Bain Capital's Tax Dodge- How David Callahan Gets it Completely Wrong

Far be it for me to take on a supposed expert such as David Callahan, senior fellow at Demos. He presumably has an education that I clearly do not have. But his piece today, "Bain Capital's Tax Dodge", in the Huffington Post is wrong. Plain and simple, wrong. 

His facts are right, as far as I know, but he comes to the absolutely wrong conclusion based entirely on his own anti-Romney bias. 

And so, because I have never been one to keep my mouth shut, I must address just how wrong he is. His text is "normal" below, my insertions in red. 

It's not often that we get a detailed look inside the tax strategies of a private equity firm, so Gawker's publication of a trove of documents related to Bain Capital is a welcome event.

Meh. They are private for a reason. Why should we get to look at the tax strategies of a business that doesn't have our money or interests?

The documents show -- once again -- how sophisticated business people have myriad ways to avoid taxes and, in the case of Bain anyway, will readily skirt or break the law.

Oops, your bias is showing.

The main revelation so far is that Bain seems to have pushed the envelope and misrepresented some of its income -- saying that management fees, which would be taxable as regular income, were actually capital gains, which are taxed at a much lower rate thanks to the infamous "carried-interest" loophole.

About that loophole. Hedge funds and private equity firms make their big money by taking a cut of the returns on client money they invest. So if I invest $10 million with a hedge fund or private equity firm, and they make a 30 percent return on that money next year -- or $3 million -- they would typically take 20 percent of that return, or $600,000. In addition, they would charge me an annual management fee of probably 2 percent, or $200,000. Thanks to the carried-interest loophole, the $3 million cut is treated as capital gains earnings by the firm, and taxed at a mere 15 percent, and only the management fee is taxed as regular income.

The reason the carried-interest loophole is so outrageous is that, of course, that $3 million cut is not capital gains made by the firm. It is the firm's cut of somebody else's capital gains -- the investor who actually took the risk. The theory behind low taxes on capital gains is that it incentivizes risk-taking investment by people who might otherwise stash their wealth in safer but less productive places. But hedge funds and private equity firms are not risking their own money; they are risking somebody else's and their cut simply is not a capital gain. It is regular income and should be taxed as such.

I don't disagree with any of that. In fact, this is one of the best explanations of capital gains taxes I have read yet. Good work, Callahan. I agree completely, it is regular income and should be taxes as such. 

All this is bad enough. One reason that private equity types like Mitt Romney have such large fortunes is because their taxes are so low, leaving other taxpayers to pay more.

Wait, no. Not true. That's a popular twist of the facts. They have large fortunes because they earned the money. Not because they have lower taxes. They have lower taxes because government taxes them less. You earn what you earn. 

And just because he pays what he is taxed, does not leave other taxpayers to pay more. They pay more, because that is how much the government taxes them. 

Those are the facts. 

Is it fair? No. But it doesn't become fair by twisting the facts. Romney made more money than you. He also paid a lot more in taxes than you even earned. (You're a fellow at a small name think tank, I can just assume you make in a year what he makes in a speaking fee.) Because he has a great deal of experience understanding wealth, laws, and taxes (see: Harvard MBA, law school, and being a Governor), he pays a smaller percentage of his money to the government. The percentage he pays has no bearing on the percentage of your wealth that you pay. 

If you think he should have to pay a larger percentage than you, take it up with your Congressional representative.  

But the Bain documents show something worse. Apparently, Bain's partners resented paying regular income taxes on their management fees, and so maneuvered to represent those fees as capital gains and pay a lower rate. 

Are you suggesting that Bain's partners are somehow unique in resenting paying taxes? I thought pretty much every American ever resented paying taxes? Maybe you are different? You like giving Uncle Sam your money?

Also, let's say you really did have $10 million to invest. Who would you rather invest it with- the private equity firm that knows the laws so well as to be able to take advantage of loop-holes? Or the firm that is paying millions more in fees because they don't know the laws? 

Again, if you have a problem with the tax code (and I'm not arguing that there isn't one) your issue shouldn't be with the people paying the taxes. It should be with the people who pass taxes (ahem, the Democrats).  

As reported in the New York Times:

Bain private equity funds in which the Romney family's trusts are invested appear to have used an aggressive tax approach, which some tax lawyers believe is not legal, to save Bain partners more than $200 million in income taxes and more than $20 million in Medicare taxes.

Annual reports for four Bain Capital funds indicate that the funds converted $1.05 billion in accumulated fees that otherwise would have been ordinary income for Bain partners into capital gains, which are taxed at a much lower rate. Although some tax experts have criticized the approach, the Internal Revenue Service is not known to have challenged any such arrangements.
In a blog post Thursday, Victor Fleischer, a law professor at the University of Colorado, said that there was some disagreement among lawyers, but that he believed: "If challenged in court, Bain would lose. The Bain partners, in my opinion, misreported their income if they reported these converted fees as capital gain instead of ordinary income."

You would think that the super wealthy might shrug at paying taxes they can easily afford, but here the opposite appears to be the case: Bain's wealthy partners have been hyper-aggressive about lowering their tax bill.

Good for Bain! Did you really think people who know how to make millions, billions actually, would want to readily hand over their money? No, they want to make more. That is what they do! They are an equity firm!

The Medicare dodge is especially notable, given how conservatives endlessly trumpet the financial troubles of that program. Capital gains are not subject to payroll taxes, which means that one effect of the carried-interest loophole -- which the right defends -- is that it weakens the financial situation of Medicare and Social Security.

Again, your problem here should be with the law, not Bain. Also, "how conservatives endlessly trumpet"- gag me. You are so biased here you don't even see how ridiculous you sound. 

Also notable in this story is that the IRS has not moved more aggressively to crack down on tax cheats who misrepresent management fees as capital gains. Presumably that is because the IRS doesn't have firepower to go up against some of the best tax attorneys in the nation in legal disputes that could take years.

I am surprised that as a Democrat you don't suggest that the best tax attorneys should HAVE to work for the IRS. And again, your problem here isn't with Bain, it is with the IRS. You really have some misdirected anger issues. You really ought to get that checked out. 

All in all, the revelations about Bain's taxes confirm what New York Times tax reporter David Cay Johnston told us eight years ago in his book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super-Rich-and Cheat Everybody Else.

Only in this case, it's not clear that what Bain did was, in fact, perfectly legal.

Do you really think they would release all of their paperwork if they weren't confident that they know the laws, considering, as you put it, they are the best tax attorneys in the nation? 

Don't miss my new novel, "You Heard It Here First!" on Amazon, Nook, and Kindle!

Media Bias and What Happens Next

A look at this evening's "top of the fold" cover on the Huffington Post is a sad look at media bias in politics. From the "Hiel Hitler" pose to the "hostile takeover" headline, there is nothing but bias in this image. And since when was a five year bid a "hostile takeover?"

I stopped watching Fox News years ago because of the hatred and vile on the network. Sure, maybe it is conservative friendly (it isn't fair and balanced, that's for sure), but I don't care to hear hatred for any party. I only read the Huffington Post to get a true liberal slant on stories for something to compare my own beliefs against. I prefer CNN because I think they actually spend more time on looking pretty and sleek graphics and theme music than they do on bias. (And because they are the only American network I can rely on to give me human rights stories.)

But if there is one thing to be learned from this political cycle it is that Mitt Romney has not won over the media. The news stories today have all been about how Romney has failed to win all Republicans. Or how the base is not yet behind him. And if I hear one more story about how the GOP doesn't have a strong candidate and may have to go to a brokered convention, I may pull my hair out.

Let's look at the straight up facts.
Romney now has 429 delegates, compared with 169 for Rick Santorum, 118 for Newt Gingrich and 67 for Ron Paul. Add it up, kids. That is 429 delegates for Romney, 354 for the other three guys combined. That is a majority of Republicans behind Romney. The other three guys put together can't outdo him. Yes, I've seen the stories about not getting enough delegates and a potential brokered convention. And if that happens, so be it. There's no point in saying "Well, historically..." anymore. This campaign cycle hasn't followed any historic patterns, so we can stop pretending it will in the future.

The plain and simple truth is that Gingrich needs to step down. He has 118 delegates, which in theory is impressive. Except 53 of those came from his own home state last night. He only got 79 delegates total last night. He came in third or fourth place in every single state except for his home state! He's not winning. His money is drying up. And he will have no momentum to move forward. He has no chance of suddenly winning at a brokered convention, although I suspect that a brokered convention would be a daydream of his. He loves history. He probably relishes the idea of a shouting match on the convention floor and the thought of being carried on the shoulders of his men through the room to the stage. But the truth is, if he hadn't been absolutely vile to the competition up to this point, if he were to drop out now, he would make a good VP. But he shot himself in the foot when it comes to that.

No one is more surprised than I am that Rick Santorum is a strong contender. And the truth is, I don't actually think he is that strong on his own merits. I think what he is is the poster child for the anti-Romney vote. I don't believe people are behind Santorum as much as they are against Romney. I believe if anything were to happen at a brokered convention that it would be a dark horse who could usurp Santorum support. And if that person were charismatic and surprising enough, he/she could really compete against Romney.

(As for Ron Paul, do I think he should bow out? Yes. But I don't think it would make any difference. I don't think his supporters would then fall behind someone else. I think they would follow him out of the party. However, I do think in the tightest races like Ohio last night, it would make a difference if there had been one less "anti-Romney" option available.)

So really, it all comes down to Romney at this point. He either has to finally, convincingly win over more voters, or we're going to a brokered convention. He's a by the book kind of guy, so I don't think we'll see any surprise moves come out of him. But if it were me, and I wanted to shake things up, I'd buck convention completely at this point and do something crazy like start talking seriously about VP possibilities. If you can't get the voters to love you, get them to love your ticket. (For instance, a Romney- Nikki Haley ticket? Who could argue with that?)

Just a little interesting moment from Twitter last night. Judging by the surprising number of retweets, I'd say I'm not alone. 

What really happened at UC Davis 'Occupy' Protest?

Wondering what really happened when the police pepper sprayed a bunch of students UC Davis on November 18, 2011?
Here is a clip that truly shows the whole story, and not just the shocking parts the media ran with. The real "action" starts about 7 minutes in.

In contrast to what you see here, read how the Huffington Post reported the story-
UC David Pepper Spray Investigation Lead by Groups that Works for Wall Street Firms
UC Davis Police Pepper Spray Seated Students in Occupy Dispute

Who do these kids think they are telling the police what to do and blocking them in like that? They are borderline in holding the police hostage! I think the police had every right to pepper spray the students.

Who won the GOP National Security Debate last night?

GOP National Security Debate, Photo Source: NY Times (linked)

I read the news, so you don't have to!

So who won the GOP contenders National Security Debate as hosted by CNN? Let's do a quick recap of what the major media outlets are saying! (And in some cases what the different reporters at each outlet are saying.)


Washington Post's Stephen Stromberg - "Romney and Gingrich won. Romney because he is still the putative frontrunner and the likely nominee, and he did not mess up tonight. Gingrich because he held his own in the spotlight, unlike some of the previous anti-Romneys in this primary campaign. Otherwise, Perry still looked tired, Bachmann still sounded kooky, Huntsman was still too moderate, Ron Paul was still Ron Paul, and Cain still gave no sense he belonged on stage, even among this cast of characters."

Washington Post's Jonathon Bernstein - "I don’t think Gingrich has any plausible chance of winning the nomination... Beyond that, I agree with what seemed to be the Twitter consensus during the debate that Mitt Romney wasn’t doing especially well. He didn’t offer much to convince reluctant Republicans to resign themselves to him, but he didn’t do much to hurt himself, either. Given that he’s well in the lead, that’s probably an acceptable enough outcome for him. I do think that Perry continues to improve."

Washington Post's  Jennifer Rubin- "Both Rep. Ron Paul (R-Tex.) and Jon Huntsman were predictably buffoonish, calling for pullout from Afghanistan, cuts in the military and other positions far to the left of the Obama administration. To sum up, then, the winners tonight: Romney, Bachmann, Romney, AEI and Heritage, and Wolf Blitzer. The losers: Cain, Huntsman, Paul. Potential problems: Gingrich on immigration."

Todd Graham for CNN - "Knowing your arguments and facts is one way to gain credibility. Mitt Romney fattened his credibility bank account at the expense of Rick Perry, who supported a no fly zone over Syria."
"on Huntsman made a similar deposit when he stated that sanctions on Iran would not work since "the Chinese aren't going to play ball and the Russians aren't going to play ball," and Iran has already decided to go nuclear."
"Another way to maintain credibility is to cite proof for your arguments. Michele Bachmann has said things in previous debates (President Obama wants Medicare to collapse) and in last night's debate (suggesting that the CIA cannot interrogate terrorist suspects any longer because the ACLU is in charge) that were not very credible. These frequent ATM withdrawals hurt Bachmann because a lack of believability spills over."
"Bachmann called Pakistan "too nuclear to fail," and chastised Perry for being naïve when he said he would not give Pakistan one penny until it proved it had America's best interests in mind."  (her naivety accusation was truly a highlight of the evening - in my humble opinion)
"Ron Paul is an enigma. He can provide such thoughtful answers at one time and later interject completely unsubstantiated statements."
"Answering questions with non-answers simply isn't credible. For example, Herman Cain twice last night reached into a very old bag of tricks to answer questions with the standard "I'd consult the experts" line."
"Finally, to save credibility, you should be prepared to defend your position when giving a potentially unpopular answer. Newt Gingrich had two answers that the conservative wing of his party might not like, but he defended them well."