Romney stumbles in response.

Romney’s only effective line of attack is on the economy and he seems unable to move off that one note. Even Obama admitted that if he were in Romney’s shoes he would do the same thing.

Here’s the campaign, however, I wish Romney was running.

He should be conducting a full-throated defense of the creative destruction inherent in the free market including outsourcing, buyouts, globalization, and reorganizations. He should be pointing to examples of how these “natural corrections” force companies to shed old ways of doing things, reinvent themselves,  or die. The new companies which replace the old not only recover lost jobs and profits from the transition but ultimately create net new jobs and produce new profits that would not have been possible with the old model. He should be jumping on his soapbox to defend his op-ed piece on domestic auto manufacturing and the sclerosis that was strangling the big three before the financial collapse. Rather than suggest that a managed bankruptcy was his idea, he should trump Obama’s claim of saving the auto industry with the question of how many other industries can the government afford to save. Then point out that the growth in the domestic auto manufacturing wasn’t because the government participated. It was because the auto industries were able to restructure themselves, and that’s the process that must be allowed to continue.

He should be using the forest analogy. The forest service used to prevent all fires, but over the years discovered that this policy resulted in an unhealthy forest that was MORE susceptible to disease which created really big fires. The forests where smaller fires were allowed to burn on a more regular basis were healthier and less prone to big fires. He could make the claim that government intervention is doing the same thing to our economy by needless interference into natural processes. The result is big contractions like the most recent one rather than small manageable recessions like those we’ve experienced during the Reagan and Bush years.

In this sort of campaign his Bain experience makes sense.

In order to get elected, however, he would also have to promise workers some protections during these periods when their industries “caught fire”. Otherwise he is asking workers to take all of the risk while investors get all the rewards. An expanded safety net would do the trick. Short term support, funded through some end-of-life insurance that companies would be required to carry, would provide workers the confidence to support a new financial model that would replace dead-end jobs in dead-end industries with new high paying jobs in new high growth industries.

Ironically, this would also play to Romney’s strength. He could use his use his unique Massachusetts Healthcare experience as a plus. After all, he was the first governor of either party to implement robust healthcare reform that provided a wider safety net for Massachusetts workers. He should be claiming that he wants to bring that same common sense approach to giving every worker the protection they need to make the same sort of individual transitions from “old” economy jobs to “new” economy jobs that we want our industries to make.

If he ran this sort of campaign, I think he would be leading in the polls today.

Instead in order to win the Republican nomination he had to run from both his healthcare success and his career at Bain. This left him as just another one-note Republican and doomed this race to a partisan wrangle over who got the last good shot in at whom.

I still wouldn’t have voted for him if he ran the campaign that I suggest, BUT I think it would have sparked a very healthy debate about whether the “let it burn” philosophy DOES indeed produce better results. More than that, people would have had a real choice between individualism and collectivism with a clear understanding of the consequences of each approach.

It would also have been a MUCH more interesting campaign that this one is turning out to be.

Battling Narratives

Tuesday, July 10th, 2012

The Obama campaign has had some success characterizing Romney as a corporate raider, an outsourcer in chief, and generally someone who is out of touch with the working man and has something to hide.

The Romney campaign has had some success in blaming the current sluggish economy on Obama.

Let’s look at how both of these play out.

Romney’s fundamental claim is that he would do a better job in the White House because he has had success in the private sector. The Obama campaign narrative directly questions the wisdom of having a businessman as President. They don’t dispute his success. They question whether voters should trust someone who made money closing companies, firing people, and creating jobs overseas. The campaign has recently expanded their attempts to paint a picture of Romney as untrustworthy by calling for more complete financial disclosures than the Romney campaign has so far provided. There is evidence that Romney has accounts in countries used as tax havens.

The response by the Romney campaign has so far been slow footed.

They point to a analysis of the Obama campaign ads which absolves Romney of much of the responsibility for the incidents cited in the ads because he had an alibi. When the incidents occurred, he was spending much of his time helping turn around the Salt Lake City Olympics. While Romney did benefit financially, they claim he wasn’t directly involved in the decisions that led to closed companies, laid off employees, and overseas jobs. They also attempted to clarify a difference between creating overseas jobs to address overseas markets and creating overseas jobs to service domestic markets.

On the issue of taxes, Romney has responded that all of his investments are in a blind trust over which he has no control and that all of the taxes due on those investments have been paid. He does not dispute that some of those accounts are held in foreign accounts.

While all of this is true, it rings hollow with voters. They don’t want to hear a technical answer that absolves him of responsibility. If these things happened, which no one disputes; and he made money from them, which no one disputes; what does he plan to do as President which will prevent companies from failing, preserve US jobs, and encourage more investment in this country versus overseas? His campaign so far has failed to connect the dots.

They also want to know why he has ANY accounts in countries that are tax havens if he isn’t in fact taking advantage of their legal tax free status.

Bottom line – advantage Obama.

Obama’s fundamental claim on the economy is that he has done as well as could be expected with the size of the problem that he inherited and the intransigence of the Republicans. He has had some success, but there is more work to be done than could be reasonably expected in four years.

The Romney campaign’s message is simple. You voted for this guy who promised to make things better and things aren’t better. Punish him and those that supported him by voting for Romney.

There is no disputing the fact that the economy continues to struggle even though there have been some bright spots. There is also no disputing the fact that Obama chose to fulfill the campaign promise of healthcare reform after passing the stimulus bills rather than continue to focus on economic recovery and job growth.

Bottom line – Advantage Romney

The rest of the story, according to the Washington Post, is that many voters at this point have already made up their minds and there is precious little that could happen between now and November to change their votes.

On a national basis, that means a very close election. On a swing state basis, right now that means Obama wins fairly easily because he has a lead in the states that he needs to get 270 electoral votes. Here’s an electoral map awarding the states to each candidate based on who is ahead in the polls.

There is still plenty of risk out there for the Obama campaign because of the shaky international situation. But there is risk for the Romney campaign too.

That’s because they have not followed up their claims that it is time for change with much detail on what their changes will look like. That is their choice and it may prove a wise one because the economy itself could win the election for them. But if we remain in more or less the same position in November that we are in now, the Obama campaign may be able to create enough doubt in the minds of independent voters that they will support the policies that have been explained to them in detail versus the promises that Romney can do better.

The Obama campaign also has the advantage that at least some of the voters understand that the United States is more than just a business. It has a responsibility to its citizens that goes beyond profits. It has an obligation to protect its citizens and promote the general welfare.

That means that the government takes actions that individuals wouldn’t take. This collective commitment to good will is at the very heart of our social contract – but it is this social contract that Republicans are calling into question.

That means investments in things like education, healthcare, infrastructure, protection, and innovation. Willingness to make those investments is what has set us apart as a country. The country is hungry for a vision of what we can achieve. So far neither candidate has been successful in capturing the imagination of the country because neither has a compelling vision. Hopefully this election campaign can draw that vision out for voters and give them a real choice rather than the narrations that seem to dominate the current landscape.