Mitt Romney (Creative Commons)

Responding to boos from a South Carolina debate crowd and a decisive loss at the polls, Republican presidential candidate Mitt Romney has finally decided to release his tax returns on Tuesday. 

The former Massachusetts governor and Bain Capital CEO had been the target of pointed criticism from his Republican rivals about the merits of his highly lucrative business career, and further hurt himself with a series of gaffes that made him appear out of touch with the economic realities of the average American.

Neon Tommy spoke with Pulitzer Prize-winning Reuters economics columnist and Syracuse University professor David Cay Johnston Monday afternoon to preview Romney’s financial disclosure.

What are the most important things to look for?  What do you hope to see?

The most important returns are the gift tax returns on the trust fund, for his five sons, that the campaign says holds $100 million. We should know how much he valued the assets he put into the trust, and how much gift tax, if any, he paid. Appreciation is the issue. You put in an asset worth very little, that you know will grow enormously in value.

Things we want to know are:  How much did you value the assets when they went in? How much gift tax did you pay? What discounts did you take? You can take discounts on assets you can’t sell. If he gave part of his carried interest, they can’t sell it, so it could be written down a lot. That’s the number one most important thing, to see his gift tax returns. If he doesn’t want to give us the returns, than tell us how much he valued the assets at and how much tax he paid.

The second most important thing is his income tax returns from the years 1984-1999; those are the years he ran Bain, and those are the years when we should see how much tax he paid when he built his fortune. Ideally, I’d like to see a statement of how much total tax he has paid since 1984, how much gift tax he paid and how much he valued the gifts at when they were put into the trust.

Now, none of this is to be construed as suggesting anything was illegal. I am highly confident that Romney has complied with the law. If there’s a scandal here, it’s the law. Most people do not understand one of the main themes that I have been trying to get across to people for years, which is that America has two separate systems of taxation, separate and unequal. One is for people that earn salaries and wages, and one is for business owners and investors, particularly international investors. 

What about Romney’s offshore assets?

The reason that Romney has money offshore is that two classes of investors in the kinds of funds that he ran require an offshore corporation. One group is foreign investors. If you’re an Italian, you don’t want to file American tax returns, so you invest in an offshore corporation which then invests in the partnership. These are known as “blockers”, because they block the U.S. tax. The second class of investors includes American tax-exempt organizations, principally pension funds and charitable endowments. If they have market gains due to borrowed money, and all these investment funds use leverage, they are immediately taxable on gains due to the leverage.  So, if you put in $100 and the fund borrows $900, making your total investment $1000, and you make $1000, you owe tax on $900. But if you invest in an offshore corporation, which then invests in the U.S., you don’t have any leverage directly and you are exempt; therefore, part of Romney’s carried interest would be in these offshore funds. There’s nothing nefarious about them.

The reason he has the offshore fund is not for his convenience, it’s for the convenience of the investors.

Any other unusual items?

Romney has these very large retirement accounts, $20 million plus. There’s nothing illegal about that, but if you follow the rules and do it the right way, assets in a retirement fund are shielded from creditors. Now it’s an expensive way to do it, because you will pay ordinary income rates.  Romney would pay higher rates when taking money out.

I want to be real clear: I’m absolutely confident Romney has been scrupulously following the law, and I’ve been talking to tax lawyers all over the country, ones who use carried interest but think it shouldn’t be allowed, Democrats and Republicans, and they’re all in agreement. Everyone is certain that Romney has complied with the law. The scandal is the law.

He complied with the law, but once it’s out there, the conversation about the fairness of this law is dangerous for his candidacy.

Yes. There are all these websites where people are saying, “Well he’s a crook, he has a Cayman Islands bank.” He doesn’t have a bank in the Cayman Islands and there’s nothing crooked about it.