A significant amount of Romney’s personal wealth is sequestered in this deeply opaque financial system that not only caters to the global über-rich but also is a leading cause of global inequality. The amount of money siphoned out of the US alone via tax havens is staggering. American corporations now have an estimated $1.7 trillion in foreign profits stashed offshore and beyond the reach of the IRS, according to various government estimates. American multinational companies now keep at least 60 percent of their cash offshore to avoid paying US taxes, according to a recent Senate report. The Senate Permanent Subcommittee on Investigations found that some companies, such as Hewlett-Packard and the pharmaceutical company Johnson & Johnson, keep almost all of their money offshore and rely on dubious methods to bring it back into the US without paying taxes. (HP, according to the committee, uses an endless series of short-term loans from its offshore accounts to its US parent, a move that has saved the company billions in taxes.)
Romney, who has decried the 47 percent of Americans who don’t pay income taxes, has nevertheless championed the use of tax havens by American big businesses. He told donorsgathered at an August fundraiser that one reason big businesses were thriving today was because they know how to avoid US taxes by going offshore. “They know how to find ways to get through the tax code, save money by putting various things in the places where there are low tax havens around the world for their businesses,” he said.
Meanwhile, the negative impact of these practices on the United States and other countries is significant. In 2008, the Senate Permanent Subcommittee on Investigations released a report estimating that offshore tax havens were costing the US at least $100 billion a year in lost tax revenue. “Tax havens are engaged in economic warfare against the United States, and the honest, hardworking American taxpayer is losing,” the committee’s chairman, Sen. Carl Levin (D-Mich.), declared when the report was released. “The iron ring of secrecy around tax haven banks and their deceptive banking practices enable and encourage tax cheats to hide assets from the United States.”
“The system of offshore tax havens is one of the greatest threats to the global economy: undermining markets, helping shift gargantuan quantities of wealth upwards from poor to rich, then wrapping up much of it in secrecy.”
The use of offshore entities is one reason the US tax base has been shrinking dramatically over the past half century. In 1952, at its peak, corporate taxes were responsible for more than 30 percent of all federal tax revenue; today it makes up 9 percent. The burden of keeping government afloat, meanwhile, has fallen heavily on individual taxpayers as a result. In 1952, according to a report from the Congressional Research Service, the payroll tax accounted for only about 10 percent of federal revenue; today, it’s 40 percent.
Globally, the problem is even more severe. Just consider the case of tiny, impoverished El Salvador, whose wealthy oligarchs helped Romney launch Bain Capital. Between 2001 and 2008, the US government gave El Salvador more than $500 million in foreign aid. During that same time, more than a billion dollars a year disappeared from the country from illicit outflows, including those to tax havens, according to the Global Financial Integrity program at George Washington University.
The Tax Justice Network estimates that the global superrich have stashed between $21 to $32 trillion in offshore tax havens, a figure almost twice as large the GDP of the United States. The group estimates that if the income on these investments were taxed at 30 percent, it would generate as much as $280 billion in revenue annually. That’s more than double what the world’s developed countries collectively spend on foreign aid. The lost tax revenue would be enough to pull many developing countries out of debilitating debt and greatly improve the quality of life of their citizens.
“The system of offshore tax havens is one of the greatest threats to the global economy: undermining markets, helping shift gargantuan quantities of wealth upwards from poor to rich, then wrapping up much of it in secrecy,” says John Christensen, who served for 11 years as the economic adviser for the British tax haven of Jersey and now works for the Tax Justice Network in London. Before becoming a whistleblower, Christensen helped clients in South Africa evade anti-apartheid sanctions and to dodge taxes, among other things.
“The offshore system of secrecy jurisdictions is much bigger and many times badder than almost anyone realizes. To have a US president who is a serial user and abuser of offshore secrecy, and even a defender of secrecy jurisdictions, would pose frightening threats to the US and the global economy,” he adds.
While President Obama hasn’t been particularly successful in passing legislation in this area, he did outline a number of proposals to close loopholes in the US tax code that allow American companies to exploit offshore tax havens and avoid US taxes. Some of the measures would take aim at precisely the sorts of tricks Romney and Bain, and many others, have used.
Henry, the former McKinsey chief economist, notes that Romney’s involvement in offshore tax havens is no different from that of countless other high net worth individuals and investment firms. “It seems a little naive to denounce Romney for going along with a game that has become standard practice for every single firm in his industry,” he says. “This would be like singling out some individual plantation owner and condemning him for not converting all his slaves to hired workers in 1860.” The difference here, though, is that Romney isn’t just any mast of high finance. He’s asking Americans to put him in charge of the country. And as Henry says, if Romney is elected, “There is almost no chance that he would try to undermine this system.”
*Update: A spokesperson for Bain Capital said in an email that “the Cayman funds are partnerships, just like U.S. partnerships or S Corporations, and they pay no corporate taxes. Instead, partners pay 100 percent of their allocated taxes. Virtually all U.S. partnerships also do this. In other words there is no difference for a U.S. taxpayer between investing in a Bain Capital fund domiciled in the Cayman Islands and investing in a U.S. partnership.”