Why the tax code favors the rich and powerful: Our pay-to-play two-party political system

Based on 2010 data -- it probably

has gotten worse for the bottom 40%

Context

There is an agreement between congress and the consumer tax preparation industry about simplifying taxes for consumers. The deal is this: Congress agrees to not pass laws simplifying taxes for consumers and in return the consumer tax preparation industry agreed to provide free tax prep services for filers with incomes below a certain level, $70,000 if memory serves. Of course, few consumers are aware of this free service. That is how the industry wants to keep it. To keep consumers in the dark and fed BS, the industry lobbies congress to not spend money advertising the existence of the free service. And finally, when some consumers do try to use the free service, the industry tries to trick them into making various payments. The whole thing is a scam to serve the tax prep industry, not consumers.  

That exemplifies how our two-party pay-to-play system fails to work for consumers doing their taxes, but works great for the industry. It keeps our taxes complicated and revenues flowing to them. It's a win-win for the industry, but a kick in the guts for us plankton, sardines and minnows. 

But us plankton, sardines and minnows is not what this post is about. There is another layer of pay-to-play tax sleaze for the big fish and whales. Feeding the big fish and whales is what this is about.

How Accounting Giants Craft Favorable Tax Rules From Inside Government

Feeding the big fish & whales

NYT: “Audrey Ellis went from PwC to the Treasury Department.

Two years later, she returned to her old firm, which promoted her to partner.”

The New York Times writes: 

Lawyers from top accounting firms do brief stints in the Treasury Department, with the expectation of big raises when they return.

For six years, Audrey Ellis and Adam Feuerstein worked together at PwC, the giant accounting firm, helping the world’s biggest companies avoid taxes.

In mid-2018, one of Mr. Feuerstein’s clients, an influential association of real estate companies, was trying to persuade government officials that its members should qualify for a new federal tax break. Mr. Feuerstein knew just the person to turn to for help. Ms. Ellis had recently joined the Treasury Department, and she was drafting the rules for this very deduction.

That summer, Ms. Ellis met with Mr. Feuerstein and his client’s lobbyists. The next week, the Treasury granted their wish — a decision potentially worth billions of dollars to PwC’s clients.

About a year later, Ms. Ellis returned to PwC, where she was immediately promoted to partner. She and Mr. Feuerstein now work together advising large companies on how to exploit wrinkles in the tax regulations that Ms. Ellis helped write.

Ms. Ellis’s case — detailed in public records and by people with direct knowledge of her work at the Treasury and at PwC — is no outlier.

The largest U.S. accounting firms have perfected a remarkably effective behind-the-scenes system to promote their interests in Washington. Their tax lawyers take senior jobs at the Treasury Department, where they write policies that are frequently favorable to their former corporate clients, often with the expectation that they will soon return to their old employers. The firms welcome them back with loftier titles and higher pay, according to public records reviewed by The New York Times and interviews with current and former government and industry officials.

The NYT goes on to point out that industry veterans working in government have had, an “enormous impact.” They (i) officially approve tax loopholes their former firms use, (ii) give tax breaks to former clients, and (iii) block efforts to rein in tax shelters. Talk about the deep state. There it is, working quietly, but fat and happy. 

The NYT mentions some examples. A former PwC partner in the Trump Treasury Department helped write regulations that allowed large multinational companies to avoid tens of billions of dollars in taxes. After doing his deep state duty for PwC, that partner went back his old job at PwC. Similarly, a senior executive at RSM, a major accounting firm, took a high level job at Treasury, and his office then expanded a tax break in ways that RSM wanted. After his deep state service he returned to work at RSM. See how that works? It is fun and easy. Well, at least for the big fish and whales. 

NYT interviews with some former industry executives viewed these practices as a major part of why tax policy is heavily skewed to favor the wealthy at the expense of most everyone else. NYT found that this is bipartisan. In the last four presidential administrations, there were at least 35 cases of people going from big accounting firms to (i) Treasury’s tax policy offices, (ii) Internal Revenue Service offices, or (iii) the Congressional Joint Committee on Taxation, followed by a return back to the same firm. The NYT writes: “In at least 16 of those cases, the officials were promoted to partner when they rejoined their old accounting firms. The firms often double the pay of employees upon their return from their government sojourns. Some partners end up earning more than $1 million a year.”

The NYT comments on current politics: “President Biden and congressional Democrats are now seeking to overhaul parts of the tax code that overwhelmingly benefit the richest Americans.”

One can easily see why big fish and whales love Republicans with its deep state operating in obscurity, but hate at least some Democrats. Whether Democrats actually will increase taxes on the rich remains to be seen. My guess, there is about a 35% chance that will happen before the 2022 elections. Industry lobbyists backed by campaign contributions are quietly swarming all over congress to make sure that all proposed tax hikes are blocked as quietly and industry fingerprint-free and politician accountability free as possible. At least some Democrats are susceptible to this kind of pay-to-play pressure (free speech persuasion). It takes only one Democrat in the Senate to side with the big fish and whales for the idea of tax increases on the rich to die and fade away.

Questions: Is there such a thing as a deep state where industry executives work in government for a while to write and/or approve tax breaks their employers want and then return to the private sector to be rewarded with some of the added value their tax breaks protected or created? What is the approximate chance the Dems will actually be able to pas tax hikes on the big fish and whales before the 2022 elections? Which party do the big fish and whales prefer on tax policy, the Dems, the Repubs, or are they seen as about the same?