Accounting Giants Create Their Own Tax Rules | December 2021
Lawyers from top accounting firms have taken advantage of the revolving door between U.S. accounting giants and the U.S. Treasury Department. According to The New York Times, accounting firm executives push their lawyers to do brief stints in the Treasury Department. Though these professionals take a significant pay cut by moving to the public sector, the expectation is that the lawyers will receive a raise when they return to the private sector.
Writing the Rules
Accounting firms might engage in this behavior because their top tax lawyers could help craft tax policies that benefit their business or their clients. These legal professionals sometimes return to their former employers with higher pay.
In one example, a former PricewaterhouseCoopers (PwC) manager helped create a rule that allowed nearly any company to claim a tax credit meant for U.S. manufacturers, even if the company was not in manufacturing. Restaurants that put garnishes on pre-made cheesecake were able to claim themselves as manufacturers and reduce their tax bills.
A Revolving Door
Looking at the past four presidential administrations, 35 people left private sector jobs at a top accounting firm for a tax policy government position and then returned to their previous employer. According to The Times’s investigation, half of these individuals became partners at their companies.
For example, Audrey Ellis worked at PwC, one of the Big Four accounting firms, for years before a two-year stint at the Treasury. After drafting rules that would give PwC clients new federal tax breaks, Ellis returned to PwC and was promoted to partner.
This so-called revolving door is seen in other areas as well. For example, according to DealBook, cryptocurrency firms are recruiting and hiring former regulators to improve their lobbying efforts.
Real-World Effects of the Tax Code
The reason that the government relies on the private sector for expertise is they want to understand how the tax code affects businesses in the real world. The flow of legal professionals from the private to the public sector, however, may be playing a part in the low tax rates for corporations. The share that corporations pay as a percentage of gross domestic product (GDP) is at a 50-year low.
Slowing the Back-and-Forth
Though the cycle between the public and private sectors has largely escaped public scrutiny, many people are attempting to shed light on this issue. The Center for Economic and Policy Research (CPR) has a project known as The Revolving Door Project (RDP) that scrutinizes the rule-writing process. RDP aims to educate the public about how accounting firms promote their interests in Washington.
Jeff Hauser of RDP said to The New York Times, “Administering the law is complicated, and corporate America distributes huge paychecks to revolving-door experts to give them the edge.”
In the Classroom
This article can be used to discuss the Big Four accounting firms and the importance of integrity in accounting (Chapter 14: Accounting and Financial Statements).
- Why might accounting firms encourage their top lawyers to work in the Treasury?
- Based on the numbers, do you think this issue is widespread?
- Why does the government rely on the private sector for expertise?
This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell, Linda Ferrell, and Geoff Hirt.
Andrew Ross Sorkin, Jason Karaian, Sarah Kessler, Stephen Gandel, Lauren Hirsch, and Ephrat Livni, "How Tax Giants Write Their Own Rules," The New York Times, September 20, 2021, https://www.nytimes.com/2021/09/20/business/dealbook/treasury-department-tax-jobs.html
Jesse Drucker and Danny Hakim, "How Accounting Giants Craft Favorable Tax Rules from Inside Government," The New York Times, September 19, 2021, https://www.nytimes.com/2021/09/19/business/accounting-firms-tax-loopholes-government.html
Tracy Connor, "Oh, So THIS Is How Tax Policy Gets Made," The Daily Beast, September 19, 2021, https://www.thedailybeast.com/revolving-door-between-treasury-department-and-big-accounting-influences-tax-policy