Is the Noose Closing Around Romney's Tax Returns?

Problems on my blogging computer have kept me away from here for a week, and a lot sure has happened on the Mitt Romney tax story in that time. The Obama campaign has gone after Romney on his tax havens and tax returns is two separate television ads, including a new one yesterday. Calls have mounted from Republicans for Romney to release his tax returns, yet as of last night Romney was standing firm that he would not release any besides 2010 and (so-far estimated) 2011. The most interesting development to me is that speculation on what could possibly be so bad in the returns is narrowing down to one year, 2009.

Dan Shaviro (via TaxProf Blog) makes three points:

1) We know from the 2010 tax return, in which he had a net capital loss carryforward from 2009, that he zeroed out his net capital gains - including from carried interest Bain income - in 2009.

2) 2009 was the last year in which he received certain Bain payments as the playout of his "retroactive retirement."

3) It's been hard to understand what benefit he thought he was getting from the Swiss bank account, and there was an IRS amnesty program in 2009 for fraudulent nondisclosure of offshore income.  If he had to come clean in 2009, this might be embarrassing, especially given that there was an iron fist inside the IRS leniency offer (i.e., if you held out, they might get you without any amnesty).

So it is possible that Romney had a high income, but an even lower tax rate in 2009 than 2010--maybe even zero. The other possibility is that he got caught up in having an undeclared offshore account and took the IRS amnesty in 2009.

Matthew Yglesias also thinks the IRS amnesty program could be the answer:

Failing to apply for the amnesty and then getting charged by the IRS would have been both financially and politically disastrous. So amnesty it was. But even though the amnesty would eliminate any legal or financial liability for past acts, it would hardly eliminate political liability

Wouldn't it be great if we knew which Swiss bank Romney's money had been hidden in? As you may know, the IRS nailed Union Bank of Switzerland (UBS) for helping Americans commit tax evasion (the illegal kind, as opposed to legal tax avoidance). As a result, UBS coughed up the names of more than 4400 Americans (out of 52,000 originally sought by the IRS) who had accounts there. This was the backdrop to the IRS amnesty: for the first time, the U.S. had breached Swiss banking secrecy and Americans with Swiss bank accounts could no longer be sure that their secret was safe.

In fact, we do know which bank held $3 million of Ann Romney's blind trust. It was UBS.

How do we know? Brad Malt, the Romneys' trustee, said so. Not only that, when Romney released his 2010 tax return in January of this year, he had to amend two previously filed disclosure forms, for 2007 and 2011. In 2007, he had not specified that the UBS account was in Switzerland, not the U.S., according to ABC News (UBS has branches in the U.S.).

Let's review the bidding: Ambiguous disclosure in 2007. UBS income on 2010 tax return. Retroactive revision of 2007 disclosure. IRS amnesty for undisclosed foreign accounts in 2009 powered by UBS prosecution. Refusal to release 2009 tax return. Yes, 2009 could be a big problem.

Also, as Linda Beale points out, it would be great to see 1999-2002 to help sort out the Bain claims and counter-claims.

The entire tax return saga is emblematic of a much larger issue: How there is one set of rules for the 1%, and a different one for the rest of us. If the consequences of releasing his returns would be so much worse than the sustained onslaught Romney is already absorbing, I have to question whether Romney can even finish the race.

One Year Anniversary

Today marks the one-year anniversary of Middle Class Political Economist.

Depending on whether you believe Google Blogger or Google Analytics, I've had either 64,000 or 40,000 page views in this time. Either way, it's a pretty good start, and I want to thank all my readers and commenters for taking part in the conversation. A special thanks goes out to Tim Sinclair for his guest post on the S&P downgrade of U.S. debt.

I owe a great deal of gratitude to everyone who has helped promote this blog. Mark Thoma, who had picked up David Cay Johnston's review of Investment Incentives and the Global Competition for Capital last January, linked to my very first substantive post and has been generous with links ever since. Marty Pflugrath at BartCop Entertainment was the first to make me a regular. I've also gotten frequent and/or big boosts from Mark Ames, Brad DeLong, Markos Moulitsos, Pat Garofolo, and Dan Crawford, none of whom are responsible for my errors. Many of my posts now appear at Angry Bear, Business Insider, and Daily Kos. My wife, Mary Hildebrand, comes up with some of the ideas for my posts and is always there for me. There are many more out there who have helped me, and I thank all of you as well.

Going forward, I'd like to ask everyone: How can I make this a better blog? What topics would you like to see more of? What am I doing wrong?

Again, thanks for reading, and thanks in advance for your answers to my questions. Please feel free to post them as comments or email me at kpthomas55@hotmail.com

Alabama's Airbus Subsidy Eerily Reminiscent of Auto "Transplants"

The July 2 announcement that Airbus would begin assembly of its A-320 airliner in Mobile, Alabama, may be good for Alabama, but whether it's good for the country as a whole is dubious. Indeed, it most reminds me of the subsidized arrival of foreign auto "transplants" that helped undermine Detroit's Big 3 as well as the unionization of the auto industry.


The new $600 million facility is projected to create 1000 jobs. Initial reports put subsidies to the company as $158.5 million from the state and various local governments (thanks to @varnergreg for pointing out this article). Remember, though, that initial reports are more likely to underestimate subsidies than overestimate them, as in the case of Electrolux in Memphis. However, if this is remotely near accurate, Alabama got a much better deal for Airbus than did Washington state for the Boeing 787 Dreamliner, which was 220% of the investment and $1.65 million per job (according to my calculations for Investment Incentives and the Global Competition for Capital), more than 10 times the per job cost in Alabama.

Unfortunately, this development could repeat the example of the subsidization of foreign automakers that hastened the decline of Detroit's Big Three. According to economic geographer James Rubenstein (1992, Table 1.1), from 1979 to 1991 there was a 1 to 1 correspondence in the opening and closing of new automobile and truck assembly plants in the U.S. and Canada: 20 new ones were built, 20 old ones were closed. Every one of the new facilities received subsidies from state and local (or federal and provincial, in Canada) governments. Given that the automobile industry was in a position of overcapacity for much of that period, it is no surprise that new production simply displaced older production.

Will the same thing now happen in the aircraft industry? Globally, Airbus has been putting market share above profits since the early 2000s. With its current move to Alabama, CEO Fabrice Brégier said the company hoped to grow its U.S. market share for single-aisle planes (the A-320 competes mainly with the Boeing 737) from 17% to 50% over the next 20 years. If Airbus is successful, it would be bad for the 80,000+ employees in Boeing's Commercial Airplanes group.

Of course, there is growing global demand for airliners, especially in Asia. But China has already developed its own competitor in the single-aisle market and Airbus is building A-320s in Tianjin, China, making it unclear how much of the global growth can translate into increased U.S. employment.

As was the case with foreign automakers, this is a case where a market-seeking investment was clearly coming to the United States, but the competition for the facility allowed Airbus to extract rents through the site selection process. By repeating this process for projects large and small, state and local governments deprive themselves of as much as $70 billion per year in revenue, enough to hire all state and local employees laid off since the recession began in December 2007. At the same time, over the long haul, the process in the auto industry replaced well-paid unionized workers with less well-paid, non-union workers.  The prospect that this evolution could be repeated in the aircraft industry is a pretty depressing one, when all is said and done.

Cross-posted at Angry Bear.

What is Mitt Romney Hiding? UPDATED

Mitt Romney has so far released only one year of tax returns (2010), plus an estimate for 2011. This stands in stark contrast to his father, Michigan Governor George Romney, who released 12 years of tax returns when he began running for President in 1967. As his father said at the time, "One year could be a fluke." So the questions remain about what is in Romney's older returns.

Two stories this week and last have ratcheted up the pressure. One is a recent web exclusive for "The Last Word with Laurence O'Donnell" where David Cay Johnston has five questions for Romney that can only be answered with his tax returns. The other is a blockbuster story by Nicholas Shaxson (h/t TPM) in the new Vanity Fair on the shadowy world of Romney's tax havens. Together, they put a laser-like focus on the finances of the man who could become our 45th President.

Johnston is a well-known former New York Times reporter, Pulitzer Prize winner, and the author of the major books Perfectly Legal and Free Lunch. If you don't have time to watch his 3:45 video, here are the five questions:

"1. Did you buy any illegal or gray area tax shelters?
"2. Did an IRS audit ever uncover serious problems with any of your tax returns?
"3. Did you make use of offshore vehicles to defer, or avoid paying, federal income taxes?
"4. Did you take advantage of any tax strategies that the IRS did not uncover in audits?
"5. Did you fully tithe to the Church of Jesus Christ of Latter Day Saints every year and take a deduction on your tax return that shows that?"

These are important questions. We know that Governor Romney has had a Swiss bank account, as well as money in other tax havens like the Cayman Islands, Luxembourg, Bermuda, and Ireland. Romney's answer to any question about his taxes has basically been, "Trust me." But the guy's running for President, for Pete's sake. He owes us more than that.

Shaxson, a researcher for the Tax Justice Network and author of the book Treasure Islands, asks us to consider the possibility that maybe not everything Romney has done tax-wise has been  legal. He opens with a story told by a former Bain employee about how Romney encouraged him to lie to get secret information on competitors. There is, of course, the fact that Romney has funds parked in numerous tax havens and the fact that his supposedly "blind" trust invested in a business started by Romney's son Tagg, and the fact that he has $102 million in his IRA despite a contribution limit of $2000 per year for the entire 15 years Romney ran Bain. Obviously nothing to see here...

The standard answer of the Romney campaign to all this is that he always followed the law. As Jon Stewart had to point out since the major media did not, Romney did plenty to affect the law he was supposedly "just following," including his defense of the "covered carried interest" tax loophole that let him treat his fees at Bain as if they were capital gains (15% tax) rather than wages (35% tax). All perfectly legal and as Johnston points out in his book by that name, that is the real scandal.

Further, Shaxson reveals that an early filing of the original Bain Capital fund in 1984 showed that many of its foreign investors were routed through tax havens and that at least one was a notorious financial criminal, Robert Maxwell. Thus, Bain helped foreigners take advantage of the fact that the United States has set itself up as a tax haven for non-citizens (see also Jason Sharman's paper on setting up anonymous companies in the U.S. and elsewhere; h/t Robert Kudrle). Shaxson quotes Rebecca Wilkins of Citizens for Tax Justice, “It is shocking that a presidential candidate should think that is O.K.” for Bain to service the likes of Robert Maxwell.

The bottom line is that there is a lot of unsettling information in what investigators have so far been able to piece together about Romney's finances. The easiest way for Governor Romney to put to rest what his campaign described to Shaxson as "unfounded allegations and insinuations" would be to release his tax returns. Yet he has not done so and shows no sign of changing his mind. Josh Marshall calls the questions "kryptonite" and thinks Romney will come under a lot of pressure to release more tax returns. Let's hope so. The guy's running for President, for Pete's sake.

Updated to correct "covered interest" to "carried interest." Thanks to m.jed at Angry Bear.

Update 2: Via Gotta Laff at The Political Carnival, here is a Wall Street Journal video covering the low-valued special class of shares that Romney and other Bain executives put into their IRAs, which tends to bolster Shaxson's contention that this is the source of the huge gains in Romney's IRA. (As opposed to the suggestion of some commenters that he rolled over other types of income into his IRA when he left Bain.) The key question from a tax law perspective is whether these shares were properly valued.

Health Insurance Rebates Show How Bad Insurers and State Regulators Can Be

Thursday's health care ruling was a surprising victory for the middle class. I went to bed Wednesday dreading waking up, only to be awakened by a phone call that the law had been upheld. Most of the story is well-known, and summarized in the President's speech: six million young adults under 26 who have gained  insurance, children now (and adults starting in 2014) can no longer be denied insurance due to pre-existing conditions, an end to terminating people's insurance when they get ill, closing the Medicare donut hole, etc. I want to focus on one provision the President mentioned in passing, the $1.1 billion in insurance rebates that 12.8 million Americans will be receiving August 1.

The rebates are due to the medical loss ratio or "80/20" rule that insurance companies cannot spend more than 20% of premium dollars on "administration, CEO pay, and profits," as Health Care for America Now (HCAN) summarizes it. The requirement is 85% spent on actual medical care for firms in the large group market, according to healthcare.gov.(via HCAN). Of the $1.1 billion in rebates, $393.9 million will be in the individual market, $386.4 million in the large group market, and $321.1 million in the small group market.

Although $1.1 billion in rebates is not a lot of money in the multi-trillion U.S. health care system, it is enough to provide noticeable rebates to millions of consumer before the November election. Consumers Union has a state-by-state breakdown of which insurance companies owe rebates in each state, and how much. Three patterns emerge from these data: First, some companies routinely failed to meet the 80/20 rule in state after state after state. Second, Blue Cross/Blue Shield companies, which were once largely non-profit but were converted to for-profit corporations mostly in the 1990s, are now frequent violators of the medical loss ratio rule. Third, some states, most notably Texas, have such lax insurance company regulations that violations of the rule are rampant. The data below come from the Consumers Union link above.

1) Multiple violations by individual companies: The poster child for gouging consumers and spending premium dollars on things other than health care is Golden Rule Insurance Company (since 2003 a subsidiary of UnitedHealthcare), which operates solely in the individual market, and not in either the small group or large group health care markets. According to the Consumers Union data, Golden Rule owes rebates in 23 states where it operates. Comparing the CU data with Golden Rule's website on where it operates, we find that in only nine states where it operates does it not owe rebates. We also learn that two Golden Rule subsidiaries also owe rebates, American Medical Security Life Insurance Company in Utah in the individual market, and Oxford Health Plans of New Jersey Inc. in the large employer market, bringing Golden Rule's total to fully 25 states where it owes rebates under the medical loss ratio rule. In a number of states (Alabama, Florida, Indiana, Kentucky, Maryland, Michigan, Mississippi, and West Virginia) , Golden Rule owes more money than any other insurer in the individual market.

Furthermore, UnitedHealthcare subsidiaries carrying the UHC name owe rebates in 28 states in the small business market, large business market, or both.

I don't mean to single out UnitedHealthcare for overcharging: depending on the state and the market, Aetna, Connecticut General, and Time Insurance Company, among others, owe substantial rebates to their customers as well. But Golden Rule and UnitedHealthcare failed to meet their 80/20 tests in so many states that they really stand out.

2) In many states in which Golden Rule does not owe the highest rebates in the individual market, Blue Cross/Blue Shield does. This includes states like Arizona, Missouri, Oklahoma, South Carolina, Tennessee, and most notably, Texas. This represents a complete repudiation of the historical BC/BS ethos, which included non-profit incorporation and community rating (i.e., not penalizing people for getting sick). But that's what happens when you turn non-profits into for-profits in health care.

3) This brings us to lax insurance regulation, as in Texas. Blue Cross/Blue Shield of Texas owes $89.9 million in refunds, all of it in the individual market, which by itself exceeds all the refunds in the much bigger California economy, where total refunds only amount to $73.9 million. Total rebates in Texas will total $167.0 million. The only other state with rebates exceeding $100 million this year is Florida, at $123.6 million. However, a number of states have higher average rebates, led by Vermont at $807. I believe both the total and average rebates should be examined for evidence of weak insurance regulation.

To summarize, the Supreme Court's decision was a great one for the middle class. On top of all the provisions that expand coverage and economic security, 12.8 million consumers will see refunds from their insurers to pay back for their price gouging.

This is not to say that we don't have a long way to go to complete health reform. As Aaron Carroll points out, there is a great deal more that needs to be done to our $2.7 trillion health system, including making coverage universal and getting cost increase under control. But upholding the Affordable Care Act is a step in the right direction.

Lost Output Over $3 Trillion And Rising

Still traveling, so just a quick post, but this really can't be emphasized enough. Andrew Fieldhouse at the Economic Policy Institute reports that the Congressional Budget Office now has cumulatively reduced its estimate of 2017 gross domestic product by 6.6% since the beginning of the recession in December 2007. As Fieldhouse points out, that doesn't sound like much, but when it's 6.6% of a $15 trillion economy, we are looking at about $1 trillion (with a "T") of lost income in 2017. To put it another way, that is well over $3000 of income per person that year. That is on top of $3 trillion in potential GDP already lost since the recession began, according to Fieldhouse.

The culprit, of course, is the lack of further stimulus to the economy. After the totally inadequate $800 billion stimulus package in 2009, we have had essentially nothing. At the end of 2011, Republicans had to be shamed into approving a payroll tax cut they previously favored. Indeed, as Thomas Mann of the Brookings Institute and the Norman Ornstein of the American Enterprise Institute have pointed out, it is not the case that both parties are getting more partisan. As they put it, "Let's just say it. The Republicans are the problem." It is the Republicans in Congress who are blocking further stimulus measures. Electing a new Congress that will not pass a stimulus bill will cost Americans thousands of dollars out of their pockets.

We are a long way away from George Wallace's famous claim that there was not "a dimes' worth of difference" between the two parties.

Why Not Infrastructure Spending?

Why are we not doing infrastructure spending today? Here's what the federal government started in the midst of the Great Depression:

Photo credits: Personal photos, June 21, 2012

Hoover Dam was commemorated in 1935 and completed in 1936. The dam presently provides electricity to 1.3 million people in Arizona, Nevada, and California (via Wikipedia). There is no shortage of infrastructure needs today and plenty of unemployed workers. The problem, of course, is political, not economic.

P.S. Limited blogging for the next ten days.