The complicated story of how the 1%ers and their corporations evade democracy’s taxes is the story of our crumbling schools and infrastructure and the flow of all the gains of our economy to a very few at the top. This tax evasion is also part of the story of our deficits and debt. The tax evasion is “legal” — because the tax evaders pay the people who write the tax laws. And even as their tax evasion adds to our budget deficits and debt, the 1%ers are insisting we close the deficit by cutting Social Security, Medicare and “safety-net” programs!
The Story Of How They Evade Their Taxes
We now have two years of Mitt Romney’s tax returns — prepared knowing they would be made public. We also have some records of Romney’s Bain Capital. Even these meager, sparse, sanitized records tell a story about what has been and still is happening to our government budgets — our schools, our safety net, our health and safety inspectors… Today in the NY Times there is a story, Offshore Tactics Helped Increase Romneys’ Wealth, that looks at clues to how companies like Mitt Romney’s Bain Capital have been able to evade paying their fair share of taxes. Here are snippets from this complicated article:
A variety of Bain funds in the Romneys’ portfolio have controlling stakes in foreign companies. Had those funds been set up in the United States, the Romneys and other American investors would probably have been subject to certain federal taxes for their ownership of “controlled foreign corporations.” Setting up the funds in the Caymans allowed them to avoid those taxes.
Bain and other private equity firms use a variety of mechanisms to help investors avoid those taxes, including setting up offshore “blocker” corporations, a practice that has been criticized in some circles and has prompted legislative efforts to curb it. These offshore corporations become a conduit for money for these institutional investors, as well as foreign investors looking to avoid United States taxes.
The 2011 tax return for the blind trust belonging to Mr. Romney’s wife, Ann, released last month, showed holdings, for example, in investment vehicles that control two related funds — Sankaty Credit Opportunities IV, L.P., organized in Delaware, and Sankaty Credit Opportunities (Offshore) IV, L.P., set up in the Caymans.
Why Some Are Here And Some Are There
Why is part of the same company set up based in Delaware, and part in the Cayman Islands or Luxemburg or Bermuda? Because the functions of the American-based company are those functions that avoid taxes on foreign entities, and the functions of the Caymans-based part are the functions that would have to pay US taxes if it was in the US. But in reality it is the same company — except for tax purposes! Here is the explanation of the foreign-based parts, from the Times article:
Had those funds been set up in the United States, the Romneys and other American investors would probably have been subject to certain federal taxes for their ownership of “controlled foreign corporations.” Setting up the funds in the Caymans allowed them to avoid those taxes.
Here is an explanation of the American-based parts,
Another appeal of offshore funds is that they help private equity attract investment from deep-pocketed big institutions like pension funds and university endowments. While these are generally tax-exempt, they are liable for taxes on “unrelated business taxable income” if they put money in funds that use debt financing to make investments.
So why aren’t they all just foreign-based? Why do they need to have an American-based part? One reason is that making the loans that run up the debt that enables these companies to get the interest deductions (more tax avoidance) would incur income taxes if the loans came from a foreign entity,
Beyond their tax advantages, however, offshore funds controlled by American money managers can also create new tax problems. Those funds are limited in their ability to make loans without triggering corporate income taxes — an issue for Sankaty funds. Therefore, they usually have a parallel domestic fund that makes the loans, holds them for a period before selling a portion to the offshore fund, a practice known as “season and sell.”
And, of course, the American-based entities enable the low “carried interest” tax rate that hedge fund managers enjoy. The company paying Romney can’t be foreign-based,
So-called carried interest, the cut of a fund’s investment gains earned by its managers, enjoys a favorable tax treatment. But under I.R.S. rules, carried interest cannot be derived from a corporation, like the offshore blockers used by Sankaty.
The American-based entities can buy American companies without incurring “foreign-based” obligations. Then the foreign-based entities can avoid the taxes that the American-based buyers of companies would have to pay. And the foreign-based investors can be in the foreign-based parts of the company, avoiding US tax obligations. Also American entities like pension funds can avoid US taxes they would otherwise have to pay.
To put it another way, the same company can pretend it is US-based when that is what it needs to be, and foreign-based when that is what it needs to be.
Is this legal?
Of Course It’s “Legal” — They Pay The People Who Write The Laws!
From the NY Times story, In a statement, the Romney campaign said, “Governor and Mrs. Romney have scrupulously followed the tax laws and have paid 100 percent of what they owed.”
As long as our politicians are controlled by the 1% and their giant corporations — and 78% of the “outside funding” in this year’s campaign is — these schemes will remain “legal.”
Important note — in a related story, today in Freeport, Il, Bain-owned Sensata is moving equipment out of a factory it is closing in order to move the jobs to China. Sensata workers are trying to block the roads to stop the equipment from leaving. Visit bainport.com for the story.