This is another in my series of bad high school book reports on selected nonfiction books that I have read recently. I write them to memorialize my thoughts in the vain hope that I will remember a bit more of what I read.
Cassidy is a journalist (i.e., not an academic economist), a staff writer for The New Yorker (translation: his policy priors are lefty). He wrote a well-received book about the 2008 financial crisis (How Markets Fail), which I have not read. Capitalism and Its Critics is a loose history of economic and related social thinking and trends from the late 18th century to the present. Cassidy characterizes it as a history of industrial capitalism (I’m not sure exactly what capitalism is, much less industrial capitalism). The late 1700s is a natural starting point if you think about when the Wealth of Nations was published (1776). It’s the transition from mercantilism (Smith’s term for the old order) to capitalism, using another frame.
Each chapter covers one or two thinkers, most frequently economists (e.g., Adam Smith, Keynes, Marx, Hayak, Friedman, etc.) or less frequently a social critic type (e.g., Anna Wheeler and Sylvia Federici). They’re conveniently listed on the dustjacket. One chapter is on a movement, the Luddites, rather than an individual thinker or two.1 It’s written for a general audience with little to no economics training, very breezy and easy to read. It bears some resemblance to The Worldly Philosophers (a favorite of mine) but is not a history of the progression and development accepted economic thought, but a broader account that ranges outside of academic economics to encompass social and political movements and criticisms. For example, important economists like Ricado, Marshall, and Bates Clark don’t merit chapters and are only covered indirectly. His focus, I think, is on the big social and political challenges to the economic order, rather than the development of received economic theory.
Although he isn’t an economist (neither am I), he seems to have a good understanding of the basics of the discipline and can convey them in simple and easy to understand ways.
Why I read it
The book fits squarely into my areas of interest, history, finance, economics, and politics. When I saw a couple of favorable reviews by actual economists and heard Cassidy on one of their podcasts, I put it on my reading list.
What I found interesting
The book was a fun and easy read – a sort of historical account of the yin and yang of the last 250 years of economic events through the lens or perspectives of a variety of economists and social critics. It’s an account of how capitalism2 has morphed, adapted, and survived largely due to political/government interventions and partial corrections of those market failures. The book is sort of a graphic novel or simplistic version of Slouching Toward Utopia, although not pretending to be a defining account and attempting to be a true economic analysis. It’s journalism, not economics.
Several recurring themes and challenges across the book’s account of the past 250 years and that – per the structure of the book, stimulated critics of capitalism and/or required legal or institutional adaptions for capitalism to survive:
Inequality – both within and across countries, including slavery and less dramatic but still very bad exploitation of labor, imperialism, etc.
Depressions, recessions, etc. – the business cycle
Concentrated economic power – monopoly, monopsony, etc.
Market failures, most glaringly the failure to account for public environmental costs
As one would expect, extended economic downturns and jarring technological development were the engines that drove critics and political adjustments. The oft predicted collapse (by Marx and others) never occurred because of the adaptability of western political systems as informed by some of critics and thinkers chronicled in Cassidy’s account. Luck or the contingency of history, put another way, was also likely a factor.3
The book introduced me to more obscure economic theorists and critics I was unaware of and provided more details on those I was aware of. That was particularly true of the early 19th century ones. I was only vaguely aware of the pre-Marx, utopian socialism movement (e.g., William Thompson etc.).
Cassidy is British and book has details about features of the British Empire – its relationship (rank exploitation) of India, South Africa, etc. – that I was unfamiliar with and how that entered into economic thinking of various theorists. I found that history very interesting.
His accounts and summaries of 20th and 21st figures covered stuff I was more familiar with, but I still found them useful and interesting – refreshing my memory and provide additional detail and information. For example, it is good to revisit/recall Thorstein Veblein, given the current conspicuous consumption by the billionaire class these days. Reading the book provided interesting details about the long-running spat between Joan Robinson and Bob Solow that I had not known. Cassidy gets down into the weeds to cover stuff like the dispute about measuring inequality between Piketty, Saez, et al and Auten and Splinter. I can’t imagine many general readers are aware of that sort of inside-baseball empirical dispute.4
A bunch of the figures he covers I was unfamiliar with (Paul Prebisch, Eric Williams, Celso Furtado, etc.).
What disappointed me
The book was probably a little longer than it needed to be. At one level, I felt a couple of chapters or figures were simply included to make points about flaws he perceives politically important given his POV, rather than for their historical significance. But that’s likely more a matter of my taste, preferences, or viewpoint than a legitimate criticism. Because he’s not an academic or professional economist, a downside of the book (at least to me, as an amateur) is that his evaluative observations and analysis didn’t add much, if any, value to me. Of course, I knew that would be the case going in.
Notes
My guess is that including the chapter was inspired by the challenges presented by AI.
I found it one of the more interesting chapters. Like most folks, I thought of Luddite as a pejorative label for technophobes, stuck in the past, or something similar and knew little about the actual people and the movement. The chapter details how the first stages of industrialization replaced craft work that supported a middle-class lifestyle with sweatshops heavily using child labor, mostly female. In short, it was a pretty horrific change from a social and human perspective with many of the more obvious productivity benefits redonning to owners of the factories. The reality, course, that consumers of clothing and textiles were also large beneficiaries as a group, but the price benefit was diffuse and small on individual bases. After a generation or so, some of the productivity benefits led higher wages, due in part to political changes. ↩︎
I will hazard a loose definition: an economic order driven by decisions under a rule-of-law order that largely relies on Smith’s hidden hand, albeit often corrupted by a wide variety of market failures. ↩︎
The low quality and lack of adaptability of Russia’s and China’s political institutions likely also explain the failed experiment of the communist revolutions and the resulting, real-world socialism. This is not a subject of the book, just my observation. ↩︎
It looks like the anti-weaponization fund may be dead (or it might just be temporarily comatose), confirming that my political predictions are usually wrong. Some combination of the courts and a handful of congressional Republicans growing a bit of a spine may have done the trick. Or maybe not.
Here are some excerpts from the June 2nd NY Times story reporting that Blanche was abandoning the fund:
Todd Blanche, the acting attorney general, said on Tuesday he was withdrawing a proposal to create a $1.8 billion fund to compensate people claiming to be victims of unfair prosecution, amid a revolt among Republicans who saw it as an ethical and political disaster.
“We’re not moving forward with the fund, period,” Mr. Blanche told members of a House Appropriations subcommittee. He repeated himself to make clear that he meant the fund proposal would be permanently withdrawn.
…
But Mr. Blanche said he would leave in place an order he signed last month that would, in effect, block the I.R.S. from investigating Mr. Trump, his family and his businesses for existing tax violations.
But the president continued to defend the fund. Not long after the Senate began debating the bill, Mr. Trump himself cast doubt on whether he had truly abandoned the fund, telling reporters at the White House that “I love it” and that “it’s so important.” He said he was unsure of its fate.
Similarly, from CNBC interview with Trump (posted 6/7/2026) when he was in western Wisconsin recently:
Trump sat with NBC’s Kristen Welker for a taped interview on a Wisconsin farm that touched on the Iran war, potential interest rate hikes, and the $1.776 billion “weaponization” fund that could financially compensate convicted violent rioters who attacked police officers on Jan. 6, 2021. Thousands of people stormed the Capitol that day, attempting to disrupt the certification of former President Joe Biden’s 2020 election victory.
The president said he would like to see the weaponization fund proceed despite setbacks that prompted acting Attorney General Todd Blanche to say it was permanently halted.
“If it was up to me, I’d pay them the kind of money that they deserve,” Trump said of the fund. “People have been destroyed. Lives have been destroyed. Many suicides, think of it.” The president has repeatedly made such claims without providing evidence.
…
Welker attempted to press Trump for evidence [of election fraud] to back up his claims, which he did not provide, and redirect Trump to a question about acting AG Blanche several times before the president pulled the plug on the interview and stormed off the set.
“Let’s call it quits because I’ve had enough, thank you, darling, have a good time,” the president said as he crushed his lapel mic underfoot on his way out.1
So, unless Congress can get an ironclad prohibition into legislation that Trump signs into law, it may rise again like a Phoenix. Here’s one effort to do that (by imposing a 100% federal tax on distributions).2 That may explain Blanche’s refusal to put his commitment into writing, per the Times reporting:
Democrats repeatedly requested that Mr. Blanche commit to rescind, in writing, his order creating the payout fund.
“You started it, you established it in writing, so it just makes sense to rescind it in writing,” said Representative Grace Meng, Democrat of New York.
“I’m not committing to put anything in writing,” he said, adding that he would abide by his word and would take the request under advisement.
Trump’s opposition to the prohibition almost surely explains why Republican senators beat back efforts by the Dems to eliminate or restrict the fund in the ICE funding reconciliation bill. NY Times story. That despite the fact that, according to the WSJ, more than a dozen Republican senators privately urged Trump to drop the fund. Privately urging and publicly doing your job and voting are, of course, two entirely different things.
What’s clear is that the IRS is going to give the Trumps and their businesses a pass on their filed tax returns. That’s a huge win for them and will likely let them skate on millions in potential tax liability. It could extend to future years, if they falsely claimed NOLs for any of the back years that carryforward. NY Times story excerpts:
Senate Republican anger about President Trump’s $1.8 billion fund for people who claim to be victims of federal overreach was loud and apparent.
It held up the Republican agenda in Congress for weeks, and during a marathon voting session on Thursday and early Friday, several Republicans voted to end the fund, though those efforts failed. Still, the furor forced the acting attorney general, Todd Blanche, to announce this week that he was abandoning it entirely.
Not so for the sweeping protections from I.R.S. audits that Mr. Blanche also ordered up for Mr. Trump and his family. On that front, Republican reaction has been much more muted, and Mr. Blanche said the audit shield would stay in place. A Democratic effort to cancel the audit protection failed on a voice vote.
The result is that an apparently unprecedented and enormously valuable public benefit for the president has, so far, flown under the radar in Congress and passed into Mr. Trump’s hands without much protest from members of his own party.
…
“He’s been audited many, many times, and many of those audits have continued for years and years and years,” said Joseph J. Thorndike, a tax historian. “I have no reason to believe that any other president has had anything like this kind of relationship with the I.R.S., as a private citizen or president.”
In 2022, the House Ways and Means Committee, then led by Democrats, released several years of Mr. Trump’s tax returns, an effort that had to overcome a legal challenge by Mr. Trump that ultimately went to the Supreme Court. The committee also published information about how the I.R.S. had audited him.
The I.R.S. opened 10 audits of Mr. Trump and his holding company between 2019 and 2022, questioning a variety of his tax positions, according to the investigation. Among the major issues were the legitimacy of enormous business losses he routinely recorded on his tax returns, as well as whether a tax break claimed on his Seven Springs estate in New York was valid. I.R.S. officials visited the Seven Springs property in January 2022, after Mr. Trump had left office.
There are serious (ahem, academic) questions about the legality of the agreement. See this Tax Notes story (no paywall). Excerpts:
The May 19 order, signed by acting U.S. Attorney General Todd Blanche following the dismissal of Trump v. IRS, No. 1:26-cv-20609 (S.D. Fla. 2026), also likely exceeds the scope of what the Justice Department may do, legal and policy professionals told Tax Notes.
“There is no historical precedent for this kind of presidential immunity from the IRS,” Ajay K. Mehrotra of Northwestern University Pritzker School of Law said. “This is truly unheard of.”
…
Negotiations involving Trump to end tax audits of himself, his family, and his businesses could violate section 7217, which prohibits the president from directly or indirectly requesting the termination of a tax audit, Brandon DeBot of the Tax Law Center at New York University wrote in a blog post.
“Trump’s dirty deal has crossed the line into illegality,” Robert Weissman and Lisa Gilbert of Public Citizen said in a statement, adding that the agreement may put IRS officers at risk of breaking the law.
However, a potential violation under section 7217 would likely hinge on Trump’s involvement because that section doesn’t apply to the U.S. attorney general.
Abigail Bellows of Common Cause said the agreement could also violate the emoluments clause of the Constitution because Trump could benefit financially if there is a discharge of an outstanding large tax audit.
A later administration, I presume, could reverse that administrative decision, making it a matter of whether the SOLs have run on the respective issues. I assume for many of the most important ones (e.g., the issue about NOLs generated by Chicago building) they will have. But for newer returns (e.g., relating to the crypto income and so forth from this administration), it likely will not have.
This is yet another update on Trump v. IRS. The district court dismissed the suit after the plaintiffs filed a notice exercising their right to do so (with prejudice) before the defendants had made an appearance. The court went out of its way to make it clear that:
Because the Notice does not reference any settlement or include a stipulation of settlement, there is no settlement of record.
Judge Williams obviously did not want anyone to think she was complicit in the administration’s purported $1.8 billion “settlement” that creates the Trump slush anti-weaponization fund and attempts to immunize the plaintiffs (him, family members, and business entities) from some ill-defined set of criminal and civil liability, including potential federal tax liability relating to previously filed tax returns.
Retired judges join fray
I had assumed that this was the end of the story with regard to court proceedings in Judge Williams’ court. Wrong. A group of 35 retired federal judges filed a motion in the case under Rule 60 or as amici seeking the court to set aside the suits’ dismissal and to start an inquiry into the purported settlement, which it characterizes as a fraud on the court because the lawsuit was a pretext to access the DOJ’s judgment fund, etc.1
List of the judges – most are Senate confirmed retired district and court of appeals judges, but a few are magistrate or bankruptcy judges – appears in the Appendix to the motion. Judges J. Michael Luttig and Nancy Gertner are the first two listed and were the likely organizers. No surprise, since both have been vocal in the media regarding their concerns about the administration’s erosion of norms and the rule of law. Luttig, a Bush appointee, is a well credentialed conservative and Gertner, a Clinton appointee, is a liberal.
The Rule 7.1 certification from the motion has a nice touch of sarcasm:
Counsel for Movants have made reasonable efforts to confer with all parties given the circumstances. In light of the extraordinary circumstances of this case, any conference would be futile. Nevertheless, counsel for Movants still provided the parties with notice, and sought their position, by emailing Plaintiffs’ counsel and the Chief of the Civil Division for the United States Attorney’s Office for the Southern District of Florida shortly before filing this motion on May 27, 2026.
Prediction
I don’t like to make predictions because I’m usually wrong. But this is one case in which I’m not at all sanguine about the prospects of nixing the fund either via this effort or more realistically in Congress.
Court case
The obvious issue is does an ordinary citizen (I assume that is how one must characterize retired federal judges) have legal standing. The likely answer is no IMO. The judges say a court of appeals case, Kem Mfg. Corp. v. Wilder, 817 F.2d 1517 (11th Cir. 1987), stands for the proposition that a nonparty (presumably w/o standing) can bring a Rule 60 motion:
based on fraud on the court, and further recognized that in “extraordinary circumstances,” the non-party need not prove his or her “interests are directly affected by the final judgment[]” to do so. Page 7.
I can’t imagine that holds up in a non-case like this where presumptively the parties are not adversarial and there is no article III case in controversy at all. Standing is a constitutional doctrine to keep the courts from making decisions that are not judicial nature (i.e., resolving live disputes between adverse parties). Waiving it based on a civil rule (that’s what the judges are arguing for), where there is no article III case to start with seems inapposite.
In the alternative, the judges assert correctly IMO that the court itself (sua sponte, as they say) could investigate the alleged fraud and issue an order to void the settlement of the ginned up case, which almost certainly was filed after the SOL had run and did not meet Article III’s adversity requirements. The administration seemed fairly clearly to be (mis)using the court process, given the post-dismissal event of creating the settlement fund. Under those circumstances, the court must have some authority to protect its integrity. In essence, the retired judges want the court to proactively pick a constitutional fight with the executive branch over misuse of the judicial process. I suspect most judges will not want to pick that fight but why not try?
That path to voiding the settlement has some serious huddles to clear, any one of which will disqualify the effort:
Judge Williams must agree. I have no knowledge of her, but that requires some serious cojones/feistiness. That goes against the typical judicial grain, which is to stay in a narrow lane and only decide what is before you.
A panel of the 11th circuit court of appeals must also agree. DOJ/Trump would surely appeal.
If the first two hurdles are cleared, SCOTUS must agree. I can’t imagine finding five justices willing to do so. If the lower courts decline, discretionary review will be denied. If – wonder of wonders – both lower courts agree to take on the executive branch/president, the natural tendency, which is not wrong, is that this is fundamentally Congress’s responsibility to police. There are already some signs of life that Congress may consider the settlement fund a bridge too far, which (even if they are unsuccessful) gives the Court a natural, not-my-job, out. Standing and case-in-controversy rules are all about constraining judicial power, not provoking constitutional disputes, yada, yada. It will be an easy decision for a Court that has been exceedingly deferential to this president.
Congressional action
I would guess there are mildly better prospects that Congress will somehow rein use of the fund in, if not outright prohibit it. But the problem is that use of the judgment fund (or whatever its proper name is) means that Congress must pass a law to do so. That means Trump has to agree to it (unlikely) or they have to pass it over his veto (even more unlikely).
One might assume that the reconciliation bill under consideration in Congress now is must-pass legislation that gives Congress leverage over Trump. I doubt that is true because the only agencies that have not been funded are ICE and CBP, whose operations can continue under the generous appropriations in OBBBA for those functions. Moreover, congressional Republicans have been remarkable supine when it comes to Trump’s demands and ICE and immigration enforcement are particularly susceptible to his demagoguing of the Republican base. I will be surprised if more than superficial limits are placed on the fund, which will give it a congressional imprimatur against other legal challenges. That’s my two cents.
5/29 Update
The probability that the first hurdle will be cleared has increased substantially. Judge Williams issued an order in response to the retired judges’ motion, reopening the case. So, she must be up to the task of taking this on. I’m also sure that Trump was hoping to draw Ailene Cannon when the suit was filed. Thankfully, that didn’t happen.
Excerpts from her order:
A court is empowered to investigate serious misconduct as a collateral issue within the purview of Rule 11 and determine “whether an attorney has abused the judicial process.” * * *
…
Here, the non-party movants advance grievous allegations that Plaintiffs voluntarily dismissed this litigation solely to avoid judicial scrutiny of a lawsuit that “was collusive from the start” and was only filed to provide the imprimatur of legality for an unlawful settlement. They point to the fact that the settlement in question includes a “three-paragraph addendum . . . [that] purports to ‘forever bar[] and preclude[]’ the United States from pursuing claims that could have been [otherwise] asserted against] Plaintiffs,” and highlight the fact that Defendants did not “even try[] to defend against Plaintiffs’ claims” despite their active opposition to nearly identical claims in other litigation. Finally, the non-party movants assert that Plaintiffs’ claims were “clearly untimely” and therefore untenable.
Accordingly, it is ORDERED AND ADJUDGED that Plaintiffs shall file a response to the Motion on or before June 12, 2026, detailing their position on the matters set forth in the Motion, including (1) the charges of collusion and whether the Parties are truly adverse; (2) the assertion that the dismissal in this case was premised on deception by the Parties; and (3) the question of whether the case should be reopened because the Court was the “victim of a fraud.” [Citations and footnotes omitted.]
Stay tuned to see what comes of this. I hope that Todd Blanche or some other DOJ political appointee gets grilled in open court on the particulars and how there can be a legitimate settlement here. Conversely, I hope that this is not an excuse for Congressional Republicans to cowardly take a pass – as in “the courts will handle this, so we can (once again) look the other way.”
The speculation proved correct. A one-page addendum to the “settlement agreement”1 of Trump v. IRS, washed away the ongoing tax audits of Trump, the family businesses, and Eric and Don Jr., as well as any potential audits for tax returns filed before May 19, 2026 (gee, I wonder if they filed for extensions for tax year 2025?).
The NYU Tax Law Center has an explanator on the lawsuit and settlement agreement, including why it likely violates various provisions of federal law. Of course, because of standing rules, enforcing the law via court action is another matter.
The tax audit protection appears as a minor after-thought or concluding feature (a la Steve Jobs’ “one more thing”) of a broad attempt to provide sweeping immunity for a broad, but ill-defined set of criminal and civil actions – past and apparently future.2 The language (for a legal document) is convoluted and odd (e.g., “matters that * * * could have been raised * * * could be pending” incorporates what can only be characterized as speculation or conjecture).
Here’s the language:
FWIW, Lawfare and Weaponization as defined in the settlement agreement, which the addendum means:
the sustained use of the levers of government power by Democrat elected officials, political and career federal employees, contractors, and agents in order to target individuals, groups, and entities for improper and unlawful political, personal, and/or ideological reasons (“Lawfare” and “Weaponization”). Other well-known examples of Lawfare and Weaponization include the Biden Administration’s abuse of the FACE Act, the Biden Administration’s wrongful labeling of certain parents as domestic terrorists, and the IRS’s targeting of groups based on improper ideological criteria.
Note that only “Democrat elected officials” can conduct defined lawfare, along with federal employees, contractors, and agents. The last clause regarding IRS targeting for “improper ideological criteria” appears to be an invitation to the Tea Party groups whose tax-exempt determination letters were delayed during the Obama administration to apply for compensation.
The creativity of this administration in finding new ways to line the pockets of Trump family, friends, and supporters knows no limit.
The IRS is part of the executive branch, but the agency has historically tried to keep its enforcement operations free from political interference, and even the appearance or prospect of blurred lines caused controversies during the Nixon and Obama administrations. The agreement between Trump as a taxpayer and the Trump administration is an unprecedented blending of personal and governmental interests, with a Trump-appointed official agreeing to remove the president, his family and his businesses from tax enforcement.
…
Tuesday’s addendum includes broad language in which the U.S. pledges to cease pursuing any matters that are or could be pending with the IRS and with other agencies or departments. The statement includes family members and “related or affiliated individuals,” although it doesn’t clearly define those terms.
“I am unaware of a single precedent where the IRS has agreed in advance to permanently forgo examination of previously filed tax returns for a specific person or business,” said Danny Werfel, who was IRS commissioner under former President Joe Biden. “People expect the same tax rules and enforcement framework to apply to everybody.”
…
The tax code prohibits the president and the heads of executive agencies—except the attorney general—from directing audits or the termination of audits. Violating the law is a crime punishable with prison time. It isn’t clear whether and how that prohibition would apply to the settlement addendum released Tuesday.
Also uncertain is whether anyone would have standing to challenge the agreement in court. Congress could step in, but such a move likely would require Republican votes over Trump’s objections.
The NY Times story (written by the Adam Liptak, the SCOTUS reporter for the Times) on the overall issue covers more sweeping ground, touching on the constitutional issues raised, the source of funds (the judgment fund), and historical precedent. Excerpts from the story:
The whole enterprise was a jarring shock to the conventional understanding of the constitutional system, raising what legal experts said were profound questions about presidential power. If the arrangement is allowed to stand, they said, Mr. Trump will have managed simultaneously to thwart Congress’s power of the purse and the ability of the courts to police the separation of powers.
Indeed, Tuesday’s addendum [Trump’s tax forgiveness/immunity] flirted with a grave question with no settled answer: Can the president pardon himself?
…
“It is really difficult to think about how to frame a judicial challenge to what the president has done here,” said Samuel R. Bagenstos, a law professor at the University of Michigan. “That doesn’t mean people aren’t trying, and that doesn’t mean something might not succeed.”
Legal challenges are indeed starting to roll in. Two police officers who defended the Capitol on Jan. 6, 2021, sued the Trump administration on Wednesday in an attempt to block the new fund, though it is not clear that they have standing to challenge it.
…
Professor Bagenstos, who served as the general counsel of the Office of Management and Budget and of the Department of Health and Human Services in the Biden administration, wrote in January about the danger posed by the Judgment Fund.
“An administration that wished to spend money on projects or beneficiaries not authorized by Congress,” he wrote, “could simply encourage its desired recipient to bring a lawsuit against the United States and then settle that lawsuit (no matter how frivolous) by making a payment from the Judgment Fund.”
…
And the suit was palpably collusive, ordinarily a reason for a judge to toss a case.
Tuesday’s addendum to the settlement, the codicil purporting to immunize Mr. Trump and his family, raised its own legal questions.
“It’s a really extreme and shocking kind of document,” Professor Bagenstos said.
Even under the Supreme Court’s 2024 decision conferring broad immunity on Mr. Trump for his official acts, purely private conduct, as the filing of a tax return would seem to be, is fair game for prosecution after a president becomes a private citizen. It is not clear whether the addendum could block a future administration from pursuing such a claim.
A series of settlements by the Obama administration that involved dipping into the same fund Mr. Trump now wishes to use illustrate the dynamics of Congress’s open-ended delegation.
Take a lawsuit brought by Native American farmers in 1999 over what they said was discrimination by the Agriculture Department. A judge denied class certification for monetary claims, meaning the government probably did not face a risk of a large court judgment. Still, after more than a decade of litigation, the government in 2011 agreed to settle the suit.
When not enough Native Americans submitted claims, the government paid out only $300 million of $680 million it had agreed to set aside. It redirected the balance to nonprofit groups serving Native Americans.
An appeals court allowed the payment to be made. In a dissent, Judge Janice Rogers Brown of the U.S. Court of Appeals for the District of Columbia Circuit said the majority had taken perverse pleasure in letting the administration do as it wished.
“Perhaps one day, I will possess my colleagues’ schadenfreude toward the executive branch raiding hundreds of millions of taxpayer dollars out of the Treasury, putting them into a slush fund disguised as a settlement, and then doling the money out to whatever constituency the executive wants bankrolled,” she wrote. “But, that day is not today.”
That settlement, though, bore only a superficial resemblance to the deal announced this week. It arose from actual litigation. And Mr. Obama did not stand to directly gain from it.
My catty comments
This whole episode – in particular the use of the judgment fund – illustrates how laws are typically written that presume basic good faith and norm following practices by government officials, but that can be exploited by unscrupulous executive branch officials. Trump and his people are unusually creative in finding those gaps and using them for their personal and political benefits.
We’ll see if Senate Republicans actually have a red line. Majority Leader Thun was quoted as saying he wasn’t “a big fan” of slush fund/settlement agreement. I guess that’s a condemnation in a world in which upsetting the dear leader risks being treated like Cassidy or Massie. As tiny evidence of a backbone, the Senate appears to be showing some resistance. How? By leaving town, of course. We’ll see if they follow form and knuckle under when they return or if they’re actually willing to put limits on the slush fund. I wouldn’t be surprised if they abandon the reconciliation bill (making ICE and CBP rely on the OBBBA’s money) rather than taking a series of tough votes on Democrats’ amendments during the vote-a-rama.
We didn’t need any more evidence of the administration’s or the GOP’s utter lack of concern about out-of-control government spending (as they typically put it) or the growing federal debt, but this provides it. That was the asserted reason for DOGE cuts (taking medicine and vaccines away from poor individuals in third world countries, cutting medical and scientific research midstream, laying off civil servants, etc.). Now, if the widespread assumption is true that pardoned J6ers are a prime beneficiary of this largesse,3 we’re handing out government to people convicted of beating police officers and sacking the US capitol.
Payments from the settlement fund likely are taxable to the recipients under general tax law rules in most cases. Good luck with DOJ issuing 1099s. The Tax Law Center makes the plausible argument that the entire fund allocation is taxable to the plaintiffs (i.e., Trump et al).
Given the likely insider trading in oil futures that appears to be based on information derived from the administration sources as well as Trump’s prescient stock trades, I wonder if hyper aggressive tax returns were filed last month in anticipation of the audit immunity by Trump, Don Jr., Eric, and/or the businesses. It would be consistent with appears to be the practice.
Gift tax returns may have been filed and the ability to challenge the reported valuations, which may also govern subsequent estate tax returns, will have evaporated if this is legal.
Similarly, the various enterprises they have been engaged in (consider the funding of their crypto operations as one example), there are sure to be a host of opportunities to under report income and so on. No worries, you have an Audit Immunity card.
Continuing to think about the implications of all this makes my mind melt down.
Notes
It’s hard for me to characterize something as a settlement when the same person is ultimately calling the shots on the putative dispute that is being settled – hence, my scare quotes. ↩︎
If this were legal, it’s better than a pardon. I assume that the Trump (following and likely going Biden one better) will issue blanket, sweeping pardons to a host of family, friends, and supporters just before the end of his term. But pardons (I presume without doing the legal research) can only be issued for past actions. The addendum appears to apply to future actions, including stuff happening after Trump leaves office. Moreover, what happens if Trump drops dead before he can issue pardons? One wouldn’t want to count on Vance to do so, I suppose. My natural assumption is that this cannot be legal, at least with regard to actions happening after the effective date. ↩︎
For comic relief, read this Bulwark piece on the fight among the lawyers who have been representing J6ers in their efforts to get reparations that the settlement agreement has touched off. The media and Democrats in congress have assumed that the capitol rioters are intended to be principal beneficiaries of the fund. That is why current and former capitol police officers have quixotically sued to invalidate the fund. Act AG Todd Blanche, in his congressional testimony, refused to say who specifically will qualify to be compensated by the fund, of course. ↩︎
Plaintiffs have dismissed the case, which they have the right to do since defendants have not made a filing in the case, per this notice. So much for getting a judicial patina for their slush fund. They could read the judicial tea leaves as clearly as any of us.
The district judge’s likely plan to dismiss the case (probably done with a stinging memorandum that unmasks the corrupt enterprise) must have convinced them that cutting and running was the best course of action. Unfortunately, that may not mean that we won’t still see the fund appear. Here’s an excerpt from the NYTimes story on the dismissal (my emphasis added):
President Trump withdrew his lawsuit demanding at least $10 billion against the Internal Revenue Service in an effort to skirt oversight by the judge in the case as he moves toward arranging a fund to funnel taxpayer money to his allies and supporters.
The dismissal is the latest legal turn in an extraordinary attempt by Mr. Trump to win billions of dollars in damages from a government agency he controls.
Administration officials have in recent days considered creating a roughly $1.7 billion fund to compensate political allies, but not Mr. Trump directly, who say they were wronged by the Biden administration. That fund appears to be part of private deal, reached outside the purview of the court, to resolve both Mr. Trump’s I.R.S. lawsuit and his separate administrative claims against the Justice Department, according to people familiar with it who described it to The New York Times last week.
The move by Mr. Trump was a remarkable end-run around the legal system, effectively stripping Judge Kathleen M. Williams, who has been overseeing the case in the Southern District of Florida, of her normal role in approving a formal settlement agreement. By dismissing the case in its entirety, Mr. Trump essentially freed his hand to reach a deal with administration officials without any judicial oversight.
I assume that must mean they have a theory that an implied or otherwise preexisting authorization and appropriation permit them to spend the money. IMO this is the converse of DOGE reneging on spending money under specific authorizations and appropriations (e.g., for USAID operations). So much for Congress’s once vaunted power of the purse. It appears POTUS can spend or refuse to spend pretty much without much limit.
A few minutes after I wrote the above, DOJ announced the creation of the fund with the catchy $1776 million amount. It cited the precedent of Obama’s compensation for victims of racial discrimination by USDA, SBA, and other agencies. Here’s the quote from the DOJ press release:
There is legal precedent for such a Fund, most notably the “Keepseagle” case where the Obama Administration created a $760 million fund to redress various claims alleging racism against the federal government over a period of decades.
In Keepseagle, hundreds of millions of dollars remaining in the fund were distributed to non-profits and NGOs that never made claims, whereas any money remaining in The Anti-Weaponization Fund will revert to the federal government. The Obama DOJ settled by putting $680 million from the judgment fund into a bank account for a single claims administrator to dole out. In Keepseagle the remaining money—which ended up being over $300 million—was distributed to the entities that had not even submitted claims.
In addition, establishing the settlement fund appears to have caused the Treasury Department’s general counsel to resign. Per the NYTimes:
The top lawyer at the Treasury Department stepped down on Monday in the wake of the creation of a $1.8 billion “anti-weaponization fund” that could soon make payments to President Trump’s political allies, according to three people familiar with the move.
Brian Morrissey, the Treasury’s general counsel, resigned from the position seven months after he was confirmed to it by the Senate and just hours after the Trump administration announced the fund on Monday.
That seems like an appropriate response to legal looting of the treasury like this.
Original Post
Media coverage (e.g., NYTimes, ABC, Bulwark) speculates that the court’s order directing the parties to file memoranda addressing whether the court has jurisdiction will stimulate a settlement of the case. The court issued its order, I think it is fair to say, because that is what it was concerned would happen: the defendant (IRS/DOJ/US government) had not filed an appearance, while the plaintiffs (Trump, his businesses, and two elder sons) had requested a global extension to facilitate settlement discussions. The court explicitly mentions that motion in its order.
As noted in my April IRS update, another factor was likely the court’s sua sponte motion to appoint amici to weigh in the jurisdictional issue (i.e., given Trump’s potential control of both sides of the lawsuit, is there an article III case and controversy?). That memorandum has been filed. Some excerpts from it (citations and footnotes omitted):
This case is unprecedented: A sitting president seeks monetary damages for alleged harm to his personal interests from an executive agency that he controls. That presents significant Article III subject matter jurisdiction concerns.
While this scenario is novel, the governing legal principles are not. The question at hand is whether the circumstances of this litigation present the kind of real and genuine dispute that is suitable for judicial resolution in an Article III court. And the Constitution and the applicable case law indicate that the Court should answer that question by conducting a fact-specific inquiry focused on (1) the relationship between the parties, and in particular whether they are sufficiently independent of one another, and (2) whether the Court could enter a judgment in this case that would have any concrete effect.
…
The Supreme Court has looked to principles of control in the context of a suit between a sitting President and a component of the Executive Branch. In United States v. Nixon, the Court held that a dispute between two executive-branch actors—the President and the Special Prosecutor appointed to investigate Watergate matters—could be heard by a federal court. The Court found adequate adversity because the Special Prosecutor was sufficiently independent.
…
With respect to these Defendants specifically, the President’s capacity for control is extraordinary. As a member of the President’s cabinet, the Secretary of the Treasury “is and must be the President’s alter ego in the matters of that department where the President is required by law to exercise authority.” Likewise, the IRS Commissioner is appointed by the President to a five-year term, and “[t]he Commissioner may be removed at the will of the President.” And President Trump has shown he is willing to exercise that authority. In August 2025, two months after IRS Commissioner Billy Long’s confirmation, President Trump removed him without providing a reason.
…
There is also reason to believe that the President is, in fact, exercising his control over the Defendants in this litigation. President Trump’s own statements suggest that he believes he has control over the Defendants and the DOJ lawyers charged with defending this case. On January 31, 2026, two days after President Trump filed the Complaint, a reporter asked him, “what it’s like to be on both sides of a lawsuit.”8 He responded, “It’s very interesting. I have another one where, you know, I virtually won the Mar-a-Lago break-in suit, and, you know, I have to work out some kind of a settlement. I’m supposed to work out a settlement with myself.” When asked on February 4, 2026 whether he could direct the Attorney General and the Treasury Secretary to pay him, President Trump responded: “[W]hat I would do, tell ‘em to pay me, but I’ll give 100% of the money to charity. I don’t want any of that money.”
The contrast between Defendants’ conduct here and the government’s conduct in related litigation also suggests that the President may have control over DOJ’s litigation conduct. The parties are engaged in settlement negotiations in this case, even though DOJ has asserted substantial defenses in other cases stemming from Mr. Littlejohn’s disclosures of tax information—including cases litigated during President Trump’s current term. For example, DOJ has argued that, because Mr. Littlejohn was a government contractor rather than an officer or employee of the United States, sovereign immunity was not waived.
…
Although President Trump sues here in his individual rather than official capacity, that does not affect the control analysis. The personal nature of the lawsuit is a notable point of distinction from United States v. Nixon, where the Supreme Court treated the dispute as one between the Special Counsel and the President in his official capacity. * * * [T]he fact that President Trump is a Plaintiff in his personal capacity does not diminish his ability to control the Defendants here in his official capacity as President; rather, President Trump enjoys ample actual and practical authority to control the Defendants. These indications of control are in stark contrast with Nixon, where the legal and practical independence of the Special Prosecutor, enshrined in regulation and evidenced by the litigation conduct of the parties, was central to the Supreme Court’s decision that the dispute before it was justiciable.
…
Because the relationship between the parties is essential to the adversity inquiry, it could be useful for the Court to obtain additional information about the degree to which Defendants and their lawyers are insulated from the President. The Court might request information from the parties about what measures, if any, they have taken to ensure that Defendants and the DOJ lawyers assigned to this case are free to exercise independent litigation judgment and act solely in the best interests of Defendants. It is particularly important to evaluate whether they have any protection if they take steps that could result in the defeat of the President’s claims. Any such measures must be considered against the backdrop of the President’s public assertions of direct control over the government defendants and their attorneys, as well as his previous public statements regarding his control over this particular matter.
I can see why Trump’s lawyers (and the political appointees at Treasury, IRS, and DOJ) would want to expedite a resolution. I doubt that they want a pesky federal district court judge asking questions about the relationships between the WH, DOJ, and IRS and whether defendants’ lawyers, assuming they present a vigorous defense (as FWIW, they are ethically obligated to do) which would likely defeat the claims,1 will be protected from retaliation.
I suspect there is also a high probably that the judge would dismiss the case because she does not have jurisdiction. That would eliminate the option (a main purpose, I assume, of the litigation) of putting a judicial patina on the misappropriation of the government funds to benefit the family and MAGA supporters.2
Based on the Times and ABC news articles, the speculation about a settlement appears to be twofold:
Creation of a $1.7 billion fund to compensate victims of the Biden Administration’s weaponization of the US legal system, such as the prosecution of January 6th defendants. The sky’s the limit here in defining who victims are – at least, if Trump’s doling out pardons is any guide of what is likely to be considered meritorious (such as corruption convictions or financial crimes) and victims of the Biden administration.
Resolution of the IRS audits of Trump and his business entities. That is something that has been off the radar for a while. This Tax Law Center blog post points out that DOJ does not have technical legal authority to do that. If that is what the WH wants, IRS leadership likely will make it happen – whether as part of a settlement or otherwise. I also suspect if it happens, it will be leaked to the media.
While the exact terms of the settlement are still being finalized, sources have described the proposed compensation fund as a hybrid between a victim compensation fund — similar to the civil claims process that followed the 2010 Deepwater Horizon oil spill — and a truth-and-reconciliation-style commission. Examples of truth and reconciliation commissions in other countries include governmental acknowledgment of wrongdoing related to apartheid in South Africa and Canada’s Indian residential school system.
Over the last year, the Justice Department has utilized a so-called “Weaponization Working Group” to examine what it has described as abuses of power by the Biden administration, identifying cases of alleged anti-conservative and anti-Christian bias — claims that are disputed by former officials.
Trump’s proposed commission is expected to be composed of five members who would issue monetary awards based on a majority vote, and the process for awarding money and the identities of the recipient could be kept private, according to sources.
Any remaining funds would be turned back over to the government shortly before Trump leaves office, sources said.
This appears intended to set up a formal process to award money to folks like Mike Flynn and Ashli Babbitt’s family without the need to file a lawsuit to obtain a settlement. The former’s prosecution and the latter’s shooting were both done during the first Trump administration and so could not be considered Biden administration weaponization, I guess.
Notes
It seems pretty clear that the claim is barred by the SOL without even getting to the merits. ↩︎
At least Hunter Biden (blatantly corrupt as he was) stuck to grifting from private foreign businesses, rather than looting the treasury itself. See Isaac Saul’s extensive list (but not comprehensive) of the administration’s self-dealing and corruption. ↩︎
The Trump administration’s budget for FY 2026 proposes $1.4 billion in more budget cuts for the IRS, according to Bloomberg:
“The Budget proposes to streamline IRS operations utilizing technology improvements to help focus the IRS on providing high-quality customer service while ensuring the tax laws are fairly administered,” the document said. The administration also highlighted its decision to end the IRS’s free filing tool Direct File and the almost 30% workforce cuts.
Most of the roughly $9.8 billion in proposed annual funding for the IRS is divided into three buckets: $3.13 billion for taxpayer services, $4.1 billion for enforcement, and $2.6 billion for technology and operations support.
Taxpayer services was the only category with a slight increase, from $3.04 billion in 2026, while enforcement and technology saw drops, according to the appendix.
The $1.4 billion cut would be larger than the $1.1 billion cut that Congress imposed on the agency last fiscal year. But it is less than what Trump or the House Republicans proposed to cut. So, one can choose between whether the glass is half full or two-thirds empty.
The article also reports that the administration proposes to cut the Inspector General’s (TIGTA’s) budget by $27 million or 16%.
The Tax Law Center described the budget as a continuation of “this Administration’s chaotic, self-contradictory, and damaging approach to tax administration.”
House’s proposed IRS budget
The House Republicans are on the same page, naturally.
On April 16th, the House Appropriations Committee released its budget for the IRS. It would reduce the FY 2027 funding by $1.4 billion over the 2026 level, about matching the administration’s proposed cut. Most of the cuts would, of course, fall on enforcement with taxpayer services being held constant (i.e., they would eat both inflation and the augmentation from IRA funding used in 2026). Here’s how Thompson Reuters describes the proposal:
Taxpayer Services: The fiscal ’27 bill would maintain the current funding level of nearly $3.04 billion for taxpayer services. The Trump administration had asked for a small boost to $3.13 billion. The bill also maintains the combined $86 million allocations to the Tax Counseling for the Elderly Program, low-income taxpayer clinic grants, and the Community Volunteer Income Tax Assistance Matching Grants Program, and funding for the Taxpayer Advocate Service at $271 million.
Enforcement: House Republicans would cut enforcement funding to $3.6 billion. The fiscal ’26 bill had allocated nearly $5 billion for enforcement, while the Trump administration requested $4.1 billion for FY 2027. The House bill directs $35 million in funding to the Criminal Investigation Division for investigative technology.Technology and Operations: The fiscal ’27 bill boosts tech and operations funding to $3.6 billion for FY 2027, well over the $3.16 billion provided for FY 2026. The House proposal also exceeds the Trump administration’s request of just $2.6 billion. Of that, the House would set aside $1 million for “research,” and $10 million for equipment acquisition and facility construction, repair, and renovation.
As usual, any partial salvation of the revenue collection and enforcement functions will depend upon the Senate.
Consequences of cuts
On April 13, the Yale Budget lab put out an estimate of the effects of the IRS budget cuts on revenue collections. They estimate that the almost 28k reduction in employees (3,600 revenue agents) and $20 billion budget reduction, in combination, will increase the budget deficit by $861 billion over ten years. Their estimate is more aggressive than that used by CBO in its official estimates, because they include deterrence and other effects. They described this as “conservatively estimate[ing] the return to deterrence to be 2.5 times each dollar recovered directly through audits.” Not sure how they’re sure that’s a conservative estimate.
They point out the obvious that the additional complexity of many of OBBBA’s provisions and expanded data sharing (i.e., the IRS reneging on its confidentiality pledge to ITIN filers) will also have negative effects on revenues.
Plan to fire whistleblower
Tax Notes (no paywall) reports that the IRS will fire a high-profile special agent who is leading efforts to audit abuse of Puerto Rice tax incentives and Maltese pension plans. IRS Seeks to Fire Lead Agent in Malta, Puerto Rico Probes:
The IRS has begun the process of firing a special agent leading investigations into abuse of Malta pension plans and Puerto Rico’s Act 60 tax incentives, raising questions about the future of those enforcement efforts.
A source familiar with the matter indicated that Brian J. Visalli’s termination was not just expected — it was scheduled.
…
One tax professional, who spoke on the condition of anonymity, said they had heard of the agent’s pending termination and that there is a sense of relief among those representing clients in the investigations. The source added that the agent was known for holding the line.
Michael Welu, who retired from the IRS in 2022 as a fraud enforcement adviser, said that while employees at the agency normally “go after the low-hanging fruit because it’s easy,” Visalli has pursued cases against large businesses and wealthy taxpayers who cheat on their taxes.
“He’s the only one really going after the big fish,” Welu said.
…
In a statement to Tax Notes, an IRS-CI spokesperson said: “Federal law prohibits the IRS from commenting on personnel issues. What we can say is that IRS Criminal Investigation continues to aggressively pursue tax schemes involving offshore entities, Maltese pension structures, and Puerto Rico Act 60 incentives. IRS-CI continues to dedicate resources, including coordinated enforcement efforts, to address abusive tax arrangements.”
…
The development follows a Tax Notes investigation into Treasury Assistant Secretary for Tax Policy Kenneth Kies’s work on behalf of advisers’ Malta pension plans.
Before Kies joined the second Trump administration, his firm, Federal Policy Group LLC, was engaged by a company, Water Structures LLC, that offered Malta pension plans. Kies strategized with advisers about how to resist IRS efforts to curb abuse of the structures.
Trump lawsuit
Trump is in settlement negotiations on his $10 billion lawsuit against the IRS. FWIW: he ultimately controls both sides of the negotiation, so he’s negotiating with himself. And the liability (i.e., the illegal release of his tax information) was done by a contractor of the IRS that he controlled (in his first term). So, if you’re a true believer in the unitary executive theory (John Roberts, et al), this is world championship level self-dealing. I hurt myself, so I deserve compensation in an amount I will determine.
Lawyers for Donald Trump and the Internal Revenue Service are in talks to settle the U.S. president’s $10 billion lawsuit against the tax collection agency for leaking his tax returns to the media in 2019 and 2020.
In a Friday filing in Miami federal court, the lawyers asked a judge to put the case on hold for 90 days “while the parties engage in discussions designed to resolve this matter and to avoid protracted litigation.” A pause “could narrow or resolve the issues efficiently,” they added.
The White House declined to comment. The Department of Justice, which represents the IRS, declined to comment.
A delay would give Justice Department lawyers more time to address conflicts of interest posed by the case, given that Trump is suing his own government.
Justice Department lawyers report ultimately to the president, while the IRS and the Treasury Department, which is also a defendant, are part of the executive branch.
A court order in the case raises an interesting question. Judge Williams, sua sponte, expressed concerns as to whether the court has subject matter jurisdiction and appointed some blue-chip lawyers (Don Verrilli is one) from three separate law firms as amici to assist her in deciding. Since Trump is on both sides of this dispute, that seems an obvious threshold jurisdictional question: is there really an article III case and controversy here? Stay tuned, the amici’s memorandum is due on May 21st.
Bisignano and the boxer(s)
The WSJ has a story (paywall) about Frank Bisignano, the de facto head of the IRS (Bessent appointed him CEO). He’s into sports memorabilia in a big way and is in litigation over ownership of a pair of fight-worn Mohammad Ali boxing trunks (I assume that’s the analogous term to game-worn for football, baseball, and basketball jerseys):
Eric Inselberg, a sports memorabilia buff and entrepreneur, said he gave the prized gear to his former friend Bisignano years ago as collateral for a $500,00 loan. Inselberg said he settled the debt but Bisignano has nonetheless refused to return the trunks, which he estimates are now worth $800,000.
Bisignano claims he didn’t receive them, wasn’t friends with Inselberg, and the trunks are worth that much anyway.
The story casts Inselberg’s side as follows:
Inselberg, in a deposition, described Bisignano as an “apex predator” who is holding on to the shorts out of spite. “He’s vindictive,” Inselberg said. “He thinks he can do whatever he wants.”
Bisignano, he said, is a huge sports fan who spends big on memorabilia but is ashamed to admit it.
The case turns on whether and when Inselberg can prove he gave the trunks to Bisignano. The trial was set to begin in March but is delayed until September.
The story describes a tour of Bisignano’s home (a “mansion”) in New Jersey that included a “replica of J.P. Morgan’s ornate personal library as well as a urinal in a bathroom.” (IMO: weird consumption preferences + too much money.) A witness claimed to see Ali’s trunks in Bisignano’s “man cave” on the tour. The trial (assuming there actually is one) supposedly will turn on the credibility of the witness’s testimony.
None of this instills confidence in Bisignano’s personal qualities to lead and manage complicated government agencies (he’s running both the Social Security Administration and the IRS), as far as I’m concerned.
Phone service
The Center for Taxpayer’s Rights did some testing of the IRS phone service during the 2026 filing season, randomly calling the various different phone lines (>100X times) to see how long the wait times were, as well as the number of “curtesy disconnects.” This Tax Notes article (no paywall) by Nina Olson, board member of CTR and former Taxpayer Advocate, describes the results. The IRS’s own statistics show a significant decline from the 2025 filing season, which is no surprise given the agency’s staffing losses.
Olsen herself independently in early April did some checking:
In a particularly benighted (read, masochistic) effort, on Friday, April 3, I called each of the 8 lines we were testing. I spent 5 hours and 31 minutes on hold with the IRS on that day. The TAC line answered within 3 minutes, the NTA [National Taxpayer Advocate] line within 7 minutes, and the AQC [Automated Questionable Credit] line disconnected me within 2 minutes. The ACS [Automated Collection Service] business and individual lines, on the other hand, tormented me with music and messages for 2 hours and 3 minutes, and 2 hours and 1 minute, respectively.
This simply confirms what must be the obvious effects of budget cuts and chaotic personnel policies this administration has adopted. As context, it is useful to keep in mind that taxpayer services has been cut much less than other agency functions, such as enforcement, IT services, and so forth. This is bad news for the fisc.
Getting in the anti-fraud biz
On April 22nd, the IRS put out a Whistle Blower Alert (a new category of IRS alerts, I think), Report misuse of federal funds and grants. My reading of the alert suggests that the IRS is going after fraud in use of federal government grants generally, that is, not necessarily related to tax law violations or other things under the traditional purview of the IRS.
The IRS is seeking information from the public regarding the misuse, diversion or fraudulent use of federal funds and grants by tax-exempt organizations, individuals, and businesses.
To be fair, many items listed under “What You Can Report” are arguably tax law related but some are very general. For example, the first six items on the list do not appear to be necessarily related to tax-exempt orgs, over which the IRS has supervisory responsibility, or tax law matters:
False statements or misrepresentations in grant applications.
Misuse of federal funds and grants including the diversion of funds for personal use.
Self-dealing or undisclosed conflicts of interest.
Improper payments to insiders, officers, or related parties.
Failure to perform required services or deliver promised outcomes.
Falsified reporting to federal agencies.
My observation is that if “failure to * * * deliver promised outcomes” under federal grants (5th bullet) is reportable, then, some very high percentage of federal grants are likely in play. Given the stresses on the agency, putting them in this sort of open-ended business of detecting government fraud under the whistle blower statute is imprudent, at best. But I guess that’s the world the federal government is now operating in.
2026 filing stats
The 2026 filing season report statistics show the effects of OBBA, but I seriously doubt that this will bail the GOP congressional candidates out of from possible revenge by an electorate that is increasingly unhappy (according to polls) with the current state of the affairs. The average refund increased by 11.3% but the $333 amount will only go so far to cover the increase gas and other prices resulting from the Iran War, I’d guess, in most voters’ minds.
This post updates a post I wrote over five years ago, Tax Tail Wags Investment Dog, about the tax effects of Exchange Traded Funds (ETFs). I decided an update was in order after seeing the massive flows into ETFs in the first quarter of 2026 and that the authors had updated the paper on which I based my 2021 post with four more years of data. The tax effects of ETFs are clearly happening faster and are larger than I expected.1 That is bad news for federal and state income tax revenues.
In a nutshell, the ETF structure provides a classic example of how financial engineering, the realization requirement, and step up in basis undercuts taxation of capital gain income – especially when Congress fails to constrain or limit efforts by the tax planning industry to exploit seams in the tax code. That is likely reducing federal tax revenues by over $20 billion/year and growing.
The favored taxation of ETFs is largely due to four factors:
An unintended effect of a provision of the Tax Reform Act of 1969
Favorable decisions by the SEC
Exploitation of the literal language of the tax law
Inattention by Congress
It is clear now that the effects, unless addressed by Congress, will lead to the loss of hundreds of billions of dollars in tax revenue. This has, as far as I can tell, been largely flying under the radar.2 It is also unintended and undercuts the fairness and efficiency of the tax system. But we’re stuck with it, absent a seismic change in Congressional attitudes and practices.
Mutual funds, which ETFs are a subset of, are subject to form of pass-through taxation. They are pooled investment funds owned by their shareholders. When the fund sells appreciated securities and recognizes gain, that income is passed-through and taxed to the shareholders.3 Thus, even though the shareholder has done nothing he/she may receive distributions of capital gains (or dividends for short term gains) reported on a Form 1099, because the fund itself has sold securities.4 Interest and dividends earned by the funds are similarly subject to pass through taxation, losses are not (they offset gains at the fund level).
For traditional mutual funds, distributions to satisfy shareholder redemptions are almost always made in money.5 However, the Tax Reform Act of 1969 included a provision that allows funds to instead provide for redemptions “in kind” – i.e., to hand over some of the fund’s portfolio securities to the shareholder. Congress’s rationale for making this minor change is unknown; there isn’t any written legislative history for it. It was done when Congress started to limit the ability of corporations to distribute appreciated property tax free (the General Utilities doctrine).
Making in-kind redemptions is rarely done by traditional mutual funds, by all accounts.6 That changed with the advent of ETFs in 1993 (i.e., 24 years later); they routinely do it as part of their general mode of operation.
ETFs trade on public stock exchanges. And, unlike closed-end funds, the number of outstanding ETF shares can go up or down based on market demand (i.e., they’re open-end funds). To keep their net asset values or NAVs (i.e., the value of the securities in the fund’s portfolio) aligned with the minute-to-minute changes in value of the aggregate value of outstanding ETF shares (again, all the relevant securities are typically trading on stock exchanges) requires use of in-kind redemptions through Authorized Providers or AP (essentially market makers for the ETF shares). The AP and the ETF swap shares back and forth to keep the two sets of values aligned. The shares being swapped are ETF shares themselves and the portfolio holdings (stocks for an equity ETF) of the ETF.
This swapping creates the opportunity for the ETF to purge its portfolio of low-basis shares and their potential for the ETF itself realizing capital gains that must be distributed to shareholders – i.e., when the ETF has to dispose of portfolio shares because of changes in its investment plans or sales/redemption of the ETF shares. Of course, that requires some minimum level of swapping and the authority to pick low-basis shares to do it. The SEC provided regulatory guidance provided the necessary leeway – i.e., allowing use of custom baskets of shares (e.g., low-basis ones) rather than requiring pro rata lots, a proportionate distribution of all the ETF’s portfolio securities.
The swapping and that guidance allowed the fund industry to develop the practice of “heartbeat trades” – essentially extra swapping with the AP to purge the low-basis securities. It’s extra swapping because it’s not necessary either to keep prices aligned or to satisfy purchases or sales of ETF shares. They’re doing for the purposes of getting rid of the low-basis holdings to insulate their shareholders from distribution of capital gains.
In addition, Vanguard came up with the idea of adding an ETF share class to a traditional mutual fund. That allowed it to use heartbeat trades to purge low basis holdings in the traditional fund as well. Vanguard patented that technique and the SEC also authorized it. The patent has expired and the SEC has provided general guidance for other funds to use the technique, which they have started doing.
Net result: Expanded use of ETFs, thus, reduces both capital gain distributions from mutual funds and dividends (short term gains are distributed by mutual funds as dividends).7 Use of ETFs has sky rocketed. Tax revenues similarly declined.
ETF assets are roughly $13.8 Trillion, now spread across 5,046 funds. * * * Vanguard pulls roughly $1.5B per day. VOO [Vanguard’s S&P 500 ETF] alone absorbed $39.3B YTD. * * *
And the flows are also bonkers! Year-to-date inflows ($446B) are running 64% ahead of 2025’s record pace: on track for $2T+, seven years ahead of Bloomberg Intelligence’s 2024 forecast for when we might hit that kind of number.
The post also reports that 231 new ETFs have been created in 2026 and have gathered over $37 billion in assets. By contrast, the Investment Company Institute, the industry trade association, reports traditional mutual funds have experienced outflows of more than $32 billion. Thus, in one quarter, almost half a trillion in assets flowed into ETFs while $32 billion flowed out of traditional mutual funds.
More actively managed ETFs
Actively managed mutual funds are inherently less tax efficient than index funds, because the active managers regularly buy and sell investments to maximize returns. That is what active management is all about. Indexing is a permanent buy and hold strategy with capital gain triggering selling only done if the index changes or if money is needed to pay for shareholder redemptions. Trading causes the fund to realize capital gains that are distributed to shareholders yielding tax liability.
ETFs traditionally were index funds, including those based on more exotic indexes constructed using various financial metrics (dividend history, volatility, etc.). But the according to the ETF.com post, the recent flows are often to actively managed ETFs:
A big part of this flood will be * * * [flows into] active ETFs. While we could do a lot of splitting hairs on just how “active” a lot of them are, there are indeed now more active than passive ETFs: 2,751 vs. 2,295. 84% of 2026 launches are active, with flows that mirror. Active is gaining assets at 3X its base: 12% of assets but 38% of flows.
One might naively assume that doesn’t matter. If actively managed ETFs are trading stocks and bonds, just like traditional mutual funds they will need to distribute any resulting capital gains to shareholders, typically generating tax liability. Wrong. As described above, ETFs’ ability to distribute low-basis securities to their Authorized Providers (AP) effectively can wash away many of those capital gains, especially with the ability to use “heartbeat” trades. For example, this State Street post reports in 2025 that 53% of active mutual funds distributed capital gains, while only 9% of active ETFs did. The post makes the point that tax savings are the big driver of the ETF onslaught.
Conversions
In addition to new launches, fund complexes are converting traditional mutual funds to ETFs. For example, the ETF.com post notes Dimension converted multiple of its funds to ETFs and plans to do more. I assume that accounts for some portion of the ETF in-flows and traditional funds’ outflows.
As the trend to ETFs continues, it will be harder to resist converting. ETFs not only are more tax efficient, but they also have lower fees. Those two factors should make it a no-brainer for taxable accounts to select an ETF when both flavors are available for an otherwise equivalent fund. Fund complexes still offering only traditional funds will be at a competitive disadvantage.8
Share class option
As noted above, Vanguard developed a patented structure that bolts an ETF onto a traditional fund as a separate share class, allowing the ETF’s use of heartbeat trades to cleanse the traditional mutual fund of its low-basis securities, reducing capital gain distributions for its shareholders.9
The ETF.com post describes the industry response to patent’s expiration:
The share class story is well trod at this point: the Vanguard patent for ETF share classes of traditional mutual funds expired in 2023, and by last December the SEC had granted exemptive relief to over 30 firms. Two weeks ago, on March 17th, the SEC completed the transition to this new era by issuing the final Exchange Act relief for multi-class ETFs.
(That sound you heard was a starting gun.)
About 100 applications are in, about 70 orders issued. 2 firms launched.
Longer term trend
To get a fuller picture, I went on FRED and captured data on the relative AUMs of all mutual funds and ETFs, including those holding bonds and other fixed income securities, as well as international stocks and bonds.
The following graph shows the data with the top line representing total mutual fund assets (including ETFs) and the bottom line, ETF assets. The lines are converging and likely will get much closer together. To express it in percentages, at the end of 2024 ETF assets were 49% of the total and now are closer to 58%. That’s an astounding increase in a little over a year and a quarter.10
Updated Article
I noticed via this Harvard Law School Forum post that the Moussawi, Shen, and Velthuis SSRN paper that I based my 2021 post on was updated in April of 2025. (The Harvard post is a very short summary that can be read in a minute or two.) The paper’s analysis now reflects an additional four years of data (through 2023) and more analysis (e.g., of the effect of the Vanguard share class strategy and tax-free conversions of traditional mutual funds to ETFs). Their data, of course, is still somewhat stale; it doesn’t reflect the tidal wave of ETF growth in the last year plus.
The updated article, which will be published in Review of Financial Studies, essentially presents the same story as before: the favorable tax status (i.e., deferral of most capital gains) is what is driving ETF growth. The ability to do conversions and the now general availability of the Vanguard share class strategy will only increase the amount of assets in ETFs, compared with traditional funds. The updated article has a wealth of additional information – a lot has happened in the intervening four years.11
This graph (Figure V, Panel B, p. 41) from the article illustrates the dramatic tax advantage of ETFs. It expresses realized capital gains as a percentage yield for the three types of funds:
The percentage rates are low, all under 8%. But with total AUM for all mutual funds now over $28 trillion, small percentages translate to large amounts.
The paper’s additional four years of data provides more information and certainty to its estimate of the potential effects on federal tax revenues from the migration of financial assets to ETFs. Using data through 2019, the 2021 version estimated deferral of capital gains between $400 billion and $679 billion (10-year estimate). The updated version raises that estimate to $915 billion to $1.7 trillion. (Note: the article’s data is limited to U.S. equity ETFs. Thus, it excludes ETFs that invest in foreign equity or fixed income securities. The latter generate only modest capital gains, of course.)
This is how the article (p. 32) describes the potential revenue effects:
Given that U.S. equity ETFs managed around $4.6 trillion in assets by the end of our sample period (Table A.I), it is reasonable to assume that these ETFs would contribute to the deferral of the tax on at least $915 billion and up to $1.7 trillion in short- and long-term capital gains distributions over the next decade. These projections will be much higher if we incorporate additional ETFs traded in the U.S. (other non-U.S. equity and fixed income ETFs with the in-kind redemption feature, estimated to be around $2.8 trillion in size in 2023 according to Investment Company Institute (2024)), as well as future investors’ flows into ETFs. The tax-deferral feature of ETFs also allows tax-free compounding of short- and long-term capital gains, creating larger accumulated future capital gains. Furthermore, investors can forgo paying taxes on the accumulated capital gains if they bestow their ETF shares due to the step-up in basis rule, disproportionally benefiting wealthier investors who have been migrating to ETFs in recent years.
Those numbers reflect the amount of gain deferred. To translate that to reduced tax revenue, one must make assumptions about the percentage of the deferred gains that are ultimately avoided altogether through stepped up basis (i.e., if the ETF shareholder sells, she/he will then recognize the gain based on their basis in the ETF shares) and what tax rate would have applied. Assuming 75% of the gains ultimately avoid taxation altogether and that the applicable federal rate is 15% (both of those are conservative, I think) suggests a potential 10-year revenue loss of about $150 billion.
That amount is surely very low because the paper’s numbers do not reflect:
The very large flows into ETFs since 2023
ETFs that invest in foreign equities and fixed income securities
The subsequent growth of active ETFs which have proportionately more capital gains when the traditional structure is used12
Growing use of private 351 ETFs by high-net-worth individuals to diversify holdings of concentrated direct stock holdings, such as founder stock or similar
Use of ETFs to avoid the wash sale rule (see Appendix).
I would not be surprised if the use of ETFs will lead to $300 billion in reduced federal revenue over the next ten years.13
The bottom line is that Congress’s failure since the 1990s to regularly update the tax code to limit these sorts of arrangements has had a major impact on revenues and the budget deficit. And this is just one example. It also helps to explain why recipients of capital income pay lower effective rates than wage earners, modestly boosting income inequality. With regard to SALT considerations, it is a cautionary tale for states who are attracted (for reasons of enhancing equity and revenue yield) by the proposals to increase their reliance on taxing income from capital. That income tends to melt away, in addition to being more volatile and harder to collect.
Appendix
The Appendix provides two anecdotes of how ETFs are used to avoid paying taxes, almost certainly inconsistent with the intent of the Code when the relevant provisions were enacted.
Tax-free T-bills?
One ETF, BOXX, provides an example of how the combination of financial engineering, the ETF structure, and a market for tax avoidance (w/ IMO questionable cost-benefit payoff) can lead to the development of exotic investment products.
This 2022 Bloomberg article, T-Bills Without Tax Bills? This Fund Says It Cracked the Code, describes how an enterprising former Marine used the ETF structure to obtain preferential capital gain taxation on what is essentially an alternative to money market investments. In other words, deferral until realization and then lower federal tax rates for long-term gains apply. Tax liability, of course, can be washed away by the step up in basis rules if the fund holding pass on death. This Morningstar article explains how the investment element works. The underlying investments are option contracts on stocks – nothing close to T-bills.
There are doubts as to whether the tax angle works technically. See Steve Rosenthal at TPC and Professor Daniel Hemel for more details. But the fund has been around for four years and, according to Morningstar, now has $11 billion in assets. That is a niche fund by most standards. As of the first quarter end, Fidelity’s government securities money market fund had over $400 billion in assets, by comparison. But it still must have a very large number of shareholders.
I have seen no reports in the financial or tax press that the IRS has attacked the tax strategy. If it does and is successful, the compliance and administrative issues will be an unholy mess, given the large number of shareholders and the multiple tax years involved. (For all I know, the promoters may have gotten a private letter ruling – I no longer have access to a databased of PLRs.)
A couple of observations, to get the favored federal tax treatment (i.e., long-term capital gains) one needs to hold the investment for at least a year. That is not ideal for one’s cash or most liquid holdings. It is more likely to work for someone who wants a longer-term investment with a cash-like return. There are plenty of good investment arguments against that. It used to be truism that holding cash was not really an investment. However, there is some case for holding cash as a better diversifier than longer term fixed rate investments (e.g., see this column by John Rekenthaler). Second, Morningstar gives BOXX a negative rating. Its expenses are high – the fund’s operators siphon off a fair chunk of the tax savings and the fund is riskier than a money fund and certainly than holding T-bills.
SALT implications. From a state tax perspective, if the alternative is holding T-bills as suggested by the promoter, investors forgo their state tax exemption in doing so. Federal law prohibits states from taxing interest on Treasury securities. So, if investors abandon T-bills for BOXX, it’s a small plus for state income taxes without capital gain preferences (e.g., California and Minnesota). Those states will realize tax when the investor sells and realizes a taxable capital gain versus T-bill interest that is free of state tax. In addition, for million-income folks in Minnesota, the NIIT surtax applies if the gains are realized by selling the ETF. Of course, if the interests are never sold (i.e., they pass at death), there will be no state tax.
Avoiding wash sales
The wash sale rule prevents buy and selling essentially the same security within a short window of time to realize a capital loss without actually changing your position economically or financially. This would be classic gaming of the realization requirement and has been prohibited for over a century.
The proliferation of ETFs (e.g., multiple ETFs tracking the same index) creates the opportunity to avoid the wash sale limit. Sell a Vanguard ETF and buy an identical Fidelity ETF nearly simultaneously does not change one’s investments as a financial or economic matter. A recent academic study, ETFs and the Wash Sale Loophole (June 13, 2025), documents that institutional investors are routinely doing that. Here’s a quote from the abstract:
This study examines whether institutional investors use ETFs to circumvent wash sale rules. Consistent with tax-motivated demand for ETFs, incumbent ETFs both create more shares and experience more trading volume upon the introduction of nearly identical ETFs, particularly when recent returns are negative. We show tax-sensitive institutions’ investment in highly correlated ETFs has proliferated in recent years, exceeding a quarter of their AUM. Furthermore, tax-sensitive institutions holding more ETFs are significantly more likely to engage in swapping nearly identical ETFs. This swapping behavior has become widespread, with tax-sensitive institutional investors swapping $417 billion of nearly identical ETFs since 2001. We estimate that tax-sensitive institutions realized more than $84 billion dollars in losses in highly correlated ETFs associated with the swapping activity since 2001.
Those revenue losses, in the larger scheme of things, are modest. But even saving a few billion dollars matters. In 1997, for example, Congress largely foreclosed a wash sale avoidance strategy called short against the box that was widely used. (Disclosure: I used the short against the box technique a few times back in the 1990s. I have also used the ETF strategy recently and likely will again unless the law changes.) Congress largely has abandoned doing that sort of thing.
Notes
This is what you would expect when Congress has largely abdicated its duty to protect the tax base from exploitations of gaps in law. In the 1980s and early 1990s, it did this routinely, enacting technical corrections bills and revenue raisers that closed new fissures. Anyone paying attention to federal tax policy recognizes that has not been happening in the last 25+ years. Ray Madoff makes that point in her book, The Second Estate. (Madoff’s focus is the failure to address estate and gift tax avoidance; the revenue effects for the income and corporate taxes are almost certainly larger.) It’s a sure recipe for reducing the tax on capital income. That is so because financial engineering can easily reconfigure income from investments and business operations to take legal forms that minimize its taxation. Aggressive regulations and judicial interpretations can staunch only so much of that. The real solution is for Congress to regularly tweak the Code’s language to foreclose the worst of those efforts. ETFs’ use of heartbeat trades is a classic example. See this law review article for detailed explanation of how a seemingly innocuous provision enacted in 1969 became a multi-billion-dollar tax break for ETF investors and providers. The article contends that Congress needs to fix the provision. I agree but now that the tax break has become embedded in expectations and there is more than a cottage industry benefitting from it, Congress will almost surely do nothing. It took Congress years to even partially close down syndicated conservation easements, most of which could only accurately be considered a scam. ↩︎
In 2021, Senator Wyden proposed changes (see section 17) that would repeal tax-free in-kind redemptions for mutual funds. It went nowhere. I’m not sure it was even formally introduced. He also proposed in 2025 limiting the ability to create designer ETFs that allow individuals with concentrated portfolios (classic example would be founder stock in a successful tech startup) to diversify their holdings using designer ETFs. ↩︎
Unlike S corps and partnerships, the pass-through treatment is crimped or partial. Losses are not passed through but retained in the fund and offset future gains. Short gains are passed through as dividends, so they can’t be offset by capital losses. ↩︎
The shareholder will receive a distribution of money or fund shares (if the shareholder has elected to reinvest dividends or capital gain distributions), of course. If reinvested her basis in the fund will increase accordingly. ↩︎
A typical mutual fund shareholder who requests a redemption would be shocked to receive portfolio securities instead of money. ↩︎
The change was likely stimulated by the 1969 Act’s start of limitations on the rule in General Utilities – i.e., the ability of corporations to distribute appreciated property to shareholders without recognizing gain. See the text of the Colon article at notes 84 to 93 for possibilities as to Congress’s rationale. It’s clear no one thought at the time there would be significant revenue consequences to the 1969 change or when it was confirmed in the Tax Reform Act of 1986, which repealed the General Utilities doctrine. ↩︎
Matt Levine, who writes a great free Bloomberg newsletter on financial markets, characterizes ETFs as mutual funds that don’t pay taxes, as well as an easy way to package trades. This combination explains their explosive growth. I highly recommend subscribing to his newsletter, if only for its entertainment value. ↩︎
Tax savings are irrelevant to retirement funds and other tax-exempt entities, but ETFs’ generally lower fees are important. Retirement funds, like 401(k)s, may violate their sponsor’s fiduciary duties to participants if they don’t select/offer lower fee funds. A plethora of lawsuits have challenged employers whose 401(k) plans offer higher-fee funds. ↩︎
I have personally benefited from the tax savings this structure provides. We have held three traditional Vanguard mutual funds in taxable accounts for a long time. They are based on narrower indexes and typically generated a modest amount of capital gain distributions until the ETF share classes were added. After that, the capital gain distributions totally stopped – now for well over a decade. That is so, even though the funds track indexes with stocks regularly being added and dropped from the indexes, while the value of the stocks they hold have appreciated substantially. The revised version of the Moussawi, Shen, and Velthuis article documents that my personal observation is the case for the Vanguard funds with ETF share classes. They have totally stopped distributing capital gains. See Appendix C. ↩︎
The two lines are unlikely to converge – i.e., that ETFs will not totally replace traditional open-end mutual funds. There are investment reasons to prefer traditional mutual funds under some circumstances, such as liquidity issues. Moreover, the tax advantage doesn’t matter for retirement accounts or other tax-exempt investors, although ETFs’ typically lower fees do. On that front, fund complexes will not like their low fees (= lower profits and manager compensation) and so will drag their feet in moving all their AUM to the ETF structure. In addition, SEC rules require much more frequent disclosure of the portfolio holdings of ETFs compared to traditional mutual funds. This can be a disadvantage for actively managed funds that do not want to disclose their investment strategies, particularly as they are adding to or shedding holdings. ↩︎
For example, with regard to the share class strategy, the article (p. A-20) cites a Bloomberg estimate, which I had not seen, that its use reduced Vanguard shareholders’ realized capital gains by $130 billion through 2018 (well over $20 billion in federal tax). Absent a favorable SEC decision, the share class strategy likely could not have been implemented. ↩︎
The paper assumes that ETFs are index type investments. It treats active funds and ETFs as mutually exclusive categories. That appears to be less likely to be the case now, since 2025 and 2026 data show many more active ETFs, even though they may mainly be algorithm-based strategies and not classic manager-picked active funds. ↩︎
In 2021, JCT staff preliminarily estimated that Wyden’s proposal (completely repealing tax-free in-kind redemptions) would have raised $206 billion. I’m sure they estimated a healthy rate of growth in the use of ETFs, but I doubt it was close to what is actually happening. The 2025-26 surge has surprised most observers, including industry sources. ↩︎
A recent Fox News poll1 finds that 75% of respondents consider “almost all or a great deal” of federal spending is wasteful:
In real world fiscal terms, half of federal spending pays for Social Security, Medicare, and interest on the debt:
Other poll results have found strong support for Social Security (see here and here) and Medicare (here). People like spending on those programs and do not want it cut and often favor spending even more. Of course, responding to a poll (it’s hard to get people to answer pollsters’ calls) does not require passing a logic or consistency test.
On a related topic, the Fox News poll also finds most of its respondents overwhelming think US taxes are too high. Despite the 2025 tax cuts enacted in OBBBA, that sentiment grew by 10 percent points between 2025 and 2026:
America’s taxes are very low by international standards. Here’s a TPC graph of the US’s tax levels compared with other countries:
What makes this perception even more off is the reality that America’s lower tax burden is also distributed much more progressively than that in most countries. The US heavily relies on a progressive income tax and has no broad-based national consumption tax unlike every other OCED country. That means average income people (i.e., those presumably responding to these polls) are paying even lower taxes than comparable cohorts in other countries. Put another way, affluent people in America are carrying more of the (albeit lighter) fiscal load. But the poll respondents still think they’re getting a bad deal.
I think these are the real-world political effects of the anti-tax political rhetoric that the American people have been relentlessly bombarded with over the last 45 years. These misperceptions cannot be easily corrected, given the polarized political and media environment. A fine mess you’ve gotten us into, Grover Norquist specifically and the Republican Party more generally.
Notes
Fox News is mainly an advocacy operation, not a news organization, as revealed by the discovery in the Dominion lawsuit and detailed in the book, Network of Lies. However, the Fox News poll is generally considered a well-regarded poll that is not considered to be tinged by the organization’s clear political and partisan bias. ↩︎
Caveat: This post is about public policy not investment or personal finance tactics or strategies. As a personal finance matter, Roth accounts are a great way to diversify the tax risk of a retirement portfolio – especially for someone who is sophisticated enough (or has a sophisticated advisor) to use them intelligently. I have a significant share of our retirement portfolios in Roths for precisely that reason.
One of my pet peeves is the misperception1 by sophisticated people of a what I see as a crucial flaw in the Roth structure in how we incentivize retirement savings: the Roth structure piles tax benefits on those lucky enough to be winners in the investment race, while punishing losers. The net result likely makes the structure regressive on a permanent or lifetime income basis. I have written about this twice before in an overly long and obtuse ways here and here (see “The other Roth problems” section of the latter).
A recent X post on an unrelated topic (sequencing risk in retirement savings) and a striking graph in it (see below) provided what I think is strong, indirect evidence for this effect – investment returns can systematically vary a lot by the randomness of when you start and stop retirement investing (largely when you’re born and start working). So, it caused me to once again mount one of my old hobby horses and write this post. Apologies. You can hit delete now, if you aren’t interested in hearing me drone on about this relatively esoteric topic.
Roth versus traditional structure
The incentive or subsidy provided by Roth versus traditional IRAs varies based on whether the subsidy is provided at the point of (1) the contribution or savings (traditional or frontloaded tax benefits) or (2) the distribution or consumption (Roth or backloaded tax benefits). It is well known (pp. 9-10) – based on simple algebra – that the amount of the subsidy is mathematically identical if/when two elements are the same for the entire period of saving and retirement:
The tax rate on contributions and distributions; and
The rate of return on the investment
Of course, in the real world we know that those two things are never constant. Legislation changes effective tax rates, as well as individuals’ incomes varying over their lifetimes causes their tax rates to rise and fall. Similarly, we know that investment returns vary widely. This variance results mostly from random stuff: investment skill, luck, or pure timing.2
This post relates to the last of these, timing: even if everyone invested the same amount or percentage of their retirement savings in index funds (eliminating skill and luck as a factor), investment returns will systematically vary based on when they started saving and when they started drawing down their accounts. That variance occurs because of the business cycle, animal spirits, changing expectations, yada, yada.
Why it matters
In my view, this matters crucially on a policy basis because providing the subsidy at the point of contribution is fairer or more equitable.3 That is so because the Roth structure, all else equal, provides larger incentives to individuals who realize above average investment returns. (This gets back to the assumption of a constant rate of return to make the two mechanisms equivalent.) Thus, these lucky ducks (winners in the investment lottery, so to speak) get bigger subsidies, magnifying their higher investments returns. Put another way, the portion of their return that exceeds the average return in the assumption goes untaxed. They get bigger incentives; those with lower returns get smaller incentives on average. Second, one has to assume that folks who realize systematically better investment returns typically have higher incomes, because their accounts end up being larger on average, all else equal. So, the Roth structure makes the tax and retirement system more regressive, compared to the traditional structure.
Birth lottery
A recent interesting X post on a tangentially related subject – sequencing risk in retirement savings – provides an illustration of why this assumption is likely correct and that it is not trivial. (Note: the post is about the variance in investment returns and the effects on retirement savings, NOT taxation.) The post is by Jesús Fernández-Villaverde, a U Penn economics professor, who I had never heard of but assume is a reliable source.
Investment returns vary because of the cyclical ups and downs of the stock and bond markets. There can be long periods of good markets (e.g., the 1990s) and bad markets (e.g., the 1970s). When you start investing/saving for retirement and when you stop and begin drawing down your account matters – potentially by a lot. Fernández-Villaverde did some extensive calculations of those effects and the results are quite striking. The entire X post is well worth reading for those interested in the general topic. It’s short. Here’s his graph that summarizes his results, which show a lot of variation:
Methods and results. His calculations are for a pure stock portfolio (S&P 500 index) for the period 1945-2024. He calculated real returns (i.e., he took inflation out of them). Here’s his description of the results (my emphasis added):
Over this 80-year period, the S&P 500 delivered a geometric mean real total return of about 7.5% per year. That is an impressive number. But this average return masks a lot.
Imagine a worker who starts investing at age 22 and retires at age 68. That gives them 46 years of contributions. In their first year, they contribute $1. Each subsequent year, they increase their contribution by 1% (roughly keeping pace with real wage growth). Every dollar is invested in the S&P 500. They never touch the money until retirement. No panic selling, no market timing, no strategy switching (and no management fees!). Textbook investing and waiting.
I ran this exercise for every possible cohort for which the data allow. The first cohort starts investing in 1945 and retires in 1991. The second starts in 1946 and retires in 1992. And so on, all the way to the last cohort, which starts in 1978 and retires in 2024. This yields 34 cohorts, each investing for 46 years, making the same contributions and investing in the same index. The only difference among them is which 46-year slice of historical returns they happen to live through.
The most fortunate cohort, the one that started investing in 1954 and retired in 2000, had $607 on the day of retirement (remember, all in real terms), with a real annual return of 8.82%. The unluckiest cohort, the one that started in 1963 and retired in 2009, accumulated $210, with a real annual return of 4.83%. Same contributions. Same index. Same strategy. Same investment horizon. Yet the luckiest retiree ended up with 2.9 times more wealth than the unluckiest. 4
The typical retirement account is not invested 100% in stocks, which provide a higher rate of return than bonds or cash. Conventional wisdom warns against an all-stock portfolio, especially as retirement approaches. So, his assumption exaggerates the difference between the highest and lowest returns. He redid it using a target date fund. This reduced the 2.9X difference to 1.6X.5 That is still a large difference.
He also points out that in the real world, the ones with unlucky timing relative to the business cycle will suffer more than just subpar investment returns:
In fact, sequencing risk is even worse because poor returns in the stock market are correlated with weak labor markets: you have a much higher probability of losing your job (or seeing your wage income fall) precisely when the market is doing poorly, preventing you from saving when prices are low and equities are most attractive. However, let me set that point aside today to simplify the exposition.
Policy implications. To me, this illustrates one policy reason why the Roth structure is flawed as a retirement incentive: it piles larger tax benefits on those lucky enough to realize above-average investment returns (investment skill, pure luck, or as here when they started and ended their retirement savings) who need it least. Higher returns are almost certainly correlated with higher retirement incomes, probably strongly correlated.6 This undoubtedly makes the tax and retirement systems less progressive. It persists across age cohorts, if you look at the pattern of the graph.
I can think of no countervailing policy reason for giving more to investment winners and less to investment losers. It does not incent desirable behavior (like savings or careful investing), rather random luck. Moreover, Fernández-Villaverde’s calculations make it clear what we’re often rewarding is simply timing, mainly the timing of one’s birth which no one controls. If anything, a better policy is to offset the effects of bad luck. The traditional IRA structure does that by the government assuming some of the risk of random variance in investment returns, while the Roth structure works in the opposite direction.
We’d have been much better off if Senator Roth and President Clinton had never started us down path of using the Roth structure. Unfortunately, it’s now too late. Because the Roth structure allows Congress to game the measurement of fiscal cost, it makes further movement to Roths fiscally irresistible as Congress almost surely enacts future editions of the Great American Retirement Fraud. (See my summary here.)
Of course, there are a host of other reasons for criticizing the retirement incentive system. It’s too complex, too expensive, gives a lot of help to those who don’t need it, is tilted to the affluent, etc.
Notes
Maybe systematic ignoring would be a fairer way to characterize it. ↩︎
See the classic book, Burton Malkiel, A Random Walk Down Wall Street for chapter and versus. Reading it in the early 1980s transformed my approach to investing and put me on the path to prosperity in retirement FWIW. ↩︎
There are IMO a host of other flaws with the tax incentive system for retirement savings. Among them: Requiring people to choose between Roth and traditional structures creates immense complexity and adds a lottery effect to the amount of the benefit received. The Roth structure encourages policy makers to undercount the fiscal cost of providing retirement incentives compared to the traditional structure, because it pushes cost outside the budget window. Because the size of incentives rise with tax rates, both types give bigger incentives to individuals with higher incomes and tax rates, those who are less likely to need them. Affluent people typically save without incentives. That only scratches the surface of the policy problems with our system of retirement incentives. ↩︎
Of course, comparing the worst and best case provides an exaggerated view of the difference. A more balanced approach would look at the statistics measuring the dispersion or variance in the return. Because this is a post on X, he didn’t provide that type of detail. The graph appears to show a lot of variance, and the pattern of the bars show that some age cohorts are systematic losers or winners. I personally happen to be in age cohort winners FWIW. ↩︎
My observation is that his glide path allocation much more aggressively shifts to bonds than the typical one used by Fidelity, Vanguard, etc. He has the stock allocation at 20% at the time of retirement. Vanguard and Fidelity’s target 2025 funds have their stock allocations set between 50% and 60%. So, the actual reduction is probably smaller than he suggests. ↩︎
This is what I would like to see data analysis on to potentially validate my inferences. ↩︎
A prime focus of the 2026 legislative session has been on the problem of fraud in social services programs. Absent the distraction (to put it mildly) of the ICE surge, the Republicans likely would have succeeded in making fraud the dominant session issue. This has an obvious political dimension: they hoped to ride it to electoral success in November. But it is clearly also a serious policy problem that needs to be addressed.1
Trump and the national Republicans have accommodated those efforts by making fraud in Minnesota programs a national issue. The Right-Wing media have reinforced that effort with a constant drumbeat of stories. The large dollar numbers (about $250 million) from the Feeding Our Future, COVID food assistance fraud, along with fraud in newer MA-funded programs for autism and housing assistance made Minnesota an easy target. Add to that, the former acting US Attorney threw out ridiculously large and speculative, at best, estimates ($9 billion) of additional fraud.2
I have no expertise in the workings and structures of social service programs, potential fraud in them, or how to reduce or minimize it. But as I watch the debate from the sidelines, my tax centric perspective may provide useful context, as well as an idea for detection/mitigation based on what works in the world of tax compliance.
Context: $ amount
Putting aside Joe Thompson’s numbers, reliable numbers (i.e., from court proceedings, charges, and so forth – not speculation or guesses) are well under $1 billion for Minnesota social service fraud (Strib came up with $218 million from court records back in December). As has been occasionally reported, Arizona had a series of related Medicaid fraud cases that were many multiples (>$2 billion), but it has not garnered anywhere the national attention.3
A billion dollars in fraud is large (to say the least), but to provide useful context federal tax evasion cases involving owners of one closely held obscure company, Vista Equity Partners that provides software to auto dealers, likely also defrauded taxpayers of an equal or potentially larger amount:
The IRS charged the principal owner, Robert T. Brockman, with fraudulently failing to report $2 billion in income.
Brockman died before the criminal case could be tried, but his estate settled with the IRS, paying $750 million in taxes and interest in December 2025.
The company’s CFO and another founder of the company, Robert Smith, settled with DOJ agreeing to pay $139 million in back taxes and penalties, as well as abandoning a refund claim for $182 million. His case led to the Brockman case.
It’s very easy to infer that taxpayer losses equaled or exceeded a billion or close to it from tax fraud by those two owners of Vista Equity. This attracted minimal public attention beyond the financial press and the tax world.
The cases were brought and settled during the Trump administrations. Beyond putting out the usual DOJ press releases, they did not make a big deal about it. Instead, they have been systematically dismantling and hobbling the IRS, the agency that fights tax fraud.
Moreover, Trump has pardoned a significant number of the perpetrators of tax fraud.4 An AI search turned up a list of notable pardons for tax crimes including these examples:5
Todd and Julie Chrisley: The reality TV stars were pardoned for convictions including bank fraud and tax evasion related to a $30 million loan scheme and failure to file tax returns.
Michael Grimm: A former Republican Congressman pardoned after pleading guilty to tax fraud for underreporting $900,000 in restaurant revenue.
Paul Walczak: A Florida businessman pardoned after pleading guilty to willful failure to pay over $10 million in federal taxes.
Jeremy Hutchinson: A former Arkansas state senator pardoned following convictions for bribery and tax fraud, specifically filing false tax returns.
Joseph Schwartz: A nursing home executive pardoned after pleading guilty to a $38 million Medicaid and tax fraud scheme.
Charles Kushner: Pardoned for convictions including assisting in the filing of false tax returns.
Paul Pogue: Pardoned after pleading guilty to underpaying taxes by more than $400,000.
Albert J. Pirro Jr.: Pardoned for conspiracy and four counts of tax evasion.
There is a basic asymmetry in the administration’s, and more broadly the public’s, perception of tax fraud as a lesser evil than bilking direct spending programs. (Note that some of these cases did not exclusively involve tax fraud.) This probably has something to do with the psychology of loss aversion – failing to pay taxes you owe simply is not as bad as defrauding direct spending programs. But money is money and committing tax fraud is not economically or financially different than fraudulently getting a government grant-in-aid – in terms of its effects on the federal fisc and taxpayers. That is why loss aversion is a fallacy.
It also demonstrates the administration’s hypocrisy and political opportunism. This isn’t about the integrity or the cost of government programs. It’s politics.
Context: tax system social welfare benefits
Federal and state governments increasingly have turned to the tax system to deliver social welfare benefits. This is typically done through refundable tax credits, such as the earned income tax credit (EITC), child tax credit (CTC), working family credit, dependent care credit, and so forth. Many billions of dollars of benefits are delivered through the tax system. For example, the tax expenditure for the EITC is about 2X the outlays for TANF, the main direct spending federal welfare program (income support, rather than in-kind benefits like SNAP and Medicaid).
The policy/political thinking behind the refundable tax credit approach has several rationales. It takes advantage of the existing tax system infrastructure, is cheaper and less intrusive, delivers benefits with less social stigma, is better suited to encouraging or requiring work as a condition of benefits, and so forth. So, there are some definite advantages but also drawbacks; neither is the point I want to make.
This system relies on the recipients themselves to determine whether they are eligible and to claim benefits. That often means private advisors (tax preparers) effectively function as the social workers administering the programs because the recipients consider themselves unable (often correctly) to navigate applying the rules and filing the necessary returns. Tax preparers are only lightly overseen by the IRS and state tax administrators.6
The Center for Taxpayers Rights recently published an excellent study on non-credentialed tax preparers, specifically how accurately they claimed the EITC and CTC on behalf of their low-income clients. They did this by mystery shopping – i.e., having returns prepared and seeing how well a series of non-credentialed preparers complied with the law.7 The results were not pretty. They found:
Non-Credentialed Preparers … did not understand basic aspects of filing status, refundable and other credit requirements, cash income reporting, and deductible business and home office expense rules.
Of the 28 returns that they had successfully prepared claiming social welfare type benefits (EITC, CTC, etc.), only 2 were correctly filed. The wrongly claimed refunds varied widely, both too and high and too low, but more often too high. (No surprise – that’s what market economics would predict.) The amounts were, in some cases, large (e.g., $9k). Some of the reporting behavior pretty clearly was intentional or negligent overclaiming.
The scenarios presented were not easy (to say the least). Putting it in academic terms, they were difficult exam questions. But that is often the case in the real world, where unmarried couples live together and raise children who often also have other parents. The credit rules are complex and not easy to apply in those circumstances. It illustrates both the difficulty of using the tax system to deliver these types of benefits and how open that is to mis-claiming, if not outright fraud. On a systemwide basis, the erroneous and fraudulent amounts are undoubtedly large, and the IRS and state tax authorities are woefully understaffed to address the problem.
The whole piece is worth reading. Low-income sole proprietor returns were no better and probably were worse. Low-income recipients pay a material amount for these tax preparation services and over 60% used paid preparers or purchased software (about half of those used non-credentialled preparers).
The policy point is that federal and state money could be saved and fraud reduced by better education and regulation of preparers. It’s not obvious to me that the return on investment (ROI) on efforts along those lines would not be higher than attempts to reduce fraud in direct spending social welfare programs. It’s simply less eye-catching and glitzy.
Tax compliance insights
Again, I have no expertise in social services or health care programs. Nevertheless, I’ll venture to suggest a tactic for fraud detection or mitigation, based on tax compliance rubrics. (The more obvious approaches that should be pursued first have been widely discussed: replace the creaky old IT systems, improve management, invest in human capital, etc., all of which make sense but are outside my expertise.)
A core insight from the tax world is that compliance materially rises when critical data is reported to the government by trusted third parties. For example, 1099 reporting of interests and dividends by financial institutions result in >93% compliance, while the overall voluntary compliance rate is <85%. IRS Publication 5869 (Rev. 10-2024). It might be possible to apply that insight to develop a compliance-enhancing reporting features for some Medicaid funded programs.
I’m thinking of programs where nontraditional entities (i.e., other than classic, regulated health care providers like hospitals, nursing homes, and clinics) need to use employees to provide services, like home health care, personal care attendant, long-term care, or autism services, to individuals covered by MA, Minnesota Medicaid program. Many accounts suggest that these types of programs have high potential for fraud.
Based on media stories, one pattern of fraud by these types of entities goes like this:
Fraudsters establish an entity (a nonprofit corporation or for-profit entity like an LLC) to provide the funded services. The entity applies for funding, representing it will provide services to eligible individuals and receives approval.
Entity finds or recruits eligible individuals (family members, friends, individuals taking kickbacks, etc.) who it uses to claim reimbursement for services that it asserts to have provided but doesn’t actually provide.
State reimbursements are diverted to the founders’ bank accounts and used for lavish lifestyle purchases, unrelated investments, gambling, foreign remittances, etc. rather than to provide services.
A variant is a legitimate service providing organization and the owners or managers cross over to the dark side and claim sizable reimbursement for services never provided. The owners again divert the money to their own uses, rather than paying employees who take care of MA enrollees.
A key commonality is that MA reimbursements are going to the fraudsters personally, not being used to pay employees to take care of, provide therapy, or other services to elderly, disabled, or autistic MA recipients. The key question is: can trusted third-party reporting be used to reveal that failure? The failure is not actually paying employees at a level necessary to deliver the services purported to be provided.
A natural first response would be to have the MA recipients certify and regularly report on whether and/or how often they receive services. (Maybe this is already done or is being proposed – again, my ignorance is on display.) However, that type of reporting may be unreliable for a variety of reasons – in the worst case, the recipients are complicit in the fraud (b/c they’re friends or family, are receiving kickbacks, etc.) or more generally, their incentives are not properly aligned. They may feel compelled to stay on the good side of their providers if alternatives for them to get services are scare. In short, recipients may not be trusted third-party reporters for those reasons.
The solution that occurs to me: focus on whether wages are being paid to employees. It should be feasible to set a minimum percentage of MA reimbursement, based on the type of service (personal care attendant, autism therapy or whatever.), that is typically paid in wages.8 If trusted third-party reporting reveals that the minimum levels of wages are not being paid, an audit or other investigation would be triggered.
Federal tax law requires employers to pay FICA and Medicare taxes quarterly or more frequently for their employees. These taxes are a fixed percentage of wages. The money must be paid over to the federal government. That is, it cannot be easily faked – the employer must provide social security numbers for the employees and pay the tax. In short, paying the tax and pocketing the net as fraud proceeds won’t be easy to do and ultimately would be uncovered. So, trusted third-party reporting of the payment of varying threshold amounts of federal payroll taxes would seem to be a good fraud backstop.
The gold standard would be to have the IRS report regularly on the amount of payroll tax paid by the MA provider. Providers could be required to authorize disclosure of their tax information by the IRS (i.e., waiving their confidentiality rights). But even with that, a federal statutory change would be required to permit the IRS to disclose this information to the state. Obtaining a federal law change might be a bridge too far, even when the hyperfocus by Republicans nationally on fixing fraud in social service programs. The administration’s push to use IRS data for immigration enforcement would seem to be a good argument for a more targeted use in this context. But getting anything through a polarized and gridlocked Congress is a heavy lift.
Another alternative would be to require payroll providers (most businesses use big independent firms like ADP or Paychex) to regularly report this information for MA providers to the state. The requirement that this reporting is done would be written in the MA providers’ contracts to qualify for MA reimbursement.
There are likely good reasons why something like this is not feasible, but it is the type of approach I would look at based on my tax related experience.
Notes
What is unclear to me is whether the problem is worse in Minnesota than elsewhere in the country. I have seen no credible estimates – i.e., based on multistate analyses of reliable data – that Medicaid fraud is proportionately higher in Minnesota than nationally. What is clear is that the administration’s focus on Minnesota is political, not an evenhanded or neutral effort. Arizona, for example, has a larger documented Medicaid fraud case ($2.5 billion admitted by the state for one Medicaid funded program) that did not trigger a similar state-specific enforcement effort by the federal government. Arizona’s politics likely did not provide a sufficiently tempting political target, unlike Minnesota. The appropriate federal response is to treat this as a national problem that needs to be systematically and thoughtfully analyzed and addressed with forward-looking policy solutions, as well as backward-looking enforcement. Good luck with the folks in DC doing anything like that. ↩︎
Only time will tell obviously if I’m right about my instinct that his $9 billion number is simply a wild guess, a generalization from abuse levels in one program to many. So far, no support has come out from the administration. That to me is damning, given their propensity to make up bogus stuff to support their political positions. If they had real evidence, they surely would be putting it out and it would be showing up in the Right-Wing media ecosystem in a steady stream. I do wish Thompson could be held responsible for what may have been fabulizing to gain favor with the WH. In my mind, this is contrary to the spirit of DOJ’s ethical guidelines as to how US Attorneys are to deal with the media. His $9 billion number is now routinely cited by responsible MSM outlets like the NY Times (always with qualifying adjectives like “reported” or “suggested” as in this Times article). That repetition gives credibility to and a false reality to the number. Many assume it is true when it is likely little more than a bad guess. ↩︎
Acknowledged to be at least $2.5 billion by the Arizona authorities. ↩︎
Trump has pardoned many regular (i.e., non-tax) fraudsters, most of whom likely were tax chiselers as well. This NY Times article (3/19/2026) describes pardons of 70 individuals convicted of fraud, one of which involved $1.3 billion in Medicare and Medicaid funds. This ProPublica story describes one sorry example. The only logical conclusion is that his fixation on social service fraud in Minnesota is highly selective and fundamentally hypocritical. ↩︎
I also did a quick search of the DOJ’s Office of Pardon Attorney’s database and turned up more cases of pardons for tax crimes that AI must not have considered “notable” – including Darryl Strawberry, the former Mets and St. Paul Saints baseball player who pled guilty to tax evasion. Go figure why he’s not notable to AI. ↩︎
They are not licensed or explicitly regulated by the IRS, being only subject to civil and criminal penalties for violations. The IRS promulgated regulations that attempted to impose regulations, but its efforts were struck down in the Loving case by the DC Court of Appeals and not appealed to the Supreme Court. Minnesota has some additional legal rules that apply to preparers and provide enforcement authority to DOR. But they are not licensed or directly regulated in Minnesota. A few other states do that. ↩︎
Most preparers are non-credentialed – i.e., they are not CPAs, licensed attorneys, or enrolled agents, just someone who hung out a shingle and are providing tax preparation services. They have gotten a PTIN from the IRS, but that’s it. ↩︎
Adjustments would need to be made for firms that have revenues from material sources other than MA reimbursement or provide a variety of different types of MA services. There are likely a host of other technical details that would need to be worked out, which is surely an understatement. ↩︎
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