Romney's Bain Capital under investigation for tax dodging

New York's attorney-general starts examining private equity firms

Bain Capital – the company formerly run by Republican presidential candidate Mitt Romney – is among a number of private equity firms being investigated for underpayment of taxes, according to a report in the Financial Times:

[New York's attorney-general, Democrat Eric] Schneiderman has issued subpoenas as part of an investigation into the “fee-waiver” strategy, in which executives invested management fees paid by investors back into one of the investment funds. Any profits on those fees would be taxed at the capital gains rate – a much lower tax rate than if it were treated as ordinary income. There is debate over whether the strategy is legal, aggressive or illegal. The strategy was risky and could have resulted in losses for the manager if the investment funds were not profitable.

The fact that Bain Capital is being investigated has led to some – including one "private equity executive" quoted by the FT – to brand the move as a political one, but other equity groups are being investigated as well, including KKR (part owners of Alliance Boots, amongst others) and Apollo Group (an education-focused firm which owns one of Britain's two private universities, BPP University College).

Bain is being roped into the investigation – run by the state's Taxpayer Protection Bureau – due to the hundreds of pages of the company's internal financial documents which were leaked by Gawker, which reveals that the Bain partners save more than $200m in federal income taxes and more than $20m in Medicare taxes.

The New York Times reports that there is widespread belief that the practice is not only legal, but ethically justifiable as well:

Tax lawyers have justified the arrangements by arguing that converting the management fees into carried interest, which could lose some or all of its value if a fund does poorly, entitles the managers to the lower capital gains rate, which is intended to help mitigate the risks taken by investors.

“They’re risking their management fee — they’re giving up the right to that management fee in any and all events,” said Jack S. Levin, a finance lawyer whose firm has represented Bain on some matters. Mr. Levin said he did not consider the practice risky or even aggressive.

“The I.R.S. has known that private equity funds have been doing this for 20 years,” he said.

If the move is politically motivated, it's likely to prove rather successful. Romney's tax status has been under examination since the day he made his first presidential bid, and he has been extremely unwilling to reveal anything but the barest minimum of information about it. The most compelling theory as to why is the suggestion that, in 2009, he may have taken advantage of an IRS amnesty into illegal Swiss bank accounts. And the status of Romney at Bain is similarly murky.

All of which is to say that the candidate has the whiff of financial impropriety floating around him most of the time, and it doesn't take much from, say, a Democratic attorney-general to make more bad news for him.

Obama and – Bane? Bain? Romney. Obama and Romney.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.