David Cay Johnston

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

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