GOP Crony Capitalism Part I - PriceWaterhouse Coopers

Huffington Post has a fantastic article describing how businesses have abused a tax break originally designed to help US manufacturing firms. The provisions were written into the 2004 American Jobs Creation Act law and will reportedly cost US taxpayers nearly $180 billion in the next decade.

More than anything, though, the story is a classic illustration of the revolving door that plagues American government and business. The lynchpin of the story is a man named George Manousos. Manousas was just another guy at PricewaterhouseCooper (PWC), one of the "Big Four" accounting firms, and he specialized in tax law. In 2002, he joined the Bush administration in the Office of Tax Policy (OTP). In his position at the OTP, he helped Congress craft a provision called Section 199 that was designed to benefit US manufacturing companies. Having done that, his role at OTP then allowed him to craft the regulations to implement that provision that allowed for a "domestic production deduction." It allows businesses that engage in certain production activities to claim a deduction of 9% of the income from those activities, resulting in about a 3% tax savings.

The provision was written so broadly you could drive a truck through it and Manousas was the guy who could help businesses drive that truck. In 2006, he returned to PWC as a partner with the express purpose of helping a broad array businesses take advantage of the tax. He was in a perfect position to do so because he had both written the law and the regulations that implemented that law. There was no one in a position to refute his interpretation of the provision, even within the IRS, as Manousas readily admits, saying "When you have taxpayers that have advisers that have the latest and greatest thinking, and the IRS is often playing a little bit of catch-up, it can create some ambiguity about what is the right answer."

With Manousas' help, non-manufacturing companies started to take broad advantage of the provision. Visa saved over $400 million over two years using the tax break. A gift basket company claimed the deduction by saying arranging the fruit in a basket qualified as a manufacturing activity under the provision. Big box hardware stores claimed the deduction because they cut keys. Restaurant chains claimed the deduction because they "manufacture" slices of cake by cutting the full cake into pieces. TV show producers, the networks, and cable companies all claimed the deduction. And, despite IRS challenges, courts have ruled for the businesses precisely because the law is so broadly written. But, according to Manousas, everything is fine. He says, "From my perspective, the incentive works as it was designed to work, in large part." That's because from his perspective, he is banking millions as a PWC partner helping businesses screw the US taxpayer.

As noted above, PWC is one of the Big Four accounting firms. That is pretty much the definition of an oligarchy. And PWC has had its share of scandals over the years, not counting Sunday's Oscar fiasco. PWC was forced to pay Tyco $225 million because of its failure to identify the massive fraud at that company as its auditor. The UK supermarket chain Tesco overstated its profit by over $300 million over two years  againwith PWC as its auditor. PWC was also involved in the Colonial Bank debacle as the accounting firm failed to properly investigate fraudulent mortgage documents provided to Colonial from a company called Taylor Bean & Whitaker. In a twist that only an American business could pull off, Taylor Bean sued PWC, claiming that their failure to vet the mortgages for Colonial allowed Taylor Bean to provide $1.5 billion in distressed and fraudulent mortgages and that fraud eventually brought Taylor Bean down. PWC also had to settle with the New York State Department of Financial Services for helping Bank of Tokyo-Mitsubishi cover up its laundering of $100 billion for terrorism-sanctioned countries.

PWC is just another serial corporate criminal and enabler of what is essentially broad-based tax evasion by US businesses. But they will just keep on paying their fines and move on to the next scandal. And that's the real scandal.