David Cay Johnston

If you make more than about $33,500 a year, your federal income tax burden is probably lighter than you think.

The portion of your income that you pay in taxes is your “effective tax rate.” But when politicians and pundits talk about effective tax rates, the data they typically use relies on an incomplete measure for income. Use an incomplete measure for income and your tax rate calculation comes out high.

In a new analysis the Tax Policy Center, a nonpartisan Washington research organization, used a wider measure of income to calculate effective tax rates. The rates are much lower using this broader measure of income.

The Tax Policy Center computer model of the tax system, which estimates how changes in the law would affect tax burdens, has repeatedly made projections that subsequent events showed were accurate. The center is a joint project of two Washington research organizations, the Urban Institute and the Brookings Institution. The George W. Bush administration went out of its way to praise the reliability of the center findings even when they were not helpful to administration policy.

The incomplete measure is called “adjusted gross income,” or AGI. This is the number on the last line of the front page of the standard tax return.

To get a fuller picture, the Tax Policy Center used what it called “cash income” to calculate effective tax rates. This included municipal bond interest, government benefits and many of the other items that are excluded from AGI. Use this fuller measure of income and the share of income that goes to taxes falls.

SIGNIFICANT VARIATIONS

In its new analysis, the Tax Policy Center found that the discrepancy between these two ways of measuring tax rates varies significantly between different income groups.

For the middle fifth of taxpayers, those with cash income between $33,542 and $59,486 a year, the average tax burden is 4.1 percent of adjusted gross income but only 3.2 percent of cash income. So these middle-income people are paying almost one percentage point less of their income in federal income taxes than they might imagine based on the popular debate.

One percentage point may seem small, but for people in this income group it means they are actually paying one fifth less in income tax than they might think.

The percentage point discrepancy widens as incomes increase. For the next fifth of taxpayers, those earning between $59,486 and $103,465, the average federal income tax is 8.2 percent of AGI but only 7 percent of cash income, a difference of 1.2 percentage points. For the top fifth, those earning more than $103,465, the average federal income tax is 17.3 percent of AGI but only 14.9 percent of cash income.

For the top tenth of one percent – whose combined income comes close to equaling that of the bottom 50 percent of taxpayers – the disparity is even greater. The tax rate is 23.6 percent of AGI but only 19.8 percent of cash income, a difference of 3.8 percentage points.

UNDERSTATED DISPARITY

As valuable as the Tax Policy Center’s report is, the center acknowledges that it understates the disparity for people at the very top. The reason for this is that the computer model cannot capture certain kinds of income that are only available to the very wealthy. For example, Congress considers the personal use of corporate jets to be income. But, under rules Congress set in 1985, only a small fraction of the real value is included in AGI. Unfortunately, the Tax Policy Center’s model does not capture the remainder as part of cash income.

For the 40 percent of Americans on the bottom of the income ladder, using AGI to measure income also distorts the effective tax rate calculation, but in a different way.

On average, people in the bottom 40 percent receive money from the federal income tax system rather than pay money into it, so their effective tax rates are negative.

This is because the first $19,000 of income for a couple was free of income tax last year. At the same time, they may have received cash payments such as the Earned Income Tax Credit for the working poor or the Child Tax Credit for parents of children. These tax credits are not included in AGI, but the Tax Policy Center counts them as cash income.

The payments the poorest fifth of taxpayers – those who made less than $16,812 last year – get on average from the tax system amount to 12.3 percent of their AGI. But, when calculated against cash income, these payments amount to only 5.8 percent. So, the AGI method overstates the amount this group is getting from the tax system.

For most of us – those in the middle class and above – our effective tax rate is lower than politicians say. So smile a bit today. The cost of civilization is not as high as you’ve been told.

For years, the U.S. Chamber of Commerce has pressed Congress to restrict securities class action lawsuits, saying they put a damper on economic activity.  Securities lawyers argue that such suits act as a crucial protection for investors, who deserve their day in court when deceitful actions by executives cost them money.

Now, some new research sheds light on this question.

Jonathan Rogers, an associate professor of accounting at the University of Chicago’s Booth School of Business, led an investigation into why some companies get sued while others do not.

Rogers, his Booth colleague Sarah Zechman and Andrew Van Buskirk of Ohio State University identified 165 companies that were sued because their share price fell after an earnings statement had pointed to strong future performance.

Booth and his coauthors then did something that I think added real value. They paired each of their 165 companies with a company in the same industry that was not sued, matching them for size and performance. Then they compared the earnings announcements of the two groups.

So why were 165 companies sued, but 165 similar companies were not?

First, the companies that were sued made unusually optimistic remarks about their future earnings, according to the paper, in the current issue of the American Accounting Association’s Accounting Review.

UPBEAT WORDS INVITE SUITS

They used words like “excited,” “strong” and “thrilled,” and these words were frequently quoted in securities fraud complaints, the researchers found. The firms that were not sued used these words less often and made more use of words such as “weak.”

The researchers concluded that optimistic words elevated the chance of litigation slightly. But what really raised the odds was an optimistic announcement followed by a sale of stock by company insiders, they found.

“Optimistic language can get you sued,” Rogers told me, “but what’s significant is optimistic language followed by abnormal insider stock sales.”

Bragging about performance while selling lots of stock seems a fairly obvious formula for getting sued, so why has this lesson not been universally learned in executive suites?

For an answer, I turned to Gregory Roussel, a Silicon Valley corporate lawyer and former editor of the Vanderbilt Law Review, who has coached executives on how to talk up their companies without inviting litigation.

Roussel said executives are reluctant to dial back their remarks.  ”They are enthusiastic about their company and they believe what they are saying,” Roussel said, suggesting that excessive optimism rather than deception is to blame.

PUFFERY DEFENSE

Corporations that are being sued often assert that optimistic statements are not material representations and therefore not subject to the 1934 Securities Exchange Act, which requires disclosure of facts an investor would need to make investment decisions. Call it the corporate puffery defense.

Increasingly, judges think investors can distinguish such puffery from material statements and they have become more hostile to such class action lawsuits, according to David Hoffman, a professor of law at Temple University who has researched this field. As a result, “being a class actions securities litigator is a lot less lucrative than it was not many years ago,” Hoffman said.

So, can investors distinguish puffery from substance?

Stefan Padfield, a professor at the University of Akron School of Law who blogs about corporate governance, thinks not.

In a 2008 research paper on corporate puffery, Padfield found that judges generally embrace the ancient doctrine of caveat emptor. Under that doctrine, a farmer who buys a plow horse based on sales talk — instead of an inspection of its mouth and fetlocks — shouldn’t come crying to the courts if the horse turns out to be old and lame. But, Padfield found, 45 law students and professors who had made investment decisions regarded executive statements as material far more often than the judges believed.

Having bought both horses and stocks, I think Padfield’s conclusion makes sense. A work horse is not as complex or difficult to appraise as a stock.

There is a lesson here for Corporate America: companies should make their insiders put proceeds from stock sales into escrow for some period of time — 90 days ought to do it — after upbeat executive statements. If the price drops during that time, make them take the lower price or wait until the price recovers. After all, the law requires directors and executives to put company interests ahead of their own.

With so much attention placed on Mitt Romney’s verbal blunders, much less has been given to his written plans for the economy and taxes.

The Republican frontrunner’s 160-page “plan for jobs and economic growth,” which he released in September, contains some sound ideas. He would encourage more Americans to save and invest. And one of his proposals would strengthen America’s status as a technological powerhouse. See the plan here.

But there’s a side to the plan that would raise taxes on the poorest 125 million Americans while tilting tax cuts further toward the rich.

President George W. Bush cut taxes for almost everyone who paid income taxes. Romney would make the Bush tax cuts permanent. But that’s only a first step.

He would also raise taxes on poor families with children at home and those going to college. Romney does this by reducing benefits from the child tax credit and the earned income tax credit and by ending the American Opportunity tax credit for college education.

Without these tax breaks, the poorest fifth of taxpayers would pay $157 more in taxes in 2015 than under current policy, the Tax Policy Center says in its analysis of Romney’s plan. The second poorest group would pay $82 more, according to the center, whose past work has been praised by Republicans and Democrats alike.

TAX CUTS

While Romney would make these two groups — the poorest 125 million Americans — pay higher taxes, the top 60 percent all would get tax cuts. The top tenth of one percent would save, on average, $464,000 a year, the Tax Policy Center’s analysis says.

His plan gives one third of his tax cuts to the top tenth of one percent of taxpayers. By comparison, Bush gave this group only one eighth of his cuts.

Romney would also eliminate estate and gift taxes, a policy that I believe would damage the spirit of striving that has served us so well until now, replacing it with a new era of dynastic wealth.

Romney’s campaign did not answer specific questions about his tax proposals, referring me instead to the plan itself.

On the more positive side of the ledger, Romney’s plan would let households earning less than $200,000 a year collect capital gains, dividends and interest tax-free. That would encourage more Americans to build cash nest eggs and to own stocks and bonds above and beyond their retirement plans.

Unlike today, when a shrinking minority of Americans has savings accounts and bonds, in the 1970s a majority earned interest. Back then, a couple could collect $400 of interest and dividends tax-free.

Romney’s plan would give unlimited tax-free interest, dividends and capital gains to about 98 percent of households. (I have recommended the same tax break be given to everybody, but with a $1,000 cap, twice that for married couples, on tax-free capital income.)

NO TAX BREAK

Given the news coverage of the low tax rate Romney paid in 2010, and expects to pay for 2011, people could easily assume he would get a huge tax break under his own plan. That is not the case.

Under his plan, high-income taxpayers would continue to pay 15 percent on their capital income, about the same rate Romney paid in 2010 and expects to pay for 2011.

As a taxpayer, Romney would do much better under rival Newt Gingrich’s tax plan. Gingrich would let everyone collect capital gains, dividends and interest tax-free. Had that been the law in 2010, Romney’s tax bill would have been cut by at least 97 percent, my calculations show.

Another provision in Romney’s plan would be to raise the ceiling on the number of visas issued to holders of advanced degrees in math, science and engineering who have job offers in those fields from U.S. companies.

While this seems like a smart idea, it does have a downside. Software engineers and others already complain that foreign workers on visas are depressing their wages, and Romney’s plan would likely make it worse. But employers will love it.

Romney, whose father was born in Mexico, would also let foreign-born students stay in the United States, provided they earn advanced degrees in engineering, math or science. And he would open the doors to wealthy people because he believes they are “job creators.”

Those last two provisions seem very smart. It is also exactly what happens in Canada, where one in five Canadians is an immigrant.

These are serious issues with potentially far-reaching implications. This is what the media should be examining, instead of verbal trivia from the campaign trail.

PHOTO: Republican presidential candidate Mitt Romney speaks at a campaign event at an RV dealer in Loveland, Colorado February 7, 2012. The Colorado caucuses take place today. REUTERS/Rick Wilking

Newt Gingrich’s 2010 income tax return inspired a quick response from U.S. congressman Pete Stark.

Twelve days after Gingrich, a Republican presidential hopeful, made his return public, Stark proposed the Narrowing Exceptions for Withholding Taxes (NEWT) Act.

This proposal has an uncertain future in Congress, but it would be a good addition to our tax laws, closing a significant loophole that Gingrich took advantage of.

In their 2010 return, Newt and Callista Gingrich declared that most of the money they earned from their multimedia company, Gingrich Productions, was dividends, rather than compensation for their services.

Because the Medicare tax applies only to labor income, this move allowed them to avoid paying $71,152 in Medicare tax — the amount of the dividend times the 2.9 percent tax rate.

Michelle Selesky, Gingrich’s spokeswoman, did not respond to multiple requests over several days for an interview or comment.

This technique is used by many accountants, lawyers, lobbyists and performers who, like Gingrich, set up S corporations, a type of business organization that passes any tax obligations on to its owners.

The same loophole was used by John Edwards, the 2004 Democratic vice presidential nominee, to avoid about $600,000 of Medicare tax on his earnings as a trial lawyer over a period of four years, information he made public showed back then.

THEIR OWN LABOR

Some investors in S corporations have capital at stake but do little or no work. It is reasonable to classify their profits as dividends. But in the case of Gingrich, and Edwards, their income resulted from their own work and it should be taxed as such.

Stark, a California Democrat, told me he introduced the NEWT Act after learning that Newt and Callista Gingrich reported 80 percent of their nearly $3.2 million in income in 2010 as dividends, mostly from Gingrich Productions, which is set up as an S corporation.

Under Stark’s bill, the income from an S corporation with three or fewer principals would be taxed as compensation, thus incurring Medicare taxes.

Passing Stark’s bill and closing this loophole is a matter of fundamental fairness. The principle that government should tax makers of microchips and potato chips alike should also apply to earnings from work, whether it comes from work on the factory floor, or, as in Gingrich’s case, making videos.

Just as you cannot claim a depletion allowance for your aging body, you should not be able to declare that money you earned by working is a dividend.

The official scorekeepers on tax matters, Congress’s Joint Committee on Taxation, estimated in 2009 that closing the loophole would raise $11.2 billion over 10 years.

IRS ATTACKS LOOPHOLE

The IRS has been attacking this loophole in audits, challenging many tax filings that have used the same strategy that Gingrich used. One of those challenges is now before the 8th U.S. Circuit Court of Appeals in St. Louis in a case watched closely by tax professionals.

It involves David Watson, a certified public accountant in West Des Moines since 1982, who paid himself a salary of $24,000 in 2002. He then reported nine times that much in dividends, which reduced his Social Security and Medicare taxes. He followed a similar pattern in 2003. The IRS said the dividends were really labor income and demanded Medicare taxes.

Watson sued. Robert W. Pratt, the chief federal judge in Iowa’s southern judicial district, wrote in a 23-page decision in 2010 that such a small salary was “unreasonable.” A salary of $91,044 would be reasonable for someone with Watson’s skill and experience, he wrote.

The judge then ruled that Watson owed payroll taxes on $67,044 of the money he had labeled dividends, saying this finding “is amply supported by the evidence.” Watson’s case has been argued on appeal and he now awaits a ruling.

Watson told me that he does not think the IRS has the authority to decide what is salary and what is a dividend. Other court cases show that it does. But Congress should remove any ambiguity by passing Stark’s bill now.

Stark’s proposed NEWT Act contrasts with Gingrich’s own tax plan, which he released in December. Under Gingrich’s plan, dividends would not only be free of Medicare tax, they would also be entirely tax-free.

Had Gingrich’s tax proposal been the law when he filed his 2010 return, my calculations show that his income taxes would have fallen more than 90 percent. His is one of the most outrageously self-serving tax proposals I have seen in years of studying our tax system.

When the Romney campaign disclosed in December that the couple’s five sons had a $100 million trust fund, I suspected that, in setting up the fund, the Romneys used a tax strategy that allows some very rich people to avoid paying gift taxes. But it was impossible to know if this was the case without seeing their tax returns going back years.

So when Mitt Romney released the family’s 2010 tax return last week, I went looking. I found a hint on pages 132 and 134 of the return. It showed that the value of property placed that year into another family trust, the Ann D. Romney Blind Trust, was, for tax purposes, zero. The Ann Romney trust is not the same trust as the one that holds the Romney sons’ $100 million, but I wondered if the Romneys used the same approach in prior years when it came to valuing property placed into the sons’ trust.

Reuters emailed the Romney campaign spokeswoman to ask how much the Romneys paid in gift taxes on assets put into the sons’ trust over the last 17 years. The spokeswoman, citing Brad Malt, the Romney family tax lawyer, answered: none.

The idea that someone could pay zero gift taxes on contributions to a $100 million trust fund may surprise people who have heard arguments that the wealthy are overburdened by gift and estate taxes. But the Romneys’ gift-tax avoidance strategy is perfectly legal.

Under tax rules, wealthy people must pay a gift tax of 35 percent on gifts above a lifetime limit known as the “unified estate tax credit.” That limit was $1.2 million for a married couple in 1995 when the sons’ trust was created and $2 million in 2009, but is now $10 million.

So, if the limit is, at most, $10 million, how did the Romneys create this $100 million fund without paying gift taxes?

The explanation may stem from how the Romneys were able to value the assets put into the trust. If I’m right, it involves a special tax deal that Congress gives to people who manage investment partnerships, as Romney did at Bain Capital from 1984 to 1999.

This deal allows these managers to receive a kind of compensation known as “carried interest.” As the tax law sees it, carried interest does not represent ownership of stock or other securities, only the right to receive future profits. Because there is no ownership, the IRS lets people value their carried interest at zero for gift tax purposes if they meet certain technical rules. We asked the Romney campaign if carried interest was involved several times in emails. The campaign declined to comment about this and other specifics.

VALUING A GIFT AT ZERO

To understand how this works conceptually, imagine your employer gave you a bonus in company stock.

You would owe income taxes immediately on the stock as compensation, and it would be taxed at the same rate as a cash bonus. And if you gave the stock to your children, you would owe, on stock above $10 million, a gift tax of 35 percent of the market price on the day you gave it away.

Now imagine that instead of giving you stock outright, your employer gave you only the right to future increases in the value of company shares – which, like carried interest, is just a right to some potential future income. You could give that right to your children and legally tell the IRS that its value was zero provided they hold onto it for several years.

This would be legally true, even if the company’s stock had been steadily rising for years and was virtually a sure bet to continue going up in value. Of course as a matter of economics it would be a very valuable gift to your children.

The scenario of transferring a right to something of value in the future and valuing it at nothing shows up on the Romneys’ 2010 tax return, which reveals two contributions to the Ann D. Romney Blind Trust. Both contributions were valued at zero.

NO COMMENT

The Romney campaign declined to confirm that this is what happened with the sons’ trust. Malt, the family tax lawyer, and spokeswoman Andrea Saul have declined to go further than Malt’s statement that the contributions fell below the unified credit.

The campaign, which set up an email address for journalists with questions about the tax returns, did not offer any comment nor did it respond to specific questions, including whether any of the personal or trust returns had been audited, whether any adjustments had resulted and whether the gifts to the sons had been completed more than three years ago, which would put them beyond any review by the IRS.

There are other perfectly legal techniques that would also allow many millions of dollars to be passed on while avoiding gift taxes.

The Romneys could attain the same result by putting into the trust any asset whose value was expected to rapidly increase. They could also use a trust that creates an annuity for themselves for a few years provided the trust assets grew much faster than the minimum interest rate payout set by the IRS each month. In each of these cases the parents would pay any income taxes and that is just what the Romneys’ 2010 and preliminary 2011 tax returns show. They report the trust income as their own and pay the taxes on the income the trust earned from its rapidly appreciating assets — but no gift taxes.

How much income will flow from these gifts is known only to the Romney family and to Malt, who works at the Ropes & Gray law firm in Boston.

Mitt and Ann Romney appear to have complied with the law. What’s at fault is the law. Congress treats ordinary taxpayers one way and managers of private equity and hedge funds like Mitt Romney another. It’s also a fiction that there is a lifetime limit on tax-free gifts of $10 million when Congress lets unlimited sums pass untaxed this way.

Will this change? It’s hard to say, given the gridlock in Washington. But President Barack Obama’s State of the Union message could signal a new direction. In a speech that mentioned taxes 34 times, he proposed sweeping changes in the tax code, a message that could resonate in the 2012 campaign and in Congress in 2013. Watch this space.

PHOTO: Republican presidential candidate and former Massachusetts Governor Mitt Romney (L) introduces his sons Tagg (2nd L), Craig (3rd L), Josh (2nd R) and Matt, as his wife Ann (C) looks on, at a campaign rally in Des Moines, Iowa January 3, 2012, the day of the Iowa caucus.   REUTERS/Brian Snyder

The World Economic Forum opened in Davos amid choruses of central bankers and economists calling for governments to cut spending.

This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck.

We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call.

Austerity supporters are selling the idea that governments, like families, must cut back when income shrinks. But economically, governments are not like families.

Firing teachers, cops and government clerks will, for sure, reduce public spending. But budgets, like the song of the Sirens, are only part of the story. Listen only to the alluring lyrics and, like the many voyagers before Odysseus, we will suffer disastrous consequences – in our case falling incomes and worsening economies.

The full economic story begins with this principle taught to every economics student: spending equals income and income equals spending. Cut spending and incomes must fall; cut incomes and spending must fall.

Those who disagree with this say that only private spending can create wealth and that government spending is inefficient. I think the first argument is wrong, but the second is often true, which is why citizens need to pay close attention to their government.

When private spending shrinks, then either government spending must grow to make up for it or the other side of the equation, income, must shrink.

If we increase spending today by borrowing, we create a claim on future income. Families with debt must divert part of their future income to interest and principal to service that debt or go bankrupt. Governments are different, provided they have monopoly control of their currency. By definition, no sovereign government can ever go broke in its own currency.

NO TO AUSTERITY

The United States government, which has a monopoly on its currency, is $15.2 trillion in debt, roughly the same as the entire output of the economy for a year.

That figure has been sung in a refrain about massive debt threatening to bring down the economy and cause inflation. Facts, however, show otherwise.

The country was much deeper in debt, relative to the size of the economy, in 1946 than it is today and yet what followed was decades of prosperity. The 1946 debt remains and, after six decades of growth, it is inconsequential.

In Japan, government debt is roughly twice annual economic output and yet the country continues to function because real interest rates are at or below zero.

To be sure, conditions can change and interest rates can rise sharply, though central banks have ways to limit that. But that is not the problem today. The problem today is shrinking incomes due to shrinking spending.

Austerity budgets, by reducing government spending, will only make incomes fall more. The only way to make incomes rise is to make spending rise, which in the short run means more borrowing by governments to enable more public sector spending.

After reading the news from Davos, ask yourself why we should listen to the Siren song of the financial elite. After all, the people who steered our financial ship into dangerous waters in the first place were at the very top of this group. We should listen more to those will suffer from austerity budgets: children who only get one chance at an education, the sick and disabled unable to support themselves and seniors too old to work.

If, like Odysseus, we wish to row past our current economic straits into a new sea of prosperity, the one thing we must not do is be driven to economic madness by the Siren call of austerity budgets.

What advice do tax lawyers give private equity managers about saving on taxes as they build wealth?

We may get a first glimpse at the answer on Tuesday when, bowing to public pressure, Mitt Romney promises to release his 2010 tax return and a tax estimate for 2011. (See the returns here.)

To get a full picture of Romney’s taxes while he made his multimillion-dollar fortune, we would need to see returns going back to 1984-1999, which is when he ran Bain Capital Management. So far, the Republican presidential candidate has not committed to release those returns.

There’s no suggestion that the former Massachusetts governor did anything illegal. However, Congress allows managers of investment partnerships like the one Romney ran to enjoy tax-saving strategies not available to other taxpayers.

So I asked 10 lawyers in seven states how they might advise a new client who is launching an investment partnership – someone like Romney. While we do not know just what Romney’s lawyers advised, the 10 lawyers laid out nearly identical scenarios.

FIVE PIECES OF ADVICE

(1) DEFER TAX: Congress requires that most workers have income taxes withheld from their pay, but it lets investment partnership managers like Romney earn compensation now and pay taxes later, decades later. It’s called “carried interest.” Paying a tax in the future reduces its cost. Deferring a tax for three decades is the same as not paying it, the lawyers said, because the value from investing the money is far greater than the tax eventually paid. Some of the lawyers said the ability to defer will surprise people who are used to having taxes withheld before they get paid. Mitchell Gans, who teaches tax law at Hofstra Law School in Long Island, N.Y., said it takes only a minute to make clients comfortable with the idea “because it goes with the psychological phenomena that we would all rather pay later than sooner.”

(2) MINIMIZE SALARY: Take only enough salary to live comfortably, the lawyers said, and instead take as much compensation as possible in tax-deferred carried interest. The carried interest will mostly be taxed at the capital gains rate of 15 percent. By contrast, top wage earners pay tax on their highest income of 35 percent and they pay it immediately.

(3) MAXIMIZE THE VALUE OF FAMILY GIFTS: With careful planning many millions of dollars can be given to children while paying little gift tax. Make gifts in years when appraisals show the value of the carried interest is reduced because the investment is not doing well. All 10 lawyers said thorough appraisals are essential to avoid fights with the IRS over valuation, which could result in higher gift taxes and a court fight that would end up in the public record, revealing business details that would make investors shy away from the manager in the future. Romney set up what his campaign said was a trust fund now worth $100 million for his sons, but has not indicated that he will release the gift tax returns, which would show if he discounted the value of assets put into the trust and what gift taxes, if any, he paid.

(4) OBEY THE RULES: Making sure every one of the many technical tax rules is followed at all times reduces the risk that an audit dispute with the IRS or state tax authorities will spill into the public record and cause the loss of tax benefits.

(5) START A SELF-DIRECTED RETIREMENT ACCOUNT: With a self-directed account the fund manager can invest in his own deals. Some of the lawyers noted that retirement funds, including those rolled over into Individual Retirement Accounts after leaving a job, can be shielded from creditors, a valuable strategy if things go awry in the distant future. This makes retirement accounts partial substitutes for asset protection trusts, but without the stigma of asset protection trusts, which some people consider a way to evade obligations to creditors. Large retirement accounts carry no such untoward connotation, the lawyers said. However, they did caution that any asset protection offered by retirement funds comes with an increased tax. That is because any gains are taxed at the same rate as wages, 35 percent for someone like Romney, instead of the 15 percent capital gains rate. Romney’s disclosures show that he holds about a 10th of his fortune – an overall fortune estimated by the campaign at $190 million to $250 million – in retirement accounts with some of the money legally invested in the Cayman Islands and other offshore funds.

THE PUBLIC OFFICE SCENARIO

I asked the lawyers if their advice would differ for clients whose background suggested they might run for public office someday. They split on this.

Some said that their advice would be the same. Others, noting the attacks on Romney by Republican rivals over his offshore accounts or the blistering comments at many websites by individuals, said they might raise the issue of how voters would react to offshore investments, which are legal but not widely understood by Americans who are misled to believe by movies and films that they must be improper.

PHOTO: Republican presidential candidate and former Massachusetts Governor Mitt Romney speaks during a roundtable discussion about housing issues in Tampa, Florida January 23, 2012.   REUTERS/Brian Snyder

A tax return says a lot about a man, especially one aspiring to be president.

If Mitt Romney makes good on his promise during Thursday night’s Republican candidates’ debate to release “multiple years” of his returns, it will likely stir up rather than calm the political storm unless he makes public all of his returns from 1984 through 1999. Those are the years when he built a fortune of more than $200 million while running Bain Capital Management.

There’s no suspicion that Romney has done anything illegal. But what should be secret about the taxpaying relationship between a presidential hopeful and his government?

Romney himself said late on Thursday: “I’m not going to apologize for being successful.”

The former Massachusetts governor disclosed this week that he pays about 15 percent of his income in federal income taxes. That’s the same effective tax rate as a single wage earner making $60,000. Most of Romney’s income consists of dividends and capital gains, which Congress taxes at 15 percent. Were his income in wages, he would have paid a much higher rate.

Congress requires that most workers have income taxes withheld from their pay, but not so investment partnership managers like Romney, who cofounded Bain Capital Management and ran it for 15 years. They can earn compensation now and pay taxes later, decades later if they want. It’s called “carried interest.”

At the debate Romney wouldn’t say just how many years of returns he would make public. He has yet to share any of them. Before Thursday night, he had spoken only of releasing returns come April, the 2011 tax deadline. He came under public pressure to deliver more.

Unless he releases the tax returns from his Bain Capital years he will surely be pressed about how much, if any, of his fortune has yet to be taxed and how long he deferred paying on the portion that has been taxed. He will be asked about Bain accounts in the Cayman Islands, Bermuda and other tax havens. While perfectly legal, these offshore accounts convey an unsavory political whiff to many people, including some of his rivals for the Republican presidential nomination.

And what about taxes on the $100 million that Romney put into a trust for his five sons. How much Massachusetts and federal income tax, as well as gift tax, was paid on that money?

None of these questions can be answered without the returns from his Bain years.

MANY HAPPY RETURNS

Romney’s political problems could multiply once families around kitchen tables grasp the fact that while they pay taxes before getting paid, Romney arranged to delay paying his for years. The disclosures could also lead to popular support for ending such deferrals, which President Barack Obama, a Democrat, proposed in 2008 and again in September. Hedge fund and private equity firms have spent a lot of money on lobbying and campaign donations to avert any such change.

Newt Gingrich, a rival for the Republican nomination, released his own tax returns on Thursday to try to embarrass Romney. Gingrich has warned Republicans that Obama’s campaign in the run-up to November’s elections will hammer these tax issues if Romney is nominated. For sure, the Obama campaign would also hammer Romney over any refusal to disclose the full story of his income and taxes going back to 1984. A no-win situation for Romney? Maybe not.

There are presidential precedents that strongly favor disclosure. In March 2008 Obama released his returns from 2000 forward. In 1999 George W. Bush released his 1998 tax return showing how he made $17 million in carried interest from the Texas Rangers baseball deal he managed.

The practice of releasing returns even predates the revelation during Watergate that President Richard Nixon filed four fraudulent tax returns, resulting in felony indictments of two of his tax advisers.

Back in 1968, another Republican businessman seeking his party’s presidential nomination disclosed 12 years of tax returns. That man was George Romney, Mitt’s father, who said it was the right thing to do.

PHOTO: U.S. Republican presidential candidate and former Massachusetts Governor Mitt Romney and his wife Ann relax while on the campaign bus as they leave a campaign stop in Gilbert, South Carolina, January 20, 2012. REUTERS/Jim Young

Congress will spend a trillion dollars more than it levies this year, so how do Washington’s politicians respond to the 11th consecutive year of federal budgets in red ink? They plan to shrink the IRS.

Go figure. Cutting the IRS budget by more than 5 percent in real terms makes as much sense as a hospital firing surgeons or a car dealer laying off salespeople when customers fill the showroom.

Shrinking the IRS makes sense if you believe government is too big and that cutting everywhere is the best way to shrink government. But this is the staff that generates revenue, and there is easy money to be made.

Congress should listen to the national taxpayer advocate, a position it created to make sure taxpayers had a voice in how the IRS operates. In her annual report, released last week, advocate Nina Olson said Congress needed to “ensure that the IRS continues to be effective, either by reducing the IRS’ workload or by providing adequate funding to enable it to accomplish its assigned mission.”

Instead of cutting, we should be expanding the revenue-generating staff because there is plenty of tax money to be had, even in this awful economy.

IRS data show that auditors assigned to the 14,000 or so largest corporations found $9,354 of additional tax owed for every hour spent testing tax returns in the 2009 fiscal year. The highest-paid IRS auditors make $71 an hour. Based on a 2,080-hour work year, that works out to around $19 million of lost revenue annually for every senior corporate auditor position cut from the payroll.

WHY CUT?

It makes no economic sense to trim the ranks of auditors who generate more than a hundred times their annual salaries. Run a business that way and you go broke.

So why would President Barack Obama and Congress cut the IRS budget? Their actions illuminate the rise of corporate power and values, and the diminishing voice of Joe Sixpack, thanks partly to how we finance election campaigns. Then there is the growing army of corporate lobbyists and the Supreme Court’s decision in Citizens United, which allows corporations (and unions) to spend all they can afford on influencing elections.

Keep in mind the IRS costs just a half penny for each dollar of tax collected. Its proposed $11.8 billion budget would be less than the Agriculture Department spends each month.

If the IRS budget is cut, the losers will be workers and ordinary investors, who will find it harder to get their questions answered and their problems resolved by the agency. On the whole, these people do not cheat on their taxes because their incomes are easily checked — through reports by employers, mortgage banks and others. Under a law taking effect in stages between last year and next, brokerages must report the cost basis of securities. This change will reduce capital gains cheating.

TAX CHEATS

The winners will be tax cheats among sole proprietors and other business owners, who are subject to less verification. The latest IRS tax gap report, issued Jan. 6, estimates that just one percent of wages escapes tax, while 56 percent of “amounts subject to little or no” verification do so.

America’s biggest corporations, those with more than $250 million in assets, also may escape some tax if the IRS budget is cut. These nearly 14,000 companies pay about 86 percent of corporate income taxes.

Audits of these big firms were down even without a budget cut. And audits have become far more complicated, partly because Congress changed the tax code more than once a day on average from 2001 through 2010, Olson reported.

From 2005 to 2009, hours spent auditing the biggest corporations declined by 33 percent, according to IRS records analyzed by the Transactional Records Access Clearinghouse at Syracuse University in New York.

Two decades ago, when the economy was a third smaller, the IRS staff numbered about 118,000. Now it numbers 95,000 and is on the way to about 90,000. The likelihood of a big company being audited has plummeted 50 percentage points from 72 percent in 1990 to 22 percent in 2010.

Big company audits are now limited to specific issues known to the companies in advance, not unlike when cops tip off owners of favored gambling dens before a raid. Each audit also begins with an “estimated time to completion.” Working auditors tell me this is really a hard deadline that allows companies to run out the clock with delays in producing documents.

Some IRS tax detectives privately ridicule this system, calling it “audit lite.”

Whether you like the corporate income tax or think it is an abomination, failing to enforce it with the same rigor as taxes on wage earners and most investors is indefensible on economic, budget deficit and moral grounds.

IRS budget cuts worsen budget deficits and send a corrosive signal that only chumps file honest tax returns. So you have a choice. Do nothing and suffer the consequences or call your congressman, senators and the White House — today — and then vote in politicians who support, rather than undermine, tax law enforcement.

Big business is lobbying for a major cut in the corporate income tax rate, and both President Barack Obama and key congressional leaders are on their side. But the evidence that a rate cut will boost the economy is weak. What’s needed is comprehensive reform that includes a simpler, fairer and more transparent corporate tax code. But more on that later.

Consider what President George W. Bush‘s Treasury Department said in a report in 2007: big countries, such as the United States, receive far less economic benefit from lower corporate tax rates than smaller countries do. For large countries, cutting corporate tax rates “would result partly in increased capital inflow and partly in lower world interest rates.”

While other large countries have cut their corporate tax rates since then, lowering the U.S. rate would just encourage other countries to go even lower. Since we are cutting spending in the very areas that build wealth – education, infrastructure and research – a corporate tax rate cut would increase the pressure for further cuts in those areas, making us poorer.

The RATE Coalition, a group of 23 businesses and two trade associations, is among leading advocates for a cut in the corporate income tax rate from the current 35 percent. But it also wants that cut to be a part of fundamental reform.

A cut of 10 percentage points would increase economic output by 1 to 2 percentage points, the coalition says on its website, citing a study by economists Roger H. Gordon of the University of California San Diego and Young Lee of Hanyang University in Seoul. But Gordon told me that while the paper shows that “lower corporate tax rates are associated with more rapid economic growth,” that point comes with a caveat.

“We found these results only … for non-OECD (poorer) countries,” he emailed – there was no statistical relationship between lower corporate tax rates and faster economic growth among OECD countries, a coalition of 34 modern states spanning the globe and including the United States.

LITTLE DIFFERENCE

Ten of the RATE members have made detailed tax disclosures to shareholders, allowing Citizens for Tax Justice to compare their tax rates on profits earned in the United States to their rates on overseas profits. Its recent study showed that five of the 10 RATE members paid higher rates on their U.S. profits than on their foreign profits in 2008 through 2010. The other five paid lower U.S. tax rates.

Add up the figures from all 10 companies and their average U.S. tax rate was just 0.88 percentage points higher than their non-U.S. rate. That is not much of a difference, either to the companies or the U.S. economy.

The RATE Coalition has two chairs, one from each party, each with strong Washington ties. Its spokeswoman offered Democrat Elaine Kamarck, a public policy lecturer at Harvard’s John F. Kennedy School of Government, to answer questions. Kamarck said that the enduring economic doldrums and election year politics this year “almost inevitably lead to a big tax reform debate in 2013.”

“We see an interesting political consensus,” she said. Corporations want lower rates, the government needs more revenue and since the 1986 Tax Reform Act the corporate tax laws have become overgrown with favors, especially for multinational companies. Getting lower rates, she said, has to include removing many favors to level the playing field so profits are taxed evenly, not more for some industries and less for others as today.

Significantly, the RATE coalition, one of several corporate coalitions competing to shape changes in tax law next year, includes associations of retailers and railroads, both of whose tax issues are almost entirely domestic. Some of its members have spoken against the proposed tax holiday for bringing home untaxed overseas profits. The coalition does not oppose any repatriation deal for multinational companies, but says such a deal should be debated only in the context of fundamental reform.

Kamarck said she agreed with one of the major themes of this column – which is that our tax code was built for the national, industrial, wage economy of the 20th Century, creating problems for the global, services, digital economy of the 21st Century.

So why is the RATE Coalition not first promoting fundamental reform, a tabula rasa approach, and only then talking of tax rate cuts? That, she said, is just not politically doable in the next two years. Let’s hope she is wrong. Washington has done it before, in 1986. Why not again?