Mitt's Money Problem

Poor Mitt Romney. No, that adjective is inexact. The one thing he has never been, poor, is now a source of contention as he seeks to lock up the GOP nomination with a win in Saturday’s South Carolina primary and his challengers have been focusing on his mountains of money.

The issue is not that Romney is a wealthy man. Americans are not averse to electing patricians as presidents. Franklin Delano Roosevelt and John F. Kennedy were both fabulously wealthy. The pictures of the Bushes at their summer home in Kennebunkport did not hurt their electoral prospects. Being rich is not, per se, disqualifying. FDR, JFK and George W. Bush, of course, had a common touch. Papa Bush was hurt not by his money, but by the perception that he was out-of-touch. Romney’s comment that he was not paid very much for his speeches, when in fact he was paid more than $300,000 for his speeches, is more damning in the eyes of the electorate than the fact that he got rich making speeches.

No, the issue is not the money itself but how Romney’s career as head of Bain Capital exemplifies what many Americans suspect, and detest, about the modern economy. Venture capitalists do not really produce anything. Their road to riches is different from that of, say, Henry Ford or the Rockefellers. Nor, do venture capitalists get rich because, like Steve Jobs or Bill Gates, they invent something that millions of people are willing to pay a lot of money to procure. Nonetheless, venture capitalists play a useful role in the economy, marrying investments with companies that need them. Someone has to do it. A venture capitalist is a bit like a waiter: He doesn’t cook the food nor mix the drinks, but you need him to get them to your table. And, like a waiter, the venture capitalist takes his cut when money changes hands.

The real problem, however, is not that venture capitalists are part of the financial sector. Yes, some on the left see the financial sector as essentially parasitic, and there is something to that. But, the political problem for Romney is that venture capitalists do not, in fact, play by the rules that govern the rest of the economy. Romney is correct when he says that some of the companies Bain acquired succeeded and that some failed and that such successes and failures are part of the dynamics of the economy. But, what he doesn’t say, and what should increasingly become the focus of ads against him is that companies like Bain make their money whether their work succeeds or fails. Their investors may take a bath. The employees of the companies they try to restructure may get laid off. But, the rules of the road, if rules they can be called, allow the venture capitalist to skim his or her money off the top no matter what happens. They do not abide by the verdict of the market, reaping the rewards of smart investments and taking a hit when their investments don’t pan out. They get paid, and paid a great deal of money, no matter what. Is that how capitalism is supposed to work?

This is Romney’s hurdle, the perception that the system is rigged, he figured out how it is rigged, and played a game to which most Americans are not invited. Romney must combat the perception that venture capitalists are too much like Tom and Daisy Buchanan, walking breezily through their charmed life while leaving misery, and a few corpses, along the side of the road as they pass.

This perception that the game is rigged will only get more fuel when Romney inevitably releases his tax returns and people realize that his effective tax rate is about half of their own. There is an economic argument to be sure, although I find it unconvincing, that capital gains should be taxed at a lower rate: Republicans tend to forget that their patron saint Ronald Reagan's 1986 tax reform did not provide for a different capital gains tax rate. But, of course, Romney’s income for the past several years is not actually a capital gain: His take home pay has come from his partnership in Bain, and Bain does not invest its capital, it invests other people’s capital. Through another rigged feature of the tax code, hedge fund managers get to pay the capital gains rate on their income. Another example of essential unfairness, of a different set of rules for the Romneys than for you and me.

ABC News is reporting that some of Bain’s money is held in off-shore accounts in the Cayman Islands. Again, the question: Is this how capitalism is supposed to work? I do not think anyone would begrudge a candidate who made a lot of money investing overseas, building a factory here or drilling for oil there. But the Cayman Islands are not a place to invest. They are a place to hide. And few Americans have the tax lawyers and the accountants – and the instinct – to set up an off-shore account to protect their funds from paying the amount in taxes that the rest of us pay.

Romney’s opponents in tonight’s debate, if they are going to attack Romney’s record, need to sharpen their attack. They cannot set him up for the rebuttal line: “It is surprising that Republicans are attacking capitalism.” They need to articulate the case that his line of work, his method of avoiding taxes, and his off-shore accounts make him a truly awful poster boy for a party that is committed to genuine capitalism.

The Obama team, of course, will be stoking the fires. It would be easier to make the case if President Obama had previously supported, or put forward now, a revision of the tax code that would fix some of the flaws in the system such as the benefits of off-shore accounts and the special rule that allows hedge fund managers to pay the capital gains tax rate on income that is not a capital gain. I have argued before that it is incumbent upon the incumbent to make a case for a second term, to seek a mandate for three or four basic policies, such as tax reform, immigration reform and increased investment in our infrastructure. It is not enough to criticize Gov. Romney for working the system. It is better to make him the poster boy for what is wrong with the system and present a clear set of proposals to change the system to make it more fair for everyone.

Romney’s wealth, then, may be a blessing in disguise for the country if not for the candidate. We need to have a debate about how capitalism should and should not work, within what boundaries, and with what obligations to the rest of the society. Despite the cries from the far right bleachers that President Obama is a secret socialist, the fact is that the Democrats have an opportunity to make the case that Romney’s career represents much of what is wrong about modern capitalism, and that in our free society, our government is the only other societal actor with sufficient power to enforce rules of fairness that apply to all. That was, in essence, the heart of FDR’s New Deal. Some people called Roosevelt a socialist then and some call Obama a socialist today. But, FDR won four times.