Mitt Romney’s tax affairs are making headlines. And rightly so.
For the second presidential election in a row tax havens are an issue – and Cayman is in particular. Obama made it so last time.
I wonder whether that would have happened but for the small group of dedicated tax haven campaigners around the world. There was no such campaign pre 2003. Things have changed. No enough. But a lot none the less.
And this will continue to hit Romney hard – and feed the Occupy movement.
This is from Left Foot Forward, with permission:
Mitt Romney’s week from Hell is about to get worse. On Saturday he was trounced by Newt Gingrich in the South Carolina Primary; tomorrow he will reveal his tax returns for 2010, a move he has been forced into; and now Westminster MPs are calling for his Cayman Islands tax haven to be closed.
As Left Foot Forward reported last week:
Frontrunner for the Republican presidential nomination Mitt Romney has been under fire over in the United States for not being entirely open about his tax arrangements – and it is clear why.
The former Massachusetts Governor stashes an awful lot of his wealth and income away from the yes of the American Treasury and in the Cayman Islands – international tax haven and overseas British territory, or in old-fashioned language, a colony of the British Empire.
The House of Commons Early Day Motion (pdf) on “Tax Havens, transparency and the top 1%” states:
“This House notes the OECD and G20’s identification of the role of tax havens by wealthy corporations in fuelling the global economic crisis from 2009 onwards; is alarmed by reports that US former Massachusetts Governor Mitt Romney is also using the Cayman Islands, a British territory, to avoid paying the same tax rate as other US citizens; is concerned about the continued use of tax havens by the top 1% in the US and UK to avoid paying the correct tax in their own country, particularly at a time when living standards are being squeezed and services lost for ordinary working people in many Western economies; and calls on the UK government to introduce urgent legislation to help close tax havens and increase transparency so that the very richest pay their fair share of tax in their respective countries and enable governments worldwide to invest more in jobs and growth.”
The Early Day Motion has been proposed by former treasury select committee member John Cryer, Labour MP for Leyton and Wanstead.
He told Left Foot Forward:
“As a former member of the Treasury select committee, I think it is a disgrace that the Cayman Islands, a tax haven, can enable wealthy corporations and individuals such as Mitt Romney and others in the wealthiest 1% to avoid tax and still be cloaked in secrecy. Meanwhile all across the western world, hard-working people are seeing their living standards and take-home pay stagnate or reduced.
“It reminds me of President Kennedy’s comment in his inaugural speech, ‘pay any price, bear any burden’. Except it’s hard-working, modestly paid majority who are bearing that burden.”
With the Primary race set to drag on long into the Spring, this renewed scrutiny of his tax affairs is the last thing Romney needs; with Romney’s team even denying the Cayman Islands are a tax haven and more scrutiny of how the murky offshore world works, tax could become a recurring problem for Team Romney.
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I sincerely hope so.
This is the testimony to what tax campaigners have achieved.
The following comes from the Middle Class Political economist blog in the USA, and is shared with permission:
Brian Beutler at Talking Points Memo has a story purporting to tell us the “real deal” on Mitt Romney’s investments in secret Cayman Island corporations. Surprising, given theABC News (which originally broke the story) and Wall Street Journal articles he links to, Beutler nowhere mentions that these accounts are secret, in accordance with Cayman Islands bank secrecy provisions, which are some of the toughest in the world.
Worse still, Beutler gives the impression that there is nothing unusual about Romney’s use of these accounts. He writes:
The offshore funds story is about a strategy investors use not to defer income and reduce their tax burden, but to attract foreign investors who want to avoid U.S. taxation.
“One of the reasons to have a Cayman Islands entity is so that foreign investors will not get hit with U.S. income, and that’s consistent with our general tax policy,” says Victor Fleischer, a tax professor at the University of Colorado Law School. This can give American investors who offshore a competitive advantage over those who don’t, and can cost the Treasury revenue, but it’s on the level.
I contacted Richard Murphy, head of Tax Research UK and an internationally known expert on tax havens. He called this argument “ludicrous.”
Remember, there is nothing of significance in Cayman, and no money of any significance is made in Cayman. Nor is there indigenous wealth. So all money coming into the US from Cayman came from somewhere else. Now where is the most likely source? I’ll wager it’s the USA. So money flees illicitly out of the US to Cayman so it can come back in a supposedly tax free structure – that’s called “round tripping.” Not all is that way – some will come from South America and very little from Europe – wrong time zone - but the sole reason for Cayman secrecy is mainly to hide the round tripping and that’s the most venal tax sin. So to argue that you’re luring money in requires you to lure money out of somewhere first – and there’s the weakness in the argument presented – precisely because that dimension of the story is ignored in all the reports on this issue.
In other words, following this logic, if Romney (and Bain) secretly put millions of dollars into the Cayman Islands to attract funds into the U.S., as he has claimed, he’s ignoring or not saying where he thinks those funds came from, and that’s the weakness in his position. It’s at least possible that those funds were round tripping as Murphy suggests, and in that case the so-called foreign investment is in fact just U.S.-based investment repackaged to look like foreign investment with all the tax advantages that attach to that.
The round-tripping phenomenon is well-known in China, where Chinese investors put money into a Hong Kong or other location, and then send the money right back to China so it can claim subsidies not available to domestic Chinese companies.It’s entirely possible that U.S. citizens have done the same using the Cayman Islands, and Romney does not appear to be addressing that issue.
Amazingly, the Romney camp claims that the Caymans are not a tax haven. Beutler’s article misses the entire round-tripping aspect and focuses too much on legality. While at present there is no indication that he broke any laws, Romney’s actions highlight that there is one tax system for the 1%, and a different one for the rest of us. As David Cay Johnston put it, the real scandal in U.S. tax law is what is “Perfectly Legal.”
One of the US readers of this blog, Kenneth Thomas, who writes the Middle Class Political Economist blog, wrote the following and I reproduce it with his permission as it is very apposite here:
As I reported last month, the Tax Justice Network estimated that global tax evasion was over $3 trillion annually. TJN’s estimate for the U.S. was $337 billion for 2010, less than the IRS figure of $385 billion for 2006 even though GDP was higher in 2010 than 2006. Thus, the IRS figures confirm the validity of the TJN estimates. Indeed, it is quite possible that Richard Murphy’s estimate in the TJN report actually understates the amount of tax evasion globally.
There are a number of eye-popping numbers in the IRS report, beyond simply the magnitude of tax evasion. Most evasion takes the form of underreporting and underpayment, not non-filing. The amount of dollars lost to underreporting rose by 32% between 2001 and 2006; one-third of that increase came in the corporate income tax.As another sign of growing inequality in the U.S., between 2001 and 2006 corporate income tax due doubled (meaning that profits approximately doubled), while individual income only rose by 15%.
Not surprising, but still striking, is what the report says about who cheats on their taxes. People subject to both information and withholding requirements only underreport 1% of their income; people or businesses subject to information reporting but not withholding misreport 8%, but entities subject to neither information or reporting requirement, “such as business income” [on the individual, not corporate, income tax] has a 56% misreporting ratio. Since middle class taxpayers mainly fall in the first group, it is obvious that most of the opportunities for cheating belong to the wealthy.
To put this in dollar terms, of the $450 billion gross tax gap, $376 billion of it comes from underreporting income. $235 billion is on individual income tax, of which $122 billion is business income (in addition, there is another $57 billion in self-employment tax that is underreported). Finally, $67 billion of corporate income tax due was underreported. (And this is only illegal tax evasion. Abusive corporate tax avoidance, some of which will be declared illegal retroactively, would add many billions more.)
What rich individuals and corporations don’t pay in taxes, shows up as higher taxes on the middle class, bigger budget deficits, program cuts, or some combination of the three. 2006′s $385 billion in net evasion of federal taxes would cover about 1/4 of the FY 2011 budget deficit (and, as Policy Shop notes, it exceeded the $248 billion budget deficit of 2006). As Policy Shop says, the case for giving the IRS further resources for enforcement is a strong one, but Republicans in Congress are actually trying to reduce enforcement resources.
That opposition needs to be overcome.
Reuter’s Purlitzer prize winning journalist David Cay Johnston has written on my work for the Tax Justice Network on worldwide tax evasion. That work estimated a total loss to tax evasion of US$3.1 trillion world wide. The review included an excellent graphic of the top-10 countries by amount of tax evasion, set up against the size of their informal economies:
As David Cay Johnston writes:
A new report from London and President Barack Obama’s statements to “60 Minutes” show financial crimes spreading like wildfire and governments failing to stop them.
Tax evasion equals 18 percent of global tax collections, a new report by British accountant Richard Murphy shows. His report for the Tax Justice Network cleverly lined up a World Bank Report on the size of shadow economies with a Heritage Foundation report on average tax burdens by country to reach that figure.
Murphy’s $3 trillion estimate, 5 percent of the global economy, shows how a combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws impose a terrible cost on honest taxpayers and the beneficiaries of government service.
This graph demonstrates quite well that developed countries are not insulated from the harms of tax evasion. They are losing important revenue right up alongside the largest developing economies.
But the sting was in the tail of the piece, and refers to comparisons between these figures and banking fraud in the USA:
Financial theft is a growth industry because of government failures that I would attribute to excessive reliance on the financier class for advice, campaign donations and absurdly well paid jobs for officials between their government jobs.
Will the next journalist who interviews President Obama please press the issue: where are the banking fraud prosecutions, Mr. President? And don’t let up until the president picks up the phone and tells Attorney General Eric Holder he wants a 1,000 or more major felony indictments in the next nine months.
I think that demand appropriate.
But it would be as appropriate to call for more tax fraud prosecutions too. It is the threat of prison that stops tax fraud; nothing much else does, especially with professional advisers. It’s time to get tough.
This report has been brewing for some time – and now it’s finally here: a major new analysis from the highly respected Citizens for Tax Justice, looking at the taxes that major U.S. corporations have been paying. It ain’t pretty.
These 280 corporations received a total of nearly $223 billion in tax subsidies, said Robert McIntyre, Director at Citizens for Tax Justice and the report’s lead author. “This is wasted money that could have gone to protect Medicare, create jobs and cut the deficit.” As CTJ notes here and in their press release:
CTJ also, on p11 of their report, outline several key reasons why companies can pay such low taxes:
The big losers from all this, of course, is are ordinary taxpayers and particularly small and medium-sized enterprises which don’t get the same tax breaks and are therefore out-competed by them in markets on a factor that has nothing whatsoever to do with productive efficiency and everything to do with squeezing subsidies out of taxpayers. For an example of this, take a look at this article in The Hill by a small business owner, and then look at Amazon’s tax rate highlighted at the top of this blog. It is also bad for the economy, CTJ notes:
“Such a system artificially boosts the rate of return for tax-favored industries and companies and reduces the rate of return for those industries and companies that are less favored. To be sure, companies that push for tax breaks argue that the “incentives” will encourage useful activities. But the idea that the government should tell businesses what kinds of investments to make conflicts with our basic economic philosophy that consumer demand and free markets should be the test of which private investments make sense.”
Indeed. And there’s all the waste involved in paying all those tax advisers and lawyers to cook up these unproductive, distortionary tax schemes. And tax breaks don’t seem to make much difference to ordinary business investment decisions. Just take a look at this from Paul O’Neill, and, of course, Warren Buffett.
CTJ has written a long and deeply-researched report here, which will be a reference point for years to come.
Hat tip: Tax Justice Network
This news has just been released by the US government:
The Extractive Industries Transparency Initiative (EITI) has developed a voluntary framework under which governments publicly disclose their revenues from oil, gas, and mining assets, and companies make parallel disclosures regarding payments that they are making to obtain access to publicly owned resources. These voluntary disclosures are designed to foster integrity and accountability when it comes to development of the world’s natural resources. This Administration:
• Is Hereby Committing to Implement the EITI to Ensure that Taxpayers Are Receiving Every Dollar Due for Extraction of our Natural Resources. The U.S. is a major developer of natural resources. The U.S. collects approximately $10 billion in annual revenues from the development of oil, gas, and minerals on Federal lands and offshore, and disburses the bulk of these revenues to the U.S. Treasury, with smaller portions disbursed to five Federal agencies, 35 States, 41 American Indian tribes, and approximately 30,000 individual Indian mineral owners. By signing onto the global standard that EITI sets, the U.S. Government can help ensure that American taxpayers are receiving every dollar due for the extraction of these valuable public resources.
• Will Work in Partnership with Industry and Citizens to Build on Recent Progress. The Administration has already made important strides in reforming the management of our natural resources to ensure that there are no conflicts of interest between the production and the collection of revenues from these resources. Signing onto the EITI initiative will further these objectives by creating additional “sunshine” for the process of collecting revenues from natural resource extraction. Industry already provides the Federal Government with this data. We should share it with all of our citizens. Toward that end, the Federal Government will work with industry and citizens to develop a sensible plan over the next two years for disclosing relevant information and enhancing the accountability and transparency of our revenue collection efforts.
There are weaknesses in the EITI, but this is stunningly good news for an initiative only seen as being of concern to developing countries to date.
Now what about the UK joining too?
Followed by a commitment to country-by-country reporting?
From the FT on the US Republican candidate debate last night:
The debate on Monday evening, held in Tampa, Florida, was co-hosted by CNN and the Tea Party Express, an umbrella organisation for the rightwing movement, bringing it firmly into the political mainstream ahead of next year’s presidential election.
Tea Party Express co-chairman Amy Kremer told the audience ahead of the debate: “We are going to choose the next Republican nominee for president, not the Republican party.”
Ms Kremer said the Tea Party was looking for a “true constitutional conservative”.
I believe them.
I just hope there are enough sane Americans left to defeat them.
Obama proposed this deal last night:
The American Jobs Act includes $140bn for building roads, bridges and other major infrastructure projects that would put hundreds of thousands into work; $70bn in tax breaks for small businesses; tax credits for companies taking on military veterans; tax and training for the long-term jobless, and aid to states so that they do not have to lay off 280,000 teachers, as well as other workers. Infrastructure projects include repairing and modernising 35,000 schools.
The biggest expenditure, $175bn, is to put more money into the pockets of workers and their families through a 50% cut in payroll tax.
That’s nothing like big enough to solve the USA’s problems.
But kids will benefit.
Hundreds of thousands will have jobs.
Small employers will benefit.
This is a stimulus package.
And it will have a long term beneficial legacy.
But the Republicans shunned it.
That’s because like the Tories in the UK they are utterly indifferent to the needs of real people. They don’t want a strong economy. And the chaos of recession and depression is their opprtunity to dismantle the role of governemnt, and no doubt the role of democracy with it if they get their way.
Obama looks a forlorn figure in the US but God help America if they get a Republican president.
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