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Gaffes seem to be the main currency of this nigglingly small-scale campaign–and they come in many flavors.
There’s the “Akin gaffe,” when a politician says something so laughably, offensively false that the statement can only indicate profound ignorance, ideological obstinacy, or both. There’s the famous “Kinsley gaffe,” when a politician unintentionally reveals what he really thinks–or that he’s pretty sure “you didn’t build that.” How about when a politician says something politically embarrassing, but objectively and data-demonstrably true? And what if the raw factualness of the statement only serves to intensify its originator’s embarrassment? You might call it a “Romney gaffe.”
Romney Thursday night declared—to a group of rich donors, no less—that “big business is doing fine in many places,” partly because these larger corporations “know how to find ways [to] save money by putting various things in the places where there are low tax havens around the world.”
Forget about Thursday’s botched “birth certificate” joke. Romney’s words on taxes play to practically all of his core, and major, political weaknesses. Highlighting “big business” success resonates with the corporate fat-cat caricature. Attributing that success to “low tax havens” is even worse: a reminder of Romney’s own vast global holdings – from Bermuda, to Switzerland, to the Cayman’s – which have allowed him to defer his tax burden and multiply investor wealth far from American shores. The statement echoes Obama’s own June “gaffe” – “the private sector is doing fine” – which Republicans like Romney used to hammer Obama on the economy.
But for all the bad optics, Romney’s right–on both counts. “Big businesses” are doing disproportionately well in the slowly recovering economy. And those large corporations do take disproportionate advantage of complicated, compliance-intensive global tax deferral strategies and holding companies. The truth of Romney’s words–combined with their applicability to his own professional fortunes–only makes them more politically toxic.
First, let’s consider how “fine” big business is doing. The private sector is, in fact, recovering much faster than the public sector. Moreover, an ongoing corporate rally– with businesses sitting on mountains of cash–has sent the markets to five-year highs in recent weeks.
And within the private sector, big businesses are doing better than smaller ones. To illustrate, I’ve graphed the classic Dow Jones Industrial index–comprised of 30 of America’s largest companies–against the Dow Jones Mid and Small-cap indices, which chart smaller businesses. Over the past six months, having a bigger business has meant bigger market gains.
Big businesses have also been leading the post-recession hiring surge. Here’s aggregate payroll growth, since the recession, courtesy of Bureau of Labor Statistics, divided into small, medium, and large firms:
It’s easier for larger businesses to weather an uncertain economic climate; they have more suppliers, a softer labor cushion, and bigger distribution networks.
As Romney said, it’s also far easier for “big business” to take advantage of favorable tax shelters offshore. Navigating the IRS’s complicated anti-deferral regimes is a lot easier with a large compliance department, filled with high-paid experts in tax law. Many large businesses have gone through the complicated process of moving their headquarters entirely offshore. Accenture, Foster Wheeler, Tyco, and Cooper Industries all call Bermuda home. The complexity of the U.S. tax code incentivizes multinationals to shift as many facilities abroad as possible in order to avoid an extra round of corporate income tax. And for international investment firms – like Bain Capital – creating holding companies or Alternative Investment Vehicles abroad attracts foreign capital, and allows domestic investors – like Mitt Romney – to defer tax payments on their dividends. One Bain Capital fund kept over $1.5 billion in as many as eighteen of these holding companies, according to documents leaked yesterday.
These deals are complex, far beyond the range of your local print-shop or IT company. They take legal expertise and a lot of existing cash. And that’s why, in 2010, the Tax Justice Network found that, of the $21 to $32 trillion of private money sitting in offshore tax havens, $12.1 trillion is managed by multinational banks. Offshore accounting “is still dominated by the ‘Big Four’” audit firms, PricewaterhouseCoopers, Deloitte, Ernst & Young, and KPMG. They – and companies’ own compliance departments – save businesses billions in taxes. That’s why sectors filled with corporate giants pay the lowest effective tax rates abroad. Electronics manufacturers pay 8.7 percent, banks, 11.3 percent, and chemical manufacturers, 13.1 percent. All told, the effective US corporate tax rate is at its lowest since 1972: 12.1 percent.
But will Mitt's gaffe hurt him? Yesterday, when Gawker dumped almost a thousand pages of confidential Bain financial documents, financial reporters shrugged. The releases were complicated and inconsequential – no evidence of wrongdoing meant the info was “worthless,” as Fortune’s private equity maven Dan Primack put it.
But what the documents plainly showed was how, when, and why one “big business” (Bain Capital) “save[d] money by putting” millions in “low tax havens,” from Bermuda to the Caymans–exactly as Romney said. And this is something the Republican candidate claims he wants to fix. As spokeswoman Andrea Saul put it, “"Gov. Romney has long said we need to simplify the tax code, close loopholes and create a more level playing field for American businesses.” At least he knows, from experience, what he’s talking about.
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