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Romney’s Offshoring Less the Problem than the Historically Low Capital Gains Tax Rate

The ABC News report that came out last night about “Mitt Romney’s offshore tax havens” appears to get the data wrong, so you end up with a muddled analysis of the situation. What is actually happening here, as Pat Garofalo untangles, is that Romney invests in funds from his old company Bain Capital that happen to park their money offshore to avoid taxes.

As one of the wealthiest candidates to run for president in recent times, Romney has used a variety of techniques to help minimize the taxes on his estimated $250 million fortune. In addition to paying the lower tax rate on his investment income, Romney has as much as $8 million invested in at least 12 funds listed on a Cayman Islands registry. Another investment, which Romney reports as being worth between $5 million and $25 million, shows up on securities records as having been domiciled in the Caymans.

The advantages really go to Bain Capital here, not Romney. Because it’s Bain that can then reap the benefits of avoiding US taxes on the fund. This increases the interest in the fund from foreign investors looking to dodge local taxes, and makes the fund more lucrative generally. And Romney is involved with this at some level. He doesn’t want to release his taxes until April, and at that point he will release only the 2011 copy, by which point he will have shifted around his investments to avoid the offshore accounts.

Tax havens are definitely a problem, and if Romney is found to actually have some, there are laws involved. But all of this has little bearing on his 15% tax rate; after all, the point is to hide the money entirely, so that it doesn’t exist in that equation. The low tax rate comes mostly because capital gains are taxed that way. And it’s long overdue that we start talking about the low capital gains tax rate, which is an historical anomaly, and why we have it. Mitt Romney was in office in Massachusetts in 2003 when the capital gains tax lowered to 15%. In the heyday of American prosperity, the postwar period from 1946-1973, the capital gains tax rate was mostly around 25%. In fact it went up at the end of that period. Contrary to conservative belief, the capital gains tax has little bearing on business investment.

Plotting the top cap gains rate against real business investment doesn’t show much (biz investment is in natural logs to show proportional growth over this long time series). The cap gains rate bounces around based more on politics than policy, while investment pretty much grows with the cycle. Hard to see anything in the picture supporting the view that either the level or changes in cap gains taxes play a determinant role in investment decisions.

Remember, the ostensible reason for the favoritism in tax treatment here is to incentivize more investment and faster productivity growth. But that’s not in the data and the reason it’s not in the data is because investors aren’t nearly as elastic to cap gains rates as their lobbyists say they are (more precisely, they’ll carefully time their realizations to maximize their gains around rate changes, but that’s not real economic activity–that’s tax planning).

So this is not a way to goose business investment, it’s a straight money hose streaming into the pockets of the wealthy. And nothing explains income inequality more than the low capital gains tax rate of the past decade. The President has proposed changing it but not in an insistent way. His likely opponent in November has gotten fat off it, and Obama needs something or other to sell as a second-term agenda. Sounds like a plan.

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Romney’s Offshoring Less the Problem than the Historically Low Capital Gains Tax Rate

David Dayen

David Dayen