Why It Matters

The Scandal of Mitt Romney’s Low Taxes Is That They’re Legal

Romney broke no laws to get his low tax rate, and therein lies the scandal, writes Ben Jacobs.

Emmanuel Dunand, AFP / Getty Images

Mitt Romney’s tax returns today contained a scandal. The disclosure that the former Massachusetts governor made $21.6 million in 2010 while paying an income tax rate of just under 14 percent may raise eyebrows, but it’s not a shock. Romney has already admitted that his tax rate is “about 15 percent.” It’s also not a secret that Romney, who is known to be worth upward of $200 million, is rich. But what is scandalous is that Romney, despite his wealth, pays a lower tax rate than most Americans.

According to Larry Zelenak, a professor of tax law at Duke University School of Law, who has reviewed Romney’s 2010 tax return, “the main takeaway is actually that somebody in Romney’s position doesn’t have to do anything very aggressive to get extremely good tax treatment.” In fact, because of the current state of U.S. tax laws, a person as wealthy as the former Massachusetts governor “doesn’t need to do anything fancy.”

This is reinforced by Rebecca Wilkins of Citizens for Tax Justice, a tax-policy think tank in Washington, D.C. She notes that many of the steps that Romney has taken in his return are measures that are effectively available only to the wealthy. Few people “have enough money to justify offshore accounts, charitable trusts, or family foundations. They are expensive to do and you need an attorney and an accountant” to set them up and manage them.

Perhaps the most gaping loophole in current law that Romney has taken advantage is the treatment of “carried interest.” This is because managers of private equity funds, such as Bain Capital, the private-equity firm Romney founded, do not receive a salary but take a percentage of the fund’s profits instead. This is then taxed as capital gains at 15 percent, even though as Zelenak points out, “it’s clearly personal service,” which would be taxed at a much higher rate. This makes up a significant percentage of Romney’s income. Wilkins notes “most of the income is capital gains, which comes through Bain, all of which is probably carried interest.”

However, Romney’s returns still raise a few question marks. The IRS has imposed tough disclosure standards on “reportable transactions.” These are transactions that the IRS is interested in and have a higher potential for being “tax-shelter-type transactions” described Zelenak. Romney did not engage in these transactions personally. Instead, they were undertaken by entities he invested in, including those run by Bain Capital and Goldman Sachs. However, there is little that can be deciphered about these transactions as the disclosures in Romney’s returns refer back to the information filed by each fund he invested in, none of which is publically available.

The other quirk of note in the information received today is that Romney filed more than 50 forms that report transactions with foreign entities, which is unusual according to Wilkins. While “everyone [as wealthy as Romney] has some foreign stock” she said, Romney had far more foreign transactions than would be expected. While much of these foreign transactions were driven by Romney’s ongoing interests in Bain, it’s hard to get a full picture “just from the disclosure forms.” But the fact that Romney has maintained accounts in countries known as tax havens, like Switzerland or the Cayman Islands, will draw scrutiny regardless. But these are not inherently red flags. After all, as Daniel Goldberg, a tax-law professor at the University of Maryland School of Law points out, “Romney is a rich guy, and rich guys are all unusual in their own unusual ways.”

It’s still unlikely that those investments reveal anything too unseemly—after all, Romney is, as he has reminded us, “running for office, for Pete’s sake.” But this is still not a closed book. The former Massachusetts governor only released a limited amount of data, two years worth of returns without any supporting information from any partnership that he invested in. Not only does this reveal an incomplete picture, but the hundreds of pages he released will still need more time to be fully analyzed. However, Romney has long maintained that he’s fully complied with tax law, and there is nothing in his returns so far that indicates otherwise. But the fact that his tax rate is about half that of Warren Buffett’s now-famous secretary show that the scandal isn’t that Romney has done anything wrong. Instead, the real scandal is that it’s all legal.