A bold statement! Catch your breath and savor it (the statement, not your breath).
Some of you may be following the developing issue surrounding the dubious (and profoundly piggish) tactic indulged in by many private equity fund managers of avoiding (evading?) hundreds of millions of dollars in taxes on the management-fee portion of their compensation. The strategy involves "waiving" the management fees--except they're not really waived, they're "invested" in the fund or a related vehicle and paid to the manager later. So instead of paying the 35% ordinary income rate on the management fees, these Masters of the Universe pay the 15% capital gains rate--and pay it years after they earned the management fees. The amounts involved are staggering. Bain Capital alone has engaged in this tactic as to over $1 billion (yes, with a "B") in management fees, resulting in over $200 million in unpaid taxes from this company's personnel alone. And this for people already taking home tens of millions of dollars a year after taxes.
New York Attorney General Eric Schneiderman has issued subpoenas to explore how many New York residents may have stiffed his state's treasury in this fashion. The New York Times reported on it over the weekend here.
The Times' interest in what might be considered an abstruse tax issue is fueled in siginficant part by Republican Presidential Nominee Mitt Romney's longstanding relationship with Bain Capital, and the possibility that he personally benefited from these tactics either while he was actively working there, or as part of the "retirement" package he received when he left. Unlike every presidential candidate in recent memory, Romney has famously refused to disclose his tax returns except for the last two years, fueling speculation that he is either a tax cheat or at the least the beneficiary of what are referred to in polite company as "aggressive" tax strategies available only to the superrich, resulting in his paying effective tax rates that are a fraction of ordinary working folks'. (It is worth noting that not every private equity fund played this game. A number of the most prestigious and successful funds, including Blackstone and Carlyle, reportedly eschewed it.)
Romney supporters deride Attorney General Schneiderman's investigation as politically motivated, and Schneiderman is in fact a Democrat reportedly with ties to the Obama administration. Why that should discredit the inquiry whether a major-party candidate for President has underpaid his taxes by millions in the midst of an economic crisis--an inquiry that the candidate could resolve simply by disclosing to the electorate the same information every major party candidate for President has disclosed for decades--remains a riddle to me, but perhaps I lack vision. To be fair, a Romney tax advisor represented categorically to the Times that "Governor Romney's retirement agreement did not give [his] blind trust or him the right to [engage in the fee-waiver strategy], and I can confirm that neither he nor the trust has ever done this, whether before or after he retired from Bain Capital." The irreducibly concrete among us may be forgiven for preferring show to tell, but again I perhaps lack vision.
This is all very interesting, Bernie, I hear you say, but you drew me into this rather dismal lesson on federal tax policy on the premise you would show how the academic work I publish actually might matter. Fair enough: Prepare to be exhilarated.
The Wall Street Journalreports today (sub. req'd) that "a person familiar with [the NY AG's] office's thinking" has explained that the subpoenas were issued in July, before this issue sprang into public consciousness, and were raised by the office's taxpayer protection bureau (a bureau that apparently protects the taxpayers who do pay their taxes by pursuing the ones who don't) based on discussion of the issue in (wait for it . . .) "academic papers." I would be remiss if I failed to point out that this phrase in the online report is hyperlinked directly to my brilliant and perspicacious colleague Gregg Polsky's 2009 paper describing and condemning this very strategy, Private Equity Management Fee Conversions, 122 Tax Notes 743 (2009) (ssrn here).
So sharpen your nibs, my friends--real regulators may rely on your work to brook the high and mighty. And of course your mom likes it too. Hats off to Gregg Polsky for making himself useful!