Earlier this year, no less an authority than ABC News broke what it regarded as a sensational story about Mitt Romney’s supposedly secret offshore investments through Bain Capital. More recently, The Washington Post ran an article complaining that Mr. Romney, despite complying with federal disclosure rules relating to those investments, was hiding something. The Obama campaign agreed. What a surprise.
The liberal press, it seems, likes the products of the global economy - things like Volvos, BMWs, Bordeaux and brie - but is not so sure Americans should be investing in them. There’s got to be something wrong with that. So ABC News assigned its chief investigative correspondent, Brian Ross, to travel to the Cayman Islands to investigate. There, Mr. Ross eventually found the post office box for Bain Capital, and a beach.
He was a perfect choice for the assignment. Recall that he broke the story that Iraq really was behind the 2001 anthrax attacks. Of course, that was before the invasion.
On his way to the beach, Mr. Ross did some digging. He found out that the Cayman Islands is a foreign tax haven - for foreigners. And he found women on the beach - in bikinis. He found out from Mr. Romney’s financial disclosures that he had some money in Bain accounts in the Caymans but couldn’t tell whether he had avoided any taxes on them. He also found a man with a dog on his surfboard. All of this perfidy, of course, was taking place not in Las Vegas, but in the Caribbean. Mr. Ross concluded his big scoop by stating that only the superrich, like Mr. Romney, could get away with this skullduggery.
Perhaps it is time to explain to Mr. Ross, ABC News and The Washington Post the ABCs of taxation and finance. Executives of investment-management firms like Bain Capital only succeed if their clients make money. Those firms set up accounts in foreign jurisdictions for the benefit of their clients. Some of those clients are foreign. Some are American. They insist on confidentiality for their business activities because that is what prudent businesses do.
Who are those clients? Many of the investors that put their money in hedge funds are institutional investors like pension funds - such as defined-benefit pension funds for America’s union employees. They have money in the Caymans. So Mr. Ross‘ big scoop - that these vehicles are only available to the superrich - is just superfalse. Another surprise.
The next question is whether these investors get any tax breaks in the Cayman Islands. The answer is yes. For example, pension funds can leverage their investments there without paying additional taxes. If they used a nontaxable entity (called a pass-through) in the United States, the pension fund would have to pay those taxes. Why? Who knows? It makes no sense, so ask Congress. It is, however, in the national interest for defined-benefit pension funds to maximize the returns on their investments. If they don’t, the taxpayer can get stuck with the tab. They, unlike the mainstream press, need to behave rationally. Hence the post office box Mr. Ross found in the Cayman Islands.
Warren L. Dean Jr. is a partner at Thompson Coburn and an adjunct professor at Georgetown Law Center.