Romney Claims No Tax Advantage in Caymans

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Here's a puzzler from an FAQ accompanying Romney’s release of his 2011 tax returns and a summary of his returns from 1990-2009:

12. There are some investments that seem to be established in offshore accounts, like the Cayman Islands and Bermuda. Are these investments evading taxes?

No, the investments by the blind trusts in funds established in the Cayman Islands or other jurisdictions are taxed in the very same way they would be if the shares were held in the US rather than through a Cayman fund.  No taxes are evaded or reduced.  These funds are all registered with the IRS and report all income to investors and the IRS, just like domestic funds.  Whether in Bermuda or Boston or elsewhere, there is no difference in how they are taxed.

Apparently Romney also said last month that he got no tax benefit from investing in the Caymans. 

Why would anybody (or anybody’s blind-trust manager) put his money in the Cayman Islands if there were no tax benefit? Douglas Holz-Eakin, a former Congressional Budget Office Director who advised John McCain’s presidential campaign in 2008, and now runs a conservative think tank, offered this explanation a couple of days ago on the National Review Web site:

Almost everybody with a global business has a Cayman subsidiary, as do many U.S. colleges and universities. Why? First and foremost, any venture interested in having the participation of foreign investors needs a location that has a strong rule of law, well-developed financial services, and is outside the reach of the IRS. International investors need the protections and financial services, and have no desire to have their investments entangled with the IRS. The Caymans, along with Bermuda, the Bahamas, and others fit the bill.

Now, it’s my understanding that the IRS is in business to collect taxes. So if you want your money to be “outside the reach of the IRS” that means you don’t want the IRS to take it away. How can Holz-Eakin and Romney claim otherwise?

It turns out they’re playing word games. The taxes you evade by putting your money in the Caymans aren’t your own personal income taxes, but your offshore investment fund’s corporate income taxes. More Holz-Eakin:

In striking contrast to nearly every other developed country, the United States continues to tax worldwide earnings of corporations. Thus, for example, if an international investment [firm] headquartered in the Caymans earns $100 in Brazil, it will first pay the $15 in tax due to Brazil. For other international investors, that is the end of the story.

U.S. investors, however, must then pay a second layer of tax to the U.S. government, bringing their tax rate up to the U.S. level of 35 percent. This additional $20 is owed, however, only when the earnings are brought back to the United States (“repatriated”). If the funds merely flow back to the Cayman-based subsidiary, the tax is not yet due. 

In other words, the Romneys aren’t evading income taxes by putting their money in the Caymans. The fund they put their money into is evading taxes by parking itself in the Cayman Islands. As a result, that fund (and therefore the Romneys) get to keep more of the profits. Why evade taxes when you can get somebody to do it for you?

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