Saturday, 16 Oct 2021

How Tax Giants Write Their Own Rules

Taxing times

There’s a well-oiled revolving door between the largest accounting firms in the U.S. and the Treasury Department, The Times’s Jesse Drucker and Danny Hakim report. The cycling of professionals between the public and private sectors is nothing new, but the ability of the biggest tax advisers to embed their employees inside the government’s most important tax policy jobs has largely escaped public scrutiny.

Here’s how it works:

Executives at the biggest accounting firms encourage their top tax lawyers to do stints at the Treasury.

While at the Treasury, these legal professionals help write rules — like one that allowed restaurants to claim a tax break intended for manufacturers by claiming they were “manufacturing” cheesecake slices out of whole cheesecakes — that allow their former corporate clients to reduce their tax bills.

The same professionals, sometimes just months after helping write new rules, are welcomed back to their former employers in more senior positions with higher pay.

By the numbers: During the past four presidential administrations, there have been at least 35 people, including five of the past six heads of the Treasury’s tax policy office, who left jobs at a top accounting firm to take a tax policy position in the government, only to return to their previous employers at a later date. About half of those returning individuals were made partners, a position that can pay as much as $1 million a year, according to public records reviewed by The Times and interviews with current and former government and industry officials.

Government agencies rely on expertise from the private sector to understand the real-world effects of the tax code. Federal rules prohibit government officials from working on many matters in which they have financial interests, like having an unwritten agreement to return to their prior firm.

(Accounting firms aren’t the only ones taking advantage of Washington’s revolving door. As DealBook recently reported, crypto firms have been aggressively hiring former regulators to bolster their lobbying operations.)

Deloitte, PwC, RSM and other accounting firms declined to comment on The Times’s investigation. Eric Sloan, a former senior tax lawyer at Deloitte, said that he saw nothing wrong with telling junior employees that stints in government would earn them big financial rewards when they returned to private practice. Tax professionals may also want to join the government to make changes that they genuinely believe are in the public interest.

The accounting industry’s back-and-forth arrangements get results. The taxes that corporations pay, as a percentage of G.D.P., have been shrinking for years. This share now sits near a 50-year low, and some former industry veterans say that the personnel flow between the private and public sectors has played a part.

“Administering the law is complicated, and corporate America distributes huge paychecks to revolving-door experts to give them the edge,” Jeff Hauser of the Revolving Door Project, part of the liberal-leaning Center for Economic and Policy Research, told DealBook. Paying government officials more would slow the door’s swing, he said: “The public is best off when government employees see the public interest and their personal interest as one and the same.”

Read the full article about how accounting giants craft favorable tax rules.

HERE’S WHAT’S HAPPENING

Global markets shudder as Evergrande, a heavily indebted Chinese property developer, faces deadlines. The beleaguered company owes $300 billion to creditors, including tens of thousands of its own staff, making it China’s most indebted company. With some interest payments due this week, fears abound that a default could ripple through the financial system.

President Biden kicks off a global vaccination push. He will use a U.N. General Assembly meeting this week to urge other countries to distribute doses of coronavirus vaccines to nations in desperate need. Separately, Pfizer and BioNTech announced that their coronavirus shots have been shown to be safe and effective in children ages 5 to 11.

Facebook responds to allegations that it has failed to address the ill effects of its platform. In a blog post responding to The Wall Street Journal’s series about the tech giant’s shortcomings, Nick Clegg, Facebook’s head of public affairs, pointed out that the company itself had produced the research that allowed others to look at the social network more critically. Clegg said Facebook understood its “significant responsibility.”

Nabisco workers end a weekslong strike. The union representing the snack maker’s employees in five states said over the weekend that members had overwhelmingly approved a new four-year contract. The agreement includes hourly wage increases and a higher company match to pension contributions.

Streaming services triumph at the Emmys. Netflix won two of the top awards, with “The Crown” taking the best drama prize and the chess-prodigy odyssey “The Queen’s Gambit” claiming the title of best limited series. “Ted Lasso,” of Apple TV+, won for best comedy series.

The irony of stablecoins

Stablecoins are cryptocurrencies whose values are pegged to assets like gold or the dollar, which is meant to make them less volatile. Stablecoins may also be the most ironically named innovation in the cryptocurrency industry in the eyes of regulators in Washington. But they are no laughing matter.

Despite their name, stablecoins may wobble dangerously. Officials in Washington are worried that firms issuing these cryptocurrencies are not holding adequate reserves. If a critical mass of stablecoin holders want to convert their tokens simultaneously, that could lead to a kind of modern-day bank run. The use of stablecoins has grown so explosively in the past year, from virtual nonexistence not long ago to a more than $120 billion market, that regulators are increasingly nervous. The issuer of the most popular stablecoin, Tether, this year settled an investigation with the New York attorney general over financial mismanagement.

Latest Updates

Are stablecoins a threat to the wider financial system? Federal regulators fear that without fast action and strict oversight of this corner of the crypto world, they might be. In a report due this fall, the Treasury Department may direct the Financial Stability Oversight Council to review whether this kind of cryptocurrency, or its issuers, should be deemed “systemically important.” The designation would allow for strict federal regulation to address issues beyond reserve levels, such as consumer and data protections, technological resilience and financial crime prevention. As it stands, stablecoins are modestly regulated through a patchwork of state banking and money transmission rules.

Stablecoins are critical to crypto’s continued growth. They underpin many of the trading, lending and borrowing services on crypto exchanges, as well as the burgeoning alternative financial services on the blockchain that is touted as the future of payments. Stablecoins could also perform the function of a government-issued digital dollar, which is under consideration by the Fed. Jay Powell, the Fed chair, has suggested a U.S. central bank digital currency could undercut the entire cryptocurrency sector. “I think that’s one of the stronger arguments in its favor,” he told Congress.

“Failing to raise the debt limit would produce widespread economic catastrophe.”

— Janet Yellen, the Treasury secretary, in an op-ed for The Wall Street Journal urging Congress to act as the U.S. approaches its borrowing limit. Yellen noted that lawmakers have altered the country’s debt ceiling about 80 times since 1960, and argued that they must do so again in the next few weeks, or “the federal government will be unable to pay its bills.”

The week ahead

A call on booster shots: Last month, President Biden announced a plan to offer a third Covid-19 vaccine shot to most Americans as early as this week. But the plan was in flux as scientists debated whether booster shots were necessary. On Friday, advisers to the F.D.A. unanimously recommended a booster shot limited to Pfizer vaccine recipients who are 65 or older or at high risk of severe Covid infections. Although the F.D.A. is not required to follow its advisers’ recommendations, it typically does. The agency is expected to make a decision in the coming days.

Taper talk: The Fed gathers this week to discuss monetary policy, and this meeting could be an important one. Many economists expect the central bank to reveal details about how and when it plans to begin winding down its bond-buying program, one of several policies it created to reduce the economic impact of the pandemic. The Fed will also release new economic projections, which will signal how much and how quickly it expects high inflation to fade.

Unanswered questions: After a streak of record highs, the stock market has looked more indecisive of late. That’s understandable, given big questions that are likely to be answered in the coming weeks, including whether the Fed will begin pulling back its economic support and whether Congress will raise the federal borrowing limit, not to mention the wait for the final details of an infrastructure spending package — and how it will be funded.

From the TimesMachine: On this day 148 years ago, The Times reported that “Wall Street was the liveliest place in New York” as the early days of what is known as the Financial Panic of 1873 took hold. The New York Stock Exchange was forced to suspend trading for the first time in its history and the crash precipitated a depression that lasted for six years.

THE SPEED READ

Deals

Tech giants have been on an acquisition spree this year, spending at least $264 billion buying up smaller rivals. (FT)

SoftBank and Tencent joined an investment round for Cars24, the Indian used-car seller, doubling its valuation, to $2 billion, in less than a year. (FT)

U.S. companies have sold a record $786 billion of junk-rated bonds and loans so far this year. (WSJ)

Hong Kong’s stock exchange is courting SPACs, but its rules for listing the blank-check vehicles are much stricter than those of other venues. (Bloomberg)

Policy

Elon Musk pledged $50 million (in a tweet, naturally) for the fund-raiser linked to the Inspiration4 mission that took four civilians into space. The SpaceX chief also mocked President Biden for not acknowledging his firm’s successful mission. (CNN, CNBC)

The U.S. transportation regulator is concerned that Tesla is pushing out self-driving software updates before fixing basic safety issues. (WSJ)

Prime Minister Boris Johnson of Britain plans to press Jeff Bezos on Amazon’s tax payments during his trip to New York. (Guardian)

A surge in natural gas prices will push up inflation across the U.S. and Europe, economists warn. (WSJ, FT)

Climate-focused investment funds may be undermining the fight against global warming. (FT)

Best of the rest

The designer of Alexandria Ocasio-Cortez’s “Tax the Rich” dress owes back taxes. (NY Post)

Pandemic supply chain problems are hurting the most vulnerable communities by disrupting food banks and clothes drives. (NYT)

The parent company of TikTok is introducing a usage cap of 40 minutes a day for Chinese children under 14. (WSJ)

Meeting goals on hiring working-class staff requires asking delicate questions and carefully interpreting the answers. (Bloomberg Opinion)

“How Car Rentals Explain the 2021 Economy” (NYT)

We’d like your feedback! Please email thoughts and suggestions to dealbook@nytimes.com.

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