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Bane of Bain

26 August 2012

Last week, hundreds of Bain Capital documents were released and legal and financial experts were finally able to catch a glimpse of what Mitt Romney may not be disclosing by withholding his tax records.

Gawker was the first to publish these documents in a series of posts that provide insight as to Romney’s involvement with Bain both before and after his retroactive retirement. They depict a Mitt Romney who has made a profit on everything from death-squads and abortion to steel mills and pizza. They reveal details of Romney’s holdings in the Cayman Islands.  More importantly, they show that Bain was involved in some rather shady tax evasion.

Victor Fleischer‘s, from the University of Colorado, determined Bain used a loophole called Management Fee Conversion to evade paying hundreds of millions of dollars in taxes. He summarized the tactic succinctly:

There are many variations on the theme, but here’s how many deals worked: each year, before the annual management fee comes due, the fund manager waives the management fee in exchange for a priority allocation of future profits. There is minimal economic risk involved; as long as the fund, at some point, has a profitable quarter, the managers get paid. (If the managers don’t foresee any future profits, they won’t waive the fees, and they will take cash instead.) In exchange for a minimal amount of economic risk, the tax benefit is enormous: the compensation is transformed from ordinary income (taxed at 35%) into capital gain (taxed at 15%). Because the management fees for a large private equity fund can be ten or twenty million per year, the tax dodge can literally save millions in taxes every year.

The problem is that it is not legal.

 

Bain Capital Fund VII LP, one of the funds set up under Romney’s tenure at Bain, the total management fee conversion came to about $7 million in one year alone. Bear in mind, this is just one of many funds which the Romney’s hold. Worse, this was not the most outrageous example. Bain Capital Fund X LP, using this tactic, was able to skip out on paying $67 million in taxes in 2009 alone.

This is just a small piece of a much larger puzzle; a puzzle Mitt Romney could complete by releasing his tax documents.

 

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