Editor’s Note: Steven M. Rosenthal is a long-time participant in the Washington D.C. tax community in both public and private roles. He is currently a senior fellow in the Urban-Brookings Tax Policy Center where his research and writing focus primarily on business tax issues.
Q: Steve, welcome and thank you for taking the time to speak with Tax Times. Many of our readers are curious about how people decide on tax careers, so can you tell us how you came into tax?
A: Well, I arrived at tax in a linear fashion. I grew up in San Diego, California, where I attended public schools and then the University of California at Berkeley. I majored in math and economics, but I was always interested in public service, in making a difference. After I finished college, I moved from California to Washington, D.C., where I worked as a research assistant in President Carter’s White House. That was a fascinating year in which I got to observe economists, lawyers, and other professionals. I was planning to be an economist, but I saw lawyers doing a lot of important things. After my year in D.C., I studied economics and public policy at Harvard, but I decided to go to law school. At Harvard, I explored fields of economics that had an overlay with law, in order to select a field of law that played to some of my analytical strengths. I studied public finance at Harvard with a couple of brilliant economists, Marty Feldstein and Alan Auerbach. I discovered that we order much of our social and economic relations through the tax law. I easily concluded this was the field for me!
The next step was to begin law school at Berkeley. At the same time, I started working as a legal research assistant for the IRS Appeals Office in San Francisco—and worked there for three years. The Appeals Officers hired me before I knew any tax law, but they taught me. There wasn’t too much tax at Berkeley.
After I finished law school, I decided to pursue tax law in D.C. I started out in private practice. One of the nice things about practicing tax in D.C. is that you can simply change a subway stop and change your practice, like working in the government. And the nature of tax practice in D.C. differs from anywhere else. It focuses on the industry of the town: the government.
Q: Steve, you’ve worked in a number of different settings. Can you help us compare practicing tax in an accounting firm and practicing tax at a law firm?
A: Oh, sure. I started with a big law firm in D.C, Wilmer, Cutler & Pickering. After a few years there, I had an opportunity to work for the Joint Committee on Taxation of the U.S. Congress. I helped develop and draft tax legislation for six years. That was long enough; I was ready to return to practice. At the time—this was the mid-1990s—the accounting firms were aggressively expanding and KPMG made me a very attractive offer: a short path to partnership; the chance to practice in a field that I really enjoyed, financial transactions and financial services; and the ability to stay in D.C., without having to move to New York. At KPMG I was the National Director, Technical, for the Financial Services Practice for several years. Slowly, though, my role evolved and shifted as KPMG changed its priorities. I was assigned to working on tax advantaged products, which I didn’t really care for. Basically, I reviewed and helped deliver tax shelters to the field. I eventually resigned and returned to law practice, working as a partner at Miller & Chevalier and, later, at Ropes & Gray, before joining the Tax Policy Center.
Comparing the accounting and law firms is interesting. When I started at KPMG, I had not really met many accountants: I’d just known a lot of lawyers. The accountants were truly outstanding professionals, brilliant and dedicated. Many of them came from the hinterlands of the country, from schools I’d never heard of—they got to the national office through hard work and real talent. Even in the field, the accountants I saw were exceptionally engaged in the work and in trying to improve themselves. The accountants and lawyers were interchangeable.
But the major drawback I saw at accounting firms is their large size. There’s a real separation of the management of the firm from the partners, the professionals, and the staff. Decisions are made—like in a large corporation—to shift the ship, and everybody on the ship must drift in the same direction. During the 90s when I was at KPMG, management decided to shift towards delivering more tax-advantaged products. I disagreed with that direction. It’s not that I thought that tax planning is inherently wrong. I think that clients are entitled to plan their affairs and to take advantage of transactions that are properly structured and have economic substance. I just saw too many aggressive transactions that, in my judgment, crossed the line.
So I returned to private law practice. My law practice focused on helping individual clients—and I largely controlled how to help them—and what advice to offer.
During that time, I always harbored the interest of returning to public service. I expected to have a chance in the start of the Obama administration, but I had registered as a lobbyist on a small matter that disqualified me for a couple of years. So I decided to leave practice—I had done it for long enough and had made enough money—to go to a think tank to cool my heels while my lobbying ban expired. It turned out that the work here at the Tax Policy Center was fascinating, and the opportunities to contribute to the public debate are great. So that’s what I’ve been doing for the last seven years. It’s a nice situation but a different career path than most tax lawyers take.
Q: How are things different for you now that you’re at a think tank versus a law firm or an accounting firm?
A: Well, most importantly, my output is different. I write blogs and articles—and I tweet @stevertax. I spend a lot of time educating the press, who are very bright but don’t know tax. I help legislative and executive branch staff informally—who tap my expertise on topics. I have a lot of professional freedom and a lot of ability to express my views based on what I think is good tax policy without advocating any cause, or advancing any client interest. I don’t bill hours very closely. Before your readership decides that this sounds like the ideal path, I have to caution that there’s very little money in it. It is, however, fulfilling.
Q: Didn’t you play a role in the changes to the D.C. tax code?
A: I did. As I said, I’ve been here at the Tax Policy Center for about seven years, but in the middle of those years, I split my time with the D.C. Tax Revision Commission (as Staff Director) and the Tax Policy Center. The D.C. Tax Revision Commission prepared a package of recommendations for the D.C. Council, which were adopted almost completely over time. I was the lead technical resource, coordinating more than a dozen consultants. I also had seen the tax legislative process from the Hill. Tony Williams, the Chair of our commission and a former mayor of Washington D.C., leaned on me heavily for both substantive ideas and processes, how to pull a package together. The experience was fascinating. We found that middle-class residents were paying a disproportionate tax burden compared to high-income and low-income taxpayers. D.C.’s business taxes were high, both regionally and nationally. The tax base was very narrow. There were all sorts of problems because not-for-profits were exempt, government institutions were exempt, and commuters were exempt. We had to create a package to solve all of those problems—and we did. We created a package that followed pretty much the recipe of the 1986 federal tax reform—a broader base, lower rates, fewer loopholes. We got support from across the political spectrum. The Tax Foundation, a right-leaning group, applauded our work, as did Grover Norquist. The Institute for Tax and Economic Policy, a left-leaning group, applauded our work, as did the D.C. Fiscal Policy Institute. We worked for a year and a half and saw our recommendations enacted into law within a year. It was good work that everybody liked.
Q: Now that you have the benefit of a few years to see the law after it was enacted and as it played out, is it still working?
A: Yes. I think D.C.’s experience turned out really well. I think everyone is really happy. The economy is vibrant. There’s great business growth. We have seen the middle-class tax relief materialize. I think some of the middle-class flight to the suburbs was reduced. A remaining problem for D.C., and a problem that plagues other cities, like Seattle and Silicon Valley and San Francisco, is that sometimes success creates additional problems. So, we see in D.C. displacement of some lower-income workers and public servants. That’s a real challenge, as is homelessness. The larger question is how do you work to make a city vibrant without leaving behind the residents who can’t keep up economically and get displaced? By and large, I’d say the D.C. tax experience worked, but there still are some issues.
Q: You have been an interested observer in the work that Congress and Treasury have done and continue to do around tax reform. What are your thoughts on the 2017 federal tax legislation that we’re all now working with?
A: Well, the good news is that there was, in fact, major tax legislation, which had been stymied in Congress for many, many years, if not decades. The bad news is the tax legislation fell short in several respects, both as a matter of process and substance.
The process, which I think contributes to some of the substantive shortcomings, was a very hastily thrown-together bill. There had been years of hearings to complain about the prior law. But Congress held no hearings on the structural solutions and changes that were part of the tax bill, like international tax reform or the pass-through business tax reform. To get enacted, the bill was raced through Congress without much input from the minority party or from impartial outsiders. Unlike the ’86 act, and unlike our work in the D.C. government, there was no consensus behind this tax bill. It was passed on a strictly partisan basis. If the parties change, the tax law will change. And the consequence is two-fold: one, there are a lot of shortcomings in the legislation and two, the tax legislation is unstable.
I think the bill failed substantively on the ways we usually evaluate tax bills—on efficiency, simplicity and fairness. For example, the pass-through provisions are a complete mess. Those provisions will not be efficient, they will not be simple, and I don’t think they are fair because by and large the relief is targeted at the very top end. Another major component to the bill, lower corporate tax rates, may have been desirable, but the right approach is what we did in D.C. to bring down tax rates and to close loopholes. There wasn’t much closing loopholes. The international tax changes were original and potentially helpful. But they were passed in haste and given very little review, so they suffer from a lot of problems. I think even Chairman Brady acknowledges that the international tax reform effort fell short.
There are a lot of technical problems in the bill, which will require a major technical corrections bill. Moreover, the complexity added to the Code is going to be hard for taxpayers and the IRS to cope with. The bill is also unstable because the individual tax relief is temporary and the business tax relief is permanent. So the individual tax relief will need to be revisited.
Finally and most importantly, we use tax law to raise the funds to pay for the services that we all demand. By cutting taxes so substantially in this last tax bill, we were left with a large shortfall at a time when the services that we need will be increasing as our population ages. The CBO’s estimates of the deficits added by the new tax legislation have become significantly bigger, increasing from $1.5 trillion at passage to $2 trillion now. There is not a chance that the tax bill pays for itself. How are we going to pay for future services? Will we slash the social safety nets, like Medicare and Social Security, for our elderly? Those difficult decisions have been kicked down the road.
Q: Steve, you and I have talked over the years about bar associations and the important work they do. I know you’ve been a long-time member and a leader in the ABA Tax Section and the D.C. Bar. Do you have any thoughts on how these organizations can grow and thrive and succeed both now and in the future?
A: Let me start by saying these associations are phenomenally helpful for practitioners who want to develop their technical skill sets as well as their network of professional relationships. I have called upon former colleagues from the ABA and the D.C. Bar to help with problems frequently, both when I was in practice and since coming to the Tax Policy Center. In my judgment, bar associations should be oriented towards helping practitioners with technical aspects of their work and with building networks of professional colleagues.
I think bar associations should also be governed transparently and inclusively. They should not be clubby or insular. There’s a natural tendency for the leadership of any large organization to become insulated. That, I think, presents an ongoing struggle for the ABA and the D.C. Bar: how to make sure that the bar continues to be open and inclusive.
For young lawyers, to break through requires showing up. I remember when I first joined the ABA I would attend these fascinating meetings and I’d hang out afterwards to listen to the panelists continue their talk after their presentation. Then they’d wander off to dinner, and I was not included. I wondered, how can I be included? What do I need to do? There are ways to get yourself involved by working on comments and speaking up more often and the like. But it turns out that just the passage of time and effort brings you into the process. 20 years later, when I attended ABA meetings, everyone stopped and said “hi” to me. But I remember the start of my career, so I have always tried when I go to bar meetings to stop and engage young people and meet with any young person that wants to meet for coffee or talk about practice over lunch. I think the bar associations are a great facilitator.
Q: Steve, any advice for other ways tax professionals can make a difference?
A: I’m a big proponent for the idea that part of a person’s professional fulfillment should be public contributions. Working in the government is one way to contribute. Bar associations and working on comments to the government are another way to contribute. What I’m doing now at a think tank is yet another way. For lawyers who don’t have the financial wherewithal to go into government and want to stay in practice and are looking for ways to contribute, I encourage them to get involved in bar associations and to do pro bono work, whether it’s tax litigation or even pro bono tax policy work. Anyone interested could reach out and speak to me, new lawyers or retiring lawyers, and I’d be eager to have their help and help them contribute to the public debate.
We’re living in really challenging times now. My fundamental view on formulating good public policy is transparency in the process and basing decisions on the evidence. That’s hard to do now, when our society seems to have such difficulty distinguishing fact from fiction. One way to help is what I’m doing now, trying to be an honest broker in the public exchange of ideas. Anyone else who’s interested in doing something like I am doing, I encourage them to try.
Q: Well, thank you, Steve, that’s inspirational stuff. We very much appreciate your time.
A: Sure. Thank you for allowing me to share my thoughts. ■