About that fishy Romney IRA

If you are going to criticize a candidate, you should say it bluntly without smarminess or insinuation. And you should put your name to it. I’ll put my name to one issue: Governor Romney has been weirdly secretive and unethical about his taxes.

I haven’t been much of a fan of the personalized Romney-bashing this campaign season. I avoid the rudely juvenile moniker “Willard.” I thought the whole “Corporations are people” supposed-gaffe was a stupid nothing. I find thinly-veiled attacks on Romney’s LDS heritage to be idiotic and reprehensible. I don’t know enough about Romney’s conduct at Bain to intelligently praise or criticize his managerial performance there.

If you are going to mount a direct personal criticism of a candidate, you should know what you’re talking about. You should say it straight without smarminess or insinuation. And you should put your name to it.

I’ll put my name to one issue. Governor Romney has–in practical, though quite possibly not legal terms–evaded paying his proper taxes. Of course, as a matter of broad policy, he’s taken advantage of loopholes to pay way too little. He and his Bain colleagues are exhibits A, B, and C in the case to tighten the carried interest thing and related provisions. His roughly-14 percent tax rate is  galling. Yet the particulars of this suff go further, too.

I’ve presumed all along that whatever he did was legal and standard fare for the uber-wealthy. Now I’m rwondering. He’s been weirdly and unacceptably secretive about these matters. He hasn’t released the full history of his returns. His stance is doubly weird when one considers how strange it is for a major presidential contender to hold complicated offshore bank accounts in Switzerland or the Caymen Islands at all.

Then there’s that fishy IRA, which has a reported rough valuation of between 20 million and 100 million dollars. Given the $30,000 (or lower) annual contribution limits for an IRA, It strains credulity to believe that properly-valued securities of the legally-permitted value would swell by a factor of 1,000, as such securities apparently did.

It seems patently obvious that whatever securities Romney and his Bain colleagues initially contributed were under-valued for strategic tax purposes. The convoluted details of Bain’s divided classes of IRA securities  hardly assuage my concerns. That wasn’t ethical or right. I’m not so sure it was legal, either.

Author: Harold Pollack

Harold Pollack is Helen Ross Professor of Social Service Administration at the University of Chicago. He has served on three expert committees of the National Academies of Science. His recent research appears in such journals as Addiction, Journal of the American Medical Association, and American Journal of Public Health. He writes regularly on HIV prevention, crime and drug policy, health reform, and disability policy for American Prospect, tnr.com, and other news outlets. His essay, "Lessons from an Emergency Room Nightmare" was selected for the collection The Best American Medical Writing, 2009. He recently participated, with zero critical acclaim, in the University of Chicago's annual Latke-Hamentaschen debate.

26 thoughts on “About that fishy Romney IRA”

  1. His purported wealth of $250M doesn’t really stand inspection either – he’s claiming annual income of $25M on investments and deferred income (partnership/ownership) from Bain. Either he’s somehow figured out how to make 10% risk-free (a proposition so attractive Bernie Madoff could use it to defraud people supposed to be experts of billions), or his actual worth is considerably greater. Or he’s laundering overseas wealth that he never reported as income when he got it, reporting it now and boosting his apparent income.

    1. Why does this require that the roughly 10% rate of return on the estimated $250M in wealth be “risk free?”. Investments in private equity partnerships are generally nowhere near “risk free,” and so a 10% rate of return is not at all implausible.

      1. Because he’s made essentially exactly the same rate two years in a row (the only two years he’s disclosed anything, in stark contrast to every modern contender and to the exhortations of his late father), and because he hardly seems the type to take great risks with his own money and his grandchildrens’ future. Witness for example the guarantee he got when he founded Bain Capital that if it didn’t work Bain Consulting would cover any losses he incurred (though not those of other participants) and would take him back.

  2. Tax avoidance is the right of every taxpayer; tax evasion is a crime. I’ll leave this distinction to our friends at the IRS. Until they have something to say, I’ll give him the benefit of the doubt, and assume he’s an avoider. Heck, I deduct my mortgage interest every April 15. It is almost as unjustifiable as the carried interest dodge, and probably even more expensive to the public fisc.

    My gorge rises, not at the avoidance, but at the control the Mitt Romneys of the world have over our tax code. Milton Friedman was fond of saying that the only “social responsibility” of a business was to follow the law. I would view this as a reasonable statement, if our businesses were not so busy writing our laws.

    1. I agree on this point. People have an obligation to follow the laws as written, and a right to utilize the laws as written. The crime of Mitt Romney’s 14-percent tax rate is not that Mitt Romney utilizes it, but that the carried interest exemption exists as law.

      That being said, there is one person running for President who has released all of his tax returns from 2000 forward (when he was a state senator in Illinois), and his running mate from 1998 forward. There is another who has released only 2010, and a partial on 2011 (when he was already several years into his quest for the Presidency, with plenty of time and opportunity to dress it up nice). And still it smells a little.

    2. I would view this as a reasonable statement,

      I do not.

      There are plenty of places where the law permits gross abuses in areas like environmental protection, working conditions, and so on. I don’t think the fact that they are legal justifies them.

      Let’s suppose that a business operates a factory in a poor country with little or no environmental legislation. The factory can dump its waste in the river, damaging the health and wellbeing of those living downstream, or it can, at greater cost, handle the waste in some other way. I think it – more precisely, the managers – has a responsibility to choose the safer method, costs be damned. To do otherwise is, essentially, to kill for money.

  3. “Willard” is, in fact, his name, although he’s been known to claim that “Mitt” was his actual first name. It may be juvenile to insist on using it, but it’s not in the same ballpark as the Replicants’ use of “Barack HUSSEIN Obama” on every possible occasion.

    1. How exactly is it different, except that Hussein has a Muslim association, which obviously the folks using it are hoping is a liability for the President, especially when repeatedly heard by low information voters?

      Note: I do think both situations are juvenile in that not calling someone the name they wish to be called is a tremendous marker of disrespect (and often mockery in addition).

      1. The most notable way that it is different is that Mr. Romney lied about it when asked a direct question. Given the Republican Party’s fetish for birth certificates that seems like a pretty serious issue.


      2. Uh…yeah, that’s the difference. One is juvenile, the other is bigoted. If you don’t see an explicit appeal to bigotry as a very significant difference then I really don’t know what to tell you.

  4. You may recall that an individual, Harry Markopolos, wrote letters to the SEC claiming that Bernie Madoff was conducting a fraudulent Ponzi scheme because it was simply impossible for anyone to obtain the returns that he was reporting to his investors. Those letters were ignored. However, the same principle that Markopolos used applies to the Romney IRAs. It is simply not possible to have generated IRAs of the size that the Romneys have without playing fast and loose with the valuation of the assets placed into the IRAs

    Dan Shaviro basically plays the Markopolos role here:

    The bigger issue raised by Romney’s $100 million IRA is whether – as I would have to say seems extremely
    plausible, just from the otherwise unlikely facts that we know – he grossly undervalued the assets that
    the IRA holds when he placed them inside, in order to evade – not just avoid – the annual contribution
    limits. Ed Kleinbard explains the basic issue here. Again, a Romney defender might be factually correct
    in arguing that “everyone does it” (so long, as by “everyone,” we are understood to mean high-flyers like
    Romney who have access to special insiders’ classes of non-publicly traded financial instruments.). But
    in this case the “it” would be violating the law, not just engaging in a clearly legally effective tax
    planning strategy. That would certainly strike me as inappropriate, and as raising broader questions
    about Romney’s character and general modus operandi.

    See here: http://danshaviro.blogspot.com/2012/07/romneys-ira-again.html (The Kleinbard link is here:http://bit.ly/MT9ecP.)

    1. A paragraph got cut off from the preceding comment. That paragraph is as follows:

      Given the contribution limits on IRAs, how one could have an IRA with $100 M in assets. Assume for a moment that you were able to invest $100K in Apple in 1984. That’s far, far more than the Romney’s could have invested over time in their IRAs and, for purposes of my illustration, I’m assuming that this investment took place in one lump almost 30 years ago. Today, not including dividends paid (which, in the case of Apple are fairly trivial in any event), you would “only” have somewhat over $18M in assets. If you want to change the stock, you are welcome to do so, but you will find that no individual stock or basket of stocks could come even close to a rate of return that would allow the IRAs to have a current value of $100M. (Berkshire Hathaway A would give the Romneys just short of $1.6M. Microsoft would be just short of $30M, not taking into account dividends.) In other words, even if the Romneys invested in the highest of high flying stocks over the last 30 years or so, they still wouldn’t have anything close to what they are showing in their IRAs.

      1. Dividends!
        Ah, that may be the magic pill.

        Take your company, have stock in in put into your IRA, and have it send out dividends.
        That is why GOPers are always harping about cutting corp taxes – so there is more money to shovel into their tax deferred things.

  5. Regarding the IRA, I think a plausible explanation is that it’s value is largely the result of roll-overs from other qualified accounts (e.g. 401Ks). I don’t think there’s a limit as to how much you can rollover. I did this once when I left a company: Had a choice to get a lump sum minus penalties or roll it over to an IRA.

    1. This does not work. While you can roll over any amount from a 401(k) to an IRA, a 401(k) has annual contribution limits that are, if anything, more restrictive than those of an IRA. This cannot be the explanation for an unusually large IRA.

      1. Mr. Neal is basically correct. The $100M dollar figure is too high. No reasonable investment manager could ever have obtained that sort of return. See my analysis above which assumes that all of the IRA contributions were made about 30 years ago. The calculations with respect to a rollover would not, as a practical matter, be much higher.

  6. What Tim said. It could clearly have resulted from rollover of other kinds of tax-sheltered retirement accounts, which usually must be converted to IRAs when/if you sever ties with an employer. I had to do that with teachers retirement contributions when I changed employers. Admittedly you might not know this if you haven’t changed jobs.

    Of course those other kinds of retirement accounts also have contribution limits, and some (I think) are related to proportionality among all employees of a firm. So the questions about fiddling with valuations don’t automatically go away.

    And I have to agree with Harold about a US presidential candidate holding his money offshore to minimize paying US taxes. It makes him look so much like part of that stateless international elite that has no loyalty to any particular country, but only to itself . . .

  7. There is something of a tendency to view IRA, 401K investments through the prism which has been the experience of the majority. However, the law covering allowable investments is really oriented towards what is NOT allowed; with the operating assumption being anything else is ok. If one had a self-directed IRA, one could invest in all sorts of things including real estate. The typical experience relating to what is allowable tends towards being dictated by what the trustee is willing to allow.

    Mitt’s folks flew the proverbial the proverbial 747 through these loopholes, exploiting wildly aggressive tactics. Unlike Madoff, these investments were real enough, they just were only available to the privileged few. As to how risky these investments are/were, I would suspect that per usual the risk was assumed by those assimilated into the cloak of private equity. The benefits went to Bain.

  8. I’m not even surprised by any of the Romney revaluations. When I was consulting with large specialty doctors’ groups in the 1980s, I ran as much money as possible into IRAs. Cooking an IRA is not a problem when you control both ends of the deal. There were fortunes to be made by evading taxes. I used the best tax lawyer that I could find to send me a written report when I sent him a question about whether what I was doing was legal or not. I told him he was betting his malpractice on him being right. I paid double his usual fee.

    He, once, sent me a formal letter stating that something I was doing was legal. He put in a hand written note complaining that what I was going to do was unethical, immoral, not common practice in business, but for some reason known only to god, it was legal.

    The Reagan administration pretended to acknowledge that pensions were not funded. They were all paper. A law was passed encouraging employers to pre-fund the plan at the beginning of the year on their estimates of what they would be liable to put in the trusts. I pre-funded everyone. I might take a plan worth $5 million on paper, make an estimated contribution on the first working day in January of $5 million of borrowed money. I could hide all of the profit made on the pre-funded $5 million inside the pension plans. I could drop the cost of borrowing on to the tax file of the corporation. No corporation that I controlled paid over $1,500 in federal taxes.

    At the end of the year, I liquidated everything possible to cash. I repaid the loans in full. The pension fund might have jumped $5 million in value in a year, but it was inside the trust and for all practical purposes was invisible.

    The government fails on unusual problems. A simple computer program to compare the reported rates of return on pension trusts would have nailed me in a hot flash. I was doubling the cash value of a pension fund for one group for almost three years in addition to the return on the annual contributions.

    1. I can’t say I fully understand the above, but I know one thing — I want this guy on my side.

      1. Evil is evil’s comment is most informative.

        Perhaps he or she could expand the post and write more on “IRA cooking” and IRA manipulation in general–on this blog or elsewhere?

        1. I don’t want to waste the time. The author mentioned something that I knew about. I responded with my experience.

          Old man Walton’s children have more accountable wealth than the poorest 100,000,000 Americans.

          That is a real problem. With that much pure access to cash, a single family can buy any law they want about anything from elected officials.

          Taxes are totally controlled by the rich’s minions.

          Wasting time on investigating how to rig IRA’s is silly in the whole context of increasing the federal government’s fixed revenues from taxes.

    2. Interesting comment. Could you clarify a bit?

      You estimate a funding requirement for the year of $5 million. Does this number have to be based on any actuarial work or the like?

      On Jan. 1 the corp borrows $5 million and puts it in the pension fund. Now the fund earns some return over the year, say 10% just for discussion. What happens on Dec. 31? Do you repay the loan with $5 million from the fund plus interest paid by the corp, thereby transferring the interest pmt (plus any earnings over and above that amount) from the corp to the fund participants? Or does the corp repay the $5 million plus interest itself?

  9. There was no actuarial work required when I started playing games. Later I dealt with people that had have actuarial reports to justify contributions to a defined benefit or a defined contribution fund. I had no problem finding actuaries. I might have to get three or four reports to get one that maximized contributions. It was a cost of doing business.

    The money did not sit idly getting OK returns. As I corrupted a larger number of people I could do untraceable deals that could not be followed by anyone but a genius. I might loan money from the pension fund to a private business. The “private business” might pay 50 percent interest. It came off of the business and taxes books and vanished. They do not audit these things. I paid everything possible for making taxable income as low as possible.

    With the private business maybe left holding the mortgage as everyone pulled out. Trying to beat the tax system causes people to do really ignorant things. In one instance the private business was part of a mob scam. I have no scruples. I never put my signature on any document that might be a felony conviction in federal court.

    My problem was that I hated rich people. Several doctors’ organizations that I worked for were going to go bankrupt. No doubt. A private investment group gave me a $2,000 or $5,000 bonus for doubling the capital in a year. I bought them into the most flighty things that I could locate. I actually hooked some of them up with the scam artists that are lauded in the Wall Street Journal. I knew the big dogs were going to bite their asses. I didn’t work for my health, I worked for money.

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