The cult of the savvy dismissed Harry Reid’s claim that someone told him Mitt Romney didn’t pay taxes for ten years as just a ploy to focus attention on the non-release of the Republican nominee’s tax returns. Surely Romney paid SOME taxes from 2000-2009, went the claim.

But what if this all goes back to Romney’s deal to end his tenure as CEO of Bain Capital? That’s the speculation that this TPM reader made.

…you’re missing the piece on the timeline where Romney cut a retirement deal with his partners to buy out his shares in the Bain Capital management company. Where it could be zero is if Romney had previously contributed his shares of the Bain Capital management company that he controlled 100% of into his IRA over the years.
The corporate structure of most private equity firms is such that there is a management company (holding company) above a set of LLCs or limited partnerships which are the actual funds investing the capital and collecting the fees/distributing the profits. Romney was both a general partner in the funds and the sole shareholder of the management company.

The management company shares are generally considered to have relatively nominal value (i.e. you can conceivably put them into an IRA) as there generally isn’t a lot of (or any) income/revenue associated with them — however, since the management company owns the brand name and controls the funds and all hiring/firing/compensation decisions (within Bain Capital), if Romney’s partners wanted to continue using the name “Bain Capital” and take over control of the private equity firm and funds in the future, they would have to buy back Romney’s shares over a period of several years for hundred+ of millions of dollars. This is not uncommon in private equity firms undergoing an ownership transition. Since these shares (could) have been contributed to an IRA over the years, the Romney’s income 2002 to 2009 would largely be from his partners at Bain buying back shares that he’s already contributed to his IRA, and just like any trading you do in your IRA, the sale of these shares would be tax free until after he turns 65 (and/or withdraws from said IRA) and he’d pay zero income taxes on that. So, if he had transferred 50% of his Bain management co. shares to an IRA, if he was being paid $20M per year to have those shares bought back, his tax rate would be a blended 7.5%. If the management company shares were held overseas or had overseas blocker entities, it is conceivable it could be even lower than that. Also, he could use his taxable shares as charitable gifts and his non-taxable IRA shares as tax free income.

This is not the first time I’ve heard this speculation. It brings together two separate threads, the leaving of Bain in 1999 and the tax returns issue. It would also explain the accumulation of $100 million in his IRA, which has always been conspicuous (Sure, he would eventually have to pay taxes on whatever he withdraws from this, but that’s down the road). Plus, as the reader explains in a later post, this is something that investors in Bain would probably know about. They would know about the purchase of shares, at the least, and they would probably know that they were getting routed into Romney’s IRA. So that answers the “how would anyone know what’s in Romney’s tax return” question. And it answers the anonymity question:

Any Limited Partner who disclosed details of Bain’s finances to Harry Reid (of all people) would likely have broken iron clad confidentiality agreements and would be risking meaningful personal and professional liability. I’m not saying Harry Reid is telling the truth, but the knowledge of Romney’s taxes and any tax-deferred or neutral deal would likely be known by more than just Romney, his family, and Bain Capital.

We know that Romney participated in Marriott’s abusive tax shelter, and we know about Swiss bank accounts and holdings in the Cayman Islands, so it’s not like he’s above aggressive tax planning strategies. And while this would be within the bounds of the law based on the structure of the company, his effective tax rate would really approach zero, if this is true. Brian Beutler shopped this around to tax experts, who agreed that it’s plausible, though they questioned the literal reading of “zero taxes.” I think the point is that the effective rate on income would be low enough as to be indistinguishable from zero. And this is pretty much par for the course in the corporate circles in which Romney operated, where the goal was to drive your effective rate down to the extent possible.

Ultimately, we’re not going to get an answer to this. It’s too damaging to everyone involved, both the subject and the source. Romney is content to run out the clock and to try and pivot to other matters. But that doesn’t mean this won’t continue to haunt him politically.