Did Romney engage in abusive foreign tax credit-generating transactions?

Yesterday's Huffington Post article by Zach Carter and Jason Cherkis, "Mitt Romney Taxes Enriched Foreign Governments at U.S. Expense," opens a new frontier in the ongoing efforts to understand more fully both the limited tax return information Romney has published, and the reasons for his unwillingness to release anything else.

In particular, the article notes that Romney had high foreign income in the years 2005-2008 (but apparently not to a similar degree in the immediately preceding and following taxable years), and that in 2008 he generated almost $800,000 in foreign tax credits, some of which was carried forward to subsequent taxable years as in excess of U.S. foreign tax credit limits.

One angle on this would be the populist job creator rhetoric about why is he investing abroad rather than here (or is this just sourcing games and shell corporations in tax havens), why is he paying foreign tax credits rather than U.S. taxes, etc.  But while that angle may be politically resonant, it's not the one of particular interest to me.

As my recent and forthcoming work on U.S. international tax policy discusses, I consider the foreign tax credit (FTC) a bad rule, from a U.S. national welfare standpoint, because, up to the FTC limit (which applies when you have eliminated all US tax liability on your foreign source income), it permits the taxpayer to treat a dollar of foreign taxes paid as just as good as a dollar of U.S. taxes paid.  I consider this a policy error on our part.  But I would agree that there is nothing even remotely unethical about a U.S. taxpayer, even one who is running for president, paying foreign taxes and then claiming the FTC to zero out the U.S. taxes that he would otherwise owe.

But is that's what going on here?  I am frankly mystified by and suspicious about the high foreign tax liabilities that Romney apparently claimed on his (still secret) 2008 federal income tax return.  Keep in mind, this was a guy with lots of passive investment income abroad, generally run through tax havens such as the Cayman Islands.  Why was he paying significant foreign taxes, when seemingly they would have  been so easy for him to avoid?  (Note: While, at Romney's income level, $800,000 may not sound like a lot of taxes, it apparently was high enough to exceed the U.S. tax due on the associated income, even though the U.S. has an unusually high marginal tax rate.  So the claimed effective tax rate on the foreign source income seems surprisingly high.)

The natural suspicion is that he may conceivably have been engaged in questionable or even downright abusive FTC-generating transactions, rather than actually economically bearing high foreign taxes.  As noted in the Carter-Cherkis article, there have been a lot of dubious transactions in recent years that permit multiple taxpayers to claim the same foreign tax credits, or the same multinational group to credit the same taxes multiple times, or that involve taxpayers' claiming FTCs that they are not actually bearing in any economic sense, or that involve their in effect "buying" someone else's unusable foreign tax credit claims without requiring them to include the associated income, etcetera.  And these transactions often are shams, subject to attack by the IRS based on standard anti-tax shelter doctrines relating to economic substance and business purpose.

Against the background of ongoing secrecy plus what we know of his embrace of aggressive tax planning strategies, it is certainly plausible that Romney both could and would have done things like this.  So he may not actually have borne high foreign taxes in lieu of U.S. taxes - which would have been well within the rules but wouldn't have benefited him economically - but, rather, may have engaged in tax planning games in order to avoid bearing significant tax burdens anywhere, possibly through deals like those that the IRS has considered questionable in other settings.

It's unfortunate that this entire discussion must be so speculative and hypothetical.  No one really knows why the high foreign tax credits popped up in Romney's 2008 return (and we only know they did due to a form buried deep in the middle of his 2010 return).  But when you keep secrets about your own recent financial dealings even though you are running for president, and when you reject norms of broader disclosure that have been standard practice for decades, you can't rightly complain about efforts to find logical explanations for seeming anomalies.