Categories
income tax

ETF Tsunami

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.

ETFs’ tax advantage

Here’s a short version of the how and why of ETF’s favored tax treatment. For a fuller account, see Colon, Unplugging Heartbeat Trades and Reforming the Taxation of ETFs.

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.

Flows

Overall

An ETF.com post, Q1 ’26: The State of the (Bonkers) ETF Market (3/27/2026), reports massive flows into ETFs (my emphasis):

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

  1. 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. ↩︎
  2. 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. ↩︎
  3. 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. ↩︎
  4. 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. ↩︎
  5. A typical mutual fund shareholder who requests a redemption would be shocked to receive portfolio securities instead of money. ↩︎
  6. 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. ↩︎
  7. 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. ↩︎
  8. 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. ↩︎
  9. 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. ↩︎
  10. 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. ↩︎
  11. 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. ↩︎
  12. 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. ↩︎
  13. 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. ↩︎
Categories
Uncategorized

Incongruity

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

  1. 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. ↩︎
Categories
income tax

Roth v traditional IRAs

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

  1. Maybe systematic ignoring would be a fairer way to characterize it. ↩︎
  2. 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. ↩︎
  3. 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. ↩︎
  4. 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. ↩︎
  5. 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. ↩︎
  6. This is what I would like to see data analysis on to potentially validate my inferences. ↩︎
Categories
Uncategorized

Fraud Framing

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

  1. 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. ↩︎
  2. 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. ↩︎
  3. Acknowledged to be at least $2.5 billion by the Arizona authorities. ↩︎
  4. 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. ↩︎
  5. 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. ↩︎
  6. 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. ↩︎
  7. 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. ↩︎
  8. 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. ↩︎
Categories
income tax tax administration

March IRS update

Trump lawsuit

NY Times headline that has to be an understatement: Justice Dept. Struggles to Respond to Trump’s Suit Against I.R.S. (3/31/2026). Excerpts (my emphasis added):

The Justice Department is struggling to decide how to respond to President Trump’s lawsuit demanding at least $10 billion from the I.R.S., as the department’s lawyers try to resolve by a mid-April deadline the profound ethical questions the case raises, according to two people familiar with the dynamic.

…

Inside the Justice Department and the White House, senior officials are in the middle of a messy and complicated debate over their next steps, according to the people familiar with the deliberations, who spoke on the condition of anonymity to describe internal discussions.

While former Justice Department officials see clear flaws in the president’s case, some Trump administration officials worry that assigning a lawyer to contest it would pose an unworkable conflict, given that such a person ultimately works for the president, according to the two people. Defending the case could also contradict a White House executive order that binds all government lawyers to the president’s interpretation of the law.

Constructive suggestions from the article’s sources include asking the court to delay the case until Trump is out of office or appointing an independent counsel to defend the case. But, of course, Trump is president and he (or his people in the WH) are unlikely to go along with that, I assume. After all, he is Trump and he obviously brought the suit expecting to win (b/c he runs the government). A good selection of the arguments for the taxpayers/public have been made in this amicus brief that was preemptively filed (when do you see that?).

The article quotes Trump’s pledge to give any of the money awarded to charity. He has a history with questionable claims about charitable contributions. Of course, his presidential library is almost certain to be set up to qualify to receive charitable contributions and would seem a likely recipient. Given the grandiose, gaudy, and tasteless plans (Miami Herald; Truth Social video), more than $10 billion might be required.

Previous blog coverage

This Hill op-ed on the Trump lawsuit and related IRS issues gets it right on the policy issues, IMO. See this Jasper Cummings’ Tax Notes article (no paywall) for a careful dissection of the legal arguments raised by the complaint. The article makes it clear there are ample technical and substantiative bases for dismissing the case or finding no liability, if Trump were an ordinary defendant.

Trump Accounts

On March 31st, the IRS announced that taxpayers had signed up 4 million children for Trump accounts. Of those, one million qualified for the $1,000 federally funded deposit to the account (i.e., they were born in 2025). So, a cost to the taxpayers of $1 billion for the contribution.

Preliminary CDC data indicate that 3.6 million babies were born in the U.S. in 2025. So, about 28% of them have signed up for the free money. I’m sure participation will rise as time goes by. The money is supposed to be deposited on July 4th.

The JCT estimate (over $3 billion/year) during the pilot phase when federal deposits are made looks to assume well over a 50% participation rate. Will be interesting to see what the ultimate participation rate is. I’m sure the program will spawn some interesting economic studies.

No decline in quality of tax court advocacy

Despite the budget cuts, layoffs, and revolving leadership carousel, the chief judge of the Tax Court, Patrick Urda, says the IRS lawyers are continuing to do well per Tax Notes podcast:

I have seen only outstanding lawyers by the IRS. It’s the same quality of lawyers that I’ve seen all along. . . . The advocacy remains consistent with what I’ve seen over the past eight years.

My instinct is the effects will show up in the long term, one way or the other – at least in the numbers and types of cases that are litigated, if not the quality of the advocacy. You’re whistling in the dark, if you think otherwise. We’re lucky that the chief counsel lawyers are in the IRS and not part of DOJ, for whom the quality of advocacy has clearly suffered.

NSPM-7

Back in September 2025, POTUS adopted National Security Presidential Memorandum 7 (NSPM-7), which claims there is:

a self-described anti-fascist movement fomenting sophisticated, organized campaigns of targeted intimidation, radicalization, threats, and violence designed to silence opposing speech, limit political activity, change or direct policy outcomes, and prevent the functioning of a democratic society.”  It goes on to assert that this requires a law enforcement strategy to “all participants in these criminal and terroristic conspiracies.

Based on summaries (i.e., I did not read the whole lengthy thing), NSPM-7 does not grant expanded enforcement authority but rather seeks to use existing law enforcement agencies, like the FBI, to target these groups and entities.

Section 2(j) of the memorandum drafts the IRS in this effort:

The Commissioner of the Internal Revenue Service (Commissioner) shall take action to ensure that no tax-exempt entities are directly or indirectly financing political violence or domestic terrorism.  In addition, where applicable, the Commissioner shall ensure that the Internal Revenue Service refers such organizations, and the employees and officers of such organizations, to the Department of Justice for investigation and possible prosecution.

Who knows what will come of this, but a NY Times story (3/19/2026) reports (buried in a graph near its end) that the FBI is close to reaching an agreement with the IRS to implement NSPM-7. Stay tuned.

Bye to Bessent

The Treasury Secretary is no longer the acting commissioner, since the duration limit for an acting commissioner was reached. But per the IRS announcement this is a distinction without a difference:

In accordance with the Federal Vacancies Reform Act, the Secretary retains the authority and responsibility to perform the functions and duties of vacant Treasury offices that are not filled on an acting basis. The IRS continues to operate without interruption, with Chief Executive Officer Frank J. Bisignano successfully leading day-to-day operations and reporting directly to the Secretary.

I have seen nothing in the media about the possible appointment of a Senate-confirmed IRS commissioner. This, of course, is consistent with the administration’s preference (dating back to Trump 1) for the flexibility of acting commissioners. Unlike the situation with U.S. Attorneys, there is no pesky statute and federal district court judges making trouble for them.

Bye to basis shifting reporting

In further unraveling of the tax compliance measures, the IRS filed a notice of its intent to revoke the Basis Shifting TOI regulations. These Biden era regs required partnerships to report when they transfer properties and basis within affiliated partnership groups. This was intended to curtail basis shifting tax shelters whereby a property’s basis is used more than once by essentially the same business to shelter income from taxation.1

WaPo has a story (Trump plans to revoke Biden tax rule that cracked down on big business abuses3/7/2026) covering the notice:

If enacted, the Trump administration’s proposal would mean that large business partnerships no longer need to tell the IRS when they shift assets from one corporate entity to another. Those transactions, called “basis shifting,” have allowed businesses to dodge tens of billions of dollars in taxes, the Treasury Department alleged in the past, by illegally depreciating the same asset over and over again.

“My concern is that people will take this as a substantive conclusion that these transactions are okay,” said Stuart Rosow, a partnership tax attorney. Rosow said that he and other lawyers who handle complex partnerships’ taxes stopped looking for the transactions to report to the IRS last year, when the Trump administration initially signaled that it would repeal the reporting requirement.

Multimillion-dollar partnerships and their lawyers had been lobbying against the rule from the moment the Treasury Department announced it.

…

The Biden administration took a three-pronged approach. With Friday’s proposal by the Trump administration, published in the Federal Register where it will require public comment before taking effect, two of the prongs are gone.

The first was a requirement that businesses report certain transactions to the IRS, so that the government could detect illegal basis shifting. That’s what Friday’s proposal revokes.

The second was an increase in audits of partnerships. Partnerships have exploded in popularity as a structure for the most profitable and complex businesses — the number of partnerships with more than $10 million in assets grew 70 percent in the 2010s, to 300,000 in 2019. Over that same time, the IRS went from auditing almost 4 in every 100 partnerships each year, to just 1 in 1,000.

The Biden administration pledged to reverse that trend, hiring hundreds of new auditors. Danny Werfel, the IRS commissioner whom Trump replaced before his term was up, said that those new auditors noticed inappropriate basis shifting right away, leading the IRS to focus on that loophole.

But the IRS workforce has shrunk drastically under Trump. In the first months of his term, more than a quarter of the agency took buyout offers or otherwise left their jobs.

That leaves only the third prong still in place — a ruling by the IRS that basis shifting is illegal if its only purpose is tax avoidance.

In a closely watched case, Otay Project LP v. Commissioner of Internal Revenue, the U.S. Tax Court ruled last week that a California housing developer illegally deducted more than $700 million in income by using transactions between parties, which the court called “engineered.” Experts viewed the decision as a victory for the Biden-era interpretation of the law — that transactions must have “economic substance” beyond mere tax avoidance.

This seems like a big deal, except it pales in the context of everything else that is going on.

GAO Report on 2025 filing season

GAO issued a report reviewing the 2025 filing season, which it found went as well as 2024 based on the usual performance metrics. That likely occurred because IRS staff essential to the filing season were spared DOGE layoffs and were prohibited from taking the deferred resignation or early retirement options until after April 15th. The naysayers a year ago who predicted a large drop in revenues as a result of IRS staff cuts were wrong. As usual, temporizing and using IRA funds saved the day. That may not be the case in 2026, but there isn’t a sign of failure so far. Degradation and slow decline rather than outright collapse are the more typical patterns. Repeatedly predicting doom is like the boy crying wolf.

Some excerpts from the report:

In addition, in December 2025 amid implementing the One Big Beautiful Bill Act (OBBBA), an IRS internal report stated that critical technology systems would not be ready for the 2026 filing season start. It also stated that return processing and customer service functions would enter the season undertrained or understaffed, which could result in errors and poor service for taxpayers.

,,,

IRS designated almost all filing season probationary staff as critical. As a result, [only] 14 of the 7,315 probationary employees whom IRS terminated in February 2025 were filing season staff.  In May 2025, IRS informed managers that all previously terminated probationary employees were reinstated and should be returned to a full-work status. IRS data show that, as of December 2025, 60 percent (4,419) of these probationary employees either did not return to IRS or separated through the deferred resignation programs. [Me: so the reversed DOGE layoffs still resulted in 60% of the employees leaving!]

,,,

IRS continued to use overtime to perform post-filing season operations and account for lost staff, according to IRS officials. … IRS officials told us that more filing season staff were required to work overtime than in previous post-filing season periods and that staff who did work overtime were working more hours.

Staff reductions may limit the Service’s ability to prevent fraud in refundable credits:

The unit that provides oversight for refundable credits and prevents and detects tax-related identity theft fraud faced challenges due to staff separations and short time frames to implement OBBBA provisions that impact refundable credits in 2026. IRS’s internal reporting stated that junior staff were performing job duties of senior staff who accepted deferred resignations and that many training-related activities were suspended during the shutdown. As a result, IRS might be less prepared to identify and mitigate potentially fraudulent activities that could jeopardize taxpayers and IRS operations.

The appropriation for taxpayer services in fiscal year 2026 was $3 billion (up from $2.8 billion in FY 2025), but short of the $3.6 billion request. The 2025 appropriation was supplemented by IRA funds, but the prospect of doing that for 2026 is much reduced:

IRS reported spending $1.2 billion in IRA funds for taxpayer services in fiscal year 2025. … Treasury estimated that in fiscal year 2026 IRS would obligate $100 million of the remaining IRA funds appropriated for taxpayer services. If this projection is actualized, it could result in a significant decrease in resources for IRA-funded initiatives. IRS officials told us that the agency may use more than $100 million in IRA funds for taxpayer services because IRS needs $3.8 billion for taxpayer services in fiscal year 2026, which is approximately $800 million more than it received in annual appropriations.

Notes

  1. It is worth noting that similar arrangements were at the heart of the disputes between the Trump businesses and the IRS or that they underlie his ability to avoid paying taxes for multiple years – including Trump International Hotel and Tower in Chicago. I have not seen that that dispute has been resolved, but I assume it will go away permanently. ↩︎
Categories
Uncategorized

Tariff Case

SCOTUS invalidated Trump’s IEEPA tariffs and its decision has gotten the expected extensive coverage by the news media, opinion writers, and legal commentators. Much of the commentary, in my opinion, makes a much bigger deal out of the decision than it merits. The decision was pretty much what I expected, and its long-term effects (legally, politically, and economically) are likely not going to amount to much. By contrast, a decision upholding the tariffs would have been a big deal.

In a nutshell, the 6-3 decision held that the relevant statute did not authorize POTUS to impose tariffs (i.e., “regulate … foreign commerce” ≠ “impose tariff”). It took 170 pages of opinion writing to get there. Roberts wrote the main opinion and relied on the major question doctrine (MQD) to construe the statutory language with Barrett and Gorsuch joining; the three liberals relied on old-fashion statutory construction; Gorsuch wrote a long petulant concurrence emphasizing his version of MQD while attacking the hypocrisy of the three liberals, Barrett for not agreeing with him on his MQD views, and the dissenters for refusing to apply MQD (primarily because of the national security and foreign policy context). Thomas, Alito and Kavanaugh dissented and would have upheld the tariffs, concluding that if you can regulate and embargo commerce, you can tariff it.

Prediction accountability

The result – invalidation of the tariffs – was what the prediction markets had expected after the November oral arguments (about 70% probability), although many were surprised that it took the Court so long to issue the decision. I was not. I’m sure the internal sniping over the MQD and the number and length of opinions largely explain that.

Back in November, I predicted that there were four sure votes to invalidate (the three liberals and Gorsuch); three to uphold (Alito, Thomas and Kavanaugh), both of which were correct. I thought Roberts and Barrett would determine the result and expected invalidation based on the tenor of the argument. That proved correct. Those who hoped for a quick 9-0 or 8-1 decision invalidating the tariffs were IMO Pollyanna’s.

Economic effects

Will the case have big economic implications or effects? Before it came down, some had speculated that a decision might have important economic effects because it would cause most of the tariffs to go away and the resulting refunds would provide an economic stimulus of sorts. Neither appears likely to have much effect.1

Reduced tariff rates

With regard to ongoing tariff rates, the main effect appears to be a modest cut in the effective tariff rate. The administration (i.e., stubborn, tariff-loving Trump himself) is determined to impose new tariffs under other statutory authority. As Kavanaugh pointed out in dissent, several statutes provide discretionary tariff authority to the president. That led him to observe that “the Court’s decision is not likely to greatly restrict Presidential tariff authority going forward.”2 This CRS Report summarizes the various statutes, as well some of the caselaw under them. It has a nice table providing a thumbnail comparison of the different authorities.

Replacing the tariffs under alternate statutory authority began immediately with the administration’s decision to impose an across-the-board 10% tariff (hey, that’s back to what Trump said he would do during the 2024 campaign).3 Yale Budget Lab estimates this will have the effect of reducing the overall effective tariff rate from about 17% to 9%. Penn Wharton Budget Model estimates the IEEPA rate of 10.3% would be replaced by 7.7%. (Each is estimating a slightly different rate.) A reasonable guess is that they will also impose additional, selective tariffs based on the country of origin, product, and so forth. Overall, the ongoing effects can be hypothesized to have a few effects – none of them of likely great economic moment (at least on a macro basis):

  • A reduced overall effective tariff rate but still much higher than under Trump 1 or Biden.
  • A modest reduction in the chaotic imposition and reduction of tariffs. Since the alternative statutory authorities are much less flexible administratively than the way the administration was using the IEEPA, they cannot be imposed based on Trumps’ whims.4
  • Lower revenues than under the pre-decision regime but tariffs will still generate substantial revenues compared to Trump 1. CBO estimates the SCOTUS decision increased the deficit by $2 trillion (over the usual 10 years). CRFB estimates the 10% tariff if made permanent (statute has a 150-day limit) would restore over half of that revenue and, of course, that ignores selective tariffs likely to be imposed under other authority.

On balance, reduced and slightly more stable tariffs and larger budget deficits and debt are the likely outcomes, one positive and one negative. Overall, it is probably close to a wash economically.

Refunds as stimulus

Refunds of the invalidated tariffs will obviously have to be paid, but as Kavanaugh said “it is likely to be a ‘mess’[.]” (p. 63). Despite the decision, the administration did not immediately stop collecting the tariffs and signaled that it was not going to be prompt in paying refunds. Evidence of the likely administrative foot dragging is found in this NY Times article, including requesting a four-month delay out of the box.5

This Executive Functions podcast with a Stanford law prof who is a trade expert, provides a good taste of the legal complexities. Refunds are likely to be paid in more of a trickle than a torrent with only modest stimulative effects. However, this Court of International Trade order suggests that the administration may be compelled to issue refunds faster than it likes. This NYTimes story on the case contains useful background information. This 13-page affidavit explains why CBP has administrative difficulties complying with the court’s order to issue refunds, given the personnel and software limits. It also validates the “mess” Kavanaugh referred to.

This NPR story reports the administration is working on a fix and that the estimated amount of refunds is $166 billion (official estimate). The Penn Wharton Budget model estimates that the refunds will be in the same ballpark ($175 billion). That’s a lot of money, but the effect probably won’t be that big because the money will be gradually paid out mostly to businesses that are unlikely to quickly spend it (or reduce prices) because that’s not what businesses typically do (unlike low-income individuals getting rebates) and because of the uncertainty about future tariffs and the economy generally. Who knows how much will get to the consumers who bore most of the ultimate burden.

Political effects

A variety of politicos suggested that an adverse decision would provide Trump with the opportunity to walk away from the negative political consequences of his tariff madness. Put another way, SCOTUS was giving him and the GOP Congress, which must stand for election in November, a political gift of sorts. Events have shown that is not the case. Trump is doubling down and will impose replacement tariffs. In fact, his doing so may put more pressure on the GOP Congress, if he seeks congressional approval to extend his section 122 temporary tariffs. (I can’t believe he will try to do that because it will almost surely fail. But I have given up predicting what he will do.) Slightly lower rates and less chaos are better than nothing but aren’t a political balm.

Of course, the political, economic, and fiscal effects of the Iran War overshadow all of this. The inflationary effects and fiscal cost of the war dwarf those of tariffs – even if Trump declares victory and goes home quickly. The Pentagon is requesting $200 billion in funding for the war, more than the official estimate of the amount of illegally collected tariffs ($166 billion).6

The real political effect might be to shore up public views of SCOTUS’s independence and standing. I’m sure that is the effect that John Roberts is hoping for. (After I wrote the first draft of this, Adam Liptak made that point as well.) Some media coverage tends in that direction, and conservative commentators are banging that drum. I expect that narrative will be augmented by Trump losing the cases on birthright citizenship and his attempt to remove Fed governor Lisa Cook.

Constitutional significance

The tariff case was a big deal as a political and policy matter because it:

  • Invalidated a signature policy of the Trump administration
  • Trump himself made such a big deal of it before and after the decision
  • It involved a lot of money ($166 billion in taxes invalidated)
  • It got a lot of press and public attention
  • It was one of the few losses the Trump administration has suffered in SCOTUS
  • Etc.

But is it a big deal legally and as a constitutional precedent? A variety of legal commentators with a conservative bent think so. A few examples: Jack Goldsmith (“blockbuster”); David French (“most important case of the century” albeit with a question mark), Sarah Isgur; and Jeffrey Rosen.7

As I suggested in the intro to the post, I don’t think so. It’s a statutory construction case. Thus, it establishes no constitutional doctrine or precedent per se. (To be fair, most of the commentators are reading it mainly as a harbinger of the Court’s sentiments and it avoided an outcome – upholding the tariffs – that would have been a truly big deal. So, there’s that.) A majority did not even agree that the newish MQD applied. That’s why Gorsuch was so exercised in his concurrence. The Court split 3-3-3 with the liberals rejecting it, Roberts, Gorsuch, and Barrett applying it, and the other three conservatives saying it didn’t apply. MQD is a constitutional doctrine that the Roberts Court created to invalidate congressional grants of power to the executive that standard statutory construction rules would allow. It clearly was unnecessary to decide the case, given the vote. As Roberts put it (p. 11):

The President’s assertion here of broad “statutory power over the national economy” is “extravagant” by any measure. And as the Government admits—indeed, boasts—the economic and political consequences of
the IEEPA tariffs are astonishing. The Government points to projections that the tariffs will reduce the national deficit by $4 trillion, and that international agreements reached in reliance on the tariffs could be worth $15 trillion. In the President’s view, whether “we are a rich nation” or a “poor” one hangs in the balance. These stakes dwarf those of other major questions cases. [Citations omitted and emphasis added.]

In short, standard statutory construction was sufficient. But likely in Roberts’ view, it was an opportunity to solidify the MQD’s standing.

Those claiming the case is a big deal are conservative oriented commentators who defending the Court from the charge that it’s “in the bag” for Trump and/or conjuring up how its actions are consistent with conservative principles (i.e., not Trumpian or partisan). I’m skeptical of those claims, although to be fair I haven’t done any serious analysis of it.

As a general matter, the charge that the conservative justices are “in the bag” for Trump or that they are simply partisans has never made sense to me. Most of them are standard-issue, conservative Federalist Society types. I assume that privately they are as appalled by Trump as are most elite, elected Republicans apparently are (based on the Romney book and various journalists reporting). Okay, Alioto and Thomas may be special cases because of their wives, more extreme partisanship, loathing of the left or other unknown factors.

Because Trump has been the effective head of the Republican Party and national conservative movement for the last decade, the conservative justices are stuck paddling in the legal wake he has created when it comes to defining presidential powers. That means that they often must rule in his favor to advance their conservative agenda. That agenda happens largely to overlap with being pro-GOP and, of course, they all were to greater or lesser extents affiliated with and active in the Republican Party. So, all else equal, they will act as Republican partisans, especially in election law cases (remember Bush v. Gore, Voting Rights Act cases, and the pending mail-in voting case), where they line up like true Republican partisans.

That the conservative justices are in the tank for Trump does not seem plausible more generally. However, I understand how Trump’s very high batting average at the Court leads people to that assumption and why Court’s ideological supporters seize on counter examples (i.e., the tariff case) to counter that. However, I do think the conservative justices are strongly inclined to put their thumbs on the scale for a more traditional Federalist Society, limited government, quasi-libertarian point-of-view.

The Goldsmith and Isgur, of course, have a more sophisticated or nuanced view of what is going as a matter of constitutional doctrine in the context of other decisions over the last decade or so to justify their claims that the tariff case is a big deal. Specifically, the theory (more or less) is that the decisions (1) uphold vertical executive power and (2) limit horizontal executive power.

  • Vertical power could be loosely defined as the president’s control over the executive branch – essentially how to execute the law, such as authority to hire and fire staff, how to spend appropriations, and internal organization and similar matters.
  • Horizontal power, by contrast, is power that verges on or is legislative in nature – powers that a high school civics teacher would say should be exercised by Congress. For example, broad discretion to impose tariffs and to forgive student loans fall into the horizontal category, explaining a couple recent decisions. MQD is a way to implement that by limiting Congress’s ability to hand over legislative-like power with broad grants of executive authority to carry out legislation unless it says so clearly and explicitly.

This dichotomy is a clever way to explain some of the decisions that expand executive powers, including some of the shadow docket rulings, while refusing to uphold (arguable) statutory grants of power. That is, they affirm vertical executive powers – e.g., invalidating limits on the president’s authority to fire heads or members of commissioners of independent agencies, how and whether to spend appropriations (USAID nixing), and limits on internal executive branch organizations (e.g., dismantling the Education Department). But they limit horizontal executive powers through narrow construction of statutory grants, including contrary to a natural reading of statutory language by MQD putting a thumb on the statutory construction scales.

My amateur view is that this is just a clever construct, a sophisticated law professorish way to cloak what the Court is doing in fancy-pants constitutional doctrine. It seems to me that it has some limits. For example, it doesn’t explain important decisions both expanding and restricting the executive – such as the grant of presidential immunity (that’s not preserving or enhancing a vertical power) or the likely carve out for the Federal Reserve for the power over personnel. That’s a vertical power that I expect the Court to invalidated, while holding the president can fire at will heads of independent agencies like the FTC.8

My instinct is that something much simpler is going with the Roberts Court decisions on presidential power – a sort of Occam’s Razor explanation – the conservative justices are guided by their policy priors. The conservative justices (Thomas excepted) are products of and were handpicked by the Federalist Society. In an oversimplified view, the Fed. Soc. agenda is a limited government, quasi-libertarian view of the world. In many ways, it is not that different than the Lochner era Court, but more nuanced and sophisticated than reading laissez faire economics into the due process and contract clauses. Basically, anything that limits or hamstrings expanded government intervention into market and private decisions is good. Secondarily, that may mean (often) ruling for Trump in the cases they hand-pick, but it’s not fundamentally pro-Trump. It’s also not partisan, although it often means the decisions are favored by Republicans. The real agenda is Federalist Society version of conservatism, limiting the scope and operations of government, especially the federal government.

The tariff case, in that context, was easy. Ruling in favor of Trump’s reading of the statute would have gone in the opposite direction by enhancing the ability to raise revenues with a strained and expansive reading of the statutory language. That is the opposite of constraining government. It also a power that might have been useful to big government liberals (i.e., Dems).9

Some random observations:

  • Defining what constitutes a horizontal power is highly subjective. It will always or almost always involve statutory construction (exceptions are when the constitution explicitly gives a legislative type power to the president, like signing and vetoing legislation). If Isgur and Goldsmith are correct, this would mean the Court will consistently construe grants of power narrowly (as in the tariff and student loan forgiveness case) when it involves extending the reach of governmental power, such as more expansive social welfare programs or regulation of private activity. However, the counter example that I would need to see is a strict or narrow construction of a negative power, limiting the president’s ability to narrow the ambit of a public program or a private law rule. That would both go against their policy priors and expand a horizontal power. I doubt the Court’s conservatives will put their thumbs on the statutory construction scales in that type of case. Instead, they will play it straight or read the grant liberally. Of course, standing rules make it difficult for cases like that to come up.
  • Isgur likes to characterize invalidating horizontal executive power as reclaiming article I powers for Congress. As she puts it, forcing Congress to do its job, rather than allowing it to make general directives or mandates in legislative enactments and relying on the executive branch to write regulations to fill in the details. Strict construction of statutory grants is sort of a de facto reenergizing of the anti-declaration doctrine through other means.
  • My view is that while she can characterize it as compelling Congress to do its job, more fundamentally it restricts its ability to do so, by rigidly limiting how it can legislate. In her formulation, it must do so specifically, which is all but impossible practically and politically. The world is so extraordinarily complex that legislating with Isgur’s desired specificity is not practical. Congress does not have the time or expertise. Moreover, political polarization and our creaky constitutional structure (goofy Senate representing more land than people leavened with the filibuster) make it politically impossible. Isgur’s edict is really a constraint on Article I powers. Rather than compelling Congress to do its job, it makes it harder to do so. In the current polarized environment, that approach may be a practical neutering of much of Congress’s power. Isgur wants a debating society or ivory tower legislature that does not match practical, political reality. Her scheme would work (maybe) in a parliamentary system but not a bicameral, gerrymandered Congress with a filibuster and rural dominated Senate. It’s an edict that guarantees little gets done (satisfying what I assume are Isgur policy priors, as well as the Federalist Society’s).
  • The throughline that I see in SCOTUS’s upholding of expansive presidential power is that in almost every case the exercise of power limits government operations that the quasi-libertarians abhor, such as not spending appropriated money, firing agency heads, laying off employees, reshuffling agency organizations, turning away asylum seekers, and so forth. Crucially, they’re not all that useful in advancing a big government agenda if/when progressive types get elected.
  • I fear the litmus test will be whether (assuming the administration requests it) the conservative justices stay lower courts’ invalidating of the SNAP and Medicaid holds put on Minnesota, Illinois, Colorado, and California or the one that singles out Minnesota. If they do, Goldsmith and Isgur need to come to terms with the character of the Court they’re defending IMO.

Concluding thoughts

On reflection, the Court’s decision was entirely predictable, holding the statute’s words mean what they say. It would have been a big deal – economically, politically, and (to a lesser extend) legally – if the Court had upheld the tariffs. Thus, the decision’s main significance is negative.

As a constitutional matter, I don’t think the case is a counterexample to the Court’s path of rewriting the constitution to give presidents more negative power to constraint government. At least that is the path I perceive the conservative justices are on in their quest to expand executive power through the unitary executive doctrine. Contrary to Isgur, expanding executive power in this fashion is a limit on Congress’s power. Sure, it’s a dictate to Congress to do its job, at one level, but it also materially moves the bar for doing so much higher. And that is really what is going on and why she promotes it.

Its Congress’s power that the Federalist Society types are really concerned about – expansion of private market regulatory interventions and increasing the social safety net – because that is what contradicts their policy priors. Making Congress act as the expert by writing (and, let’s be honest, regularly rewriting as future events inevitably will require) specific legislation (rather than relying on experts in the executive branch writing regulations that flesh out general directives) and preventing it from insulating executive expertise from rapid-fire changes both advance that agenda. Put another way, giving the executive more power to fire personnel, not spend appropriated money, rearrange administrative boxes, etc. typically will limit the scope of government. Those expanded powers under a Big Government president are not a huge risk. The tariff case is simply not a counterexample to those tendencies.

Notes

  1. For an overall assessment of the economic effects of the tariffs (before the IEEPA tariffs were invalidated) see this Brookings paper and, better yet, listen to its presentation and the discussants’ and audience’s comments, both of which were insightful, available here. What’s clear are two effects: (1) a big tax increase almost equal to 1% of GDP before the invalidation (but nowhere big enough even before invalidation of the IEEPA tariffs to offset OBBBA) and (2) a reduction of trade with China. Other effects are unclear, pending more time and data. Other interesting tidbits: 57% of imports are exempt; 90% of the tariffs were passed through to domestic consumers and producers; the potential welfare effects ranged from -0.13 to +0.1 of GDP (a discussant using a different model computed a much wider range).
    Real economic effects take longer-run data and more policy stability and certainty than Trump is likely capable of providing. ↩︎
  2. Page 63 of his opinion. Kavanaugh is overstating the case. All those statutes have limitations and restrictions, such as rate and time limits and condition precedents that must be investigated and found me, etc., which is why Trump was using IEEPA. The case will reduce tariffs, just not as much as popular perceptions think. Reading the CRS report referenced in the text provides a good guide to restrictions and details of these authorities, as well as why the administration used the IEEPA. ↩︎
  3. These section 122 tariffs are temporary, but the administration, based on reports in WaPo and the NYTimes, is undertaking steps to impose permanent tariffs under other authority. Because of the process restrictions, that will take time, as various findings etc. are required. The section 122 tariffs are already subject to a legal challenge, but it is likely weaker than the IEEPA case. ↩︎
  4. I’m making no assertions about Trump’s propensity to threaten increased tariffs, though. ↩︎
  5. Quote from article: “Terence Lau, the dean of the College of Law at Syracuse University and a former lawyer for Ford Motor, said the actions [administration’s request for 4-month delay] reflected an effort by Mr. Trump to introduce ‘administrative friction’ around the $166 billion in tariff collections. While Mr. Lau acknowledged that the refund process was so complex that it necessarily would take some time, he said the government’s court filings also showed ‘they are trying to narrow who gets refunds, and they’re stretching the timeline.’” ↩︎
  6. Of course, it is unclear how much Congress will authorize and appropriate. In any case, the fiscal cost was estimated to be $16.5 billion on day 12. ↩︎
  7. My general reaction to them is their hyperbolic. Big Yikes on the Rosen piece. He compares Gorsuch petulant concurrence defending MQD to Justice Robert Jackson’s famous Youngstown concurrence, which is considered a landmark separation of powers statement. IMO this is ridiculous, but events could prove me wrong if MQD is the cudgel the Court uses to reign in exercises of executive power whose policy results conservatives favor (unlike tariffs – most of them are free traders). ↩︎
  8. It’s because the conservative justices think Fed independence is important as a policy matter, even though it is clearly an executive branch entity and is executing monetary power and bank regulation, executive functions. ↩︎
  9. Conservatives often think that Dems are keen to impose tariffs because of the industrial labor movement (the old CIO) often favored them and were a key Democratic constituency. IMO that was truer for the old Democratic Party than now. The big constituency for tariffs and protectionism has largely moved into the Republican Party. But that’s a longer and complicated conversation that’s contestable. ↩︎
Categories
books

Books I’ve Read Recently – Taxation and Resentment

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 hope that I will remember a bit more of what I read.

Author and book

Andrea Louise Campbell, Taxation and Resentment Race, Party, and Class in American Tax Attitudes (Princeton University Press 2025).

Campbell is a political science professor at MIT who I was unfamiliar with. I’m not conversant in the political science literature. There apparently is an extensive research and academic literature on public attitudes on government spending, but very little on taxation. Campbell’s book and research is an effort to rectify that.

By her account, Campbell has long been interested in public opinion on taxation. In particular, she is interested in a longstanding paradox of popular tax attitudes: Strong support for progressive taxation as an abstract matter but opposition to specific progressive taxes (i.e., income and estate) and more tolerance of regressive taxes, such as state sales and payroll taxes. The book attempts to disentangle that paradox.

There isn’t a lot of polling on specific taxes and narrower tax issues (no surprise, I guess). Campbell relies on historical surveys that have been done by Gallop, the long-repealed ACIR which did some more detailed polls, etc. She also added a number of more detailed and probing questions to the 2012, 2016, and 2019 Cooperative Congressional Election Study (now called the Cooperative Election Study), a periodically done large survey of public opinion used by academic researchers.

Why I read it

When I saw reviews of this book, I immediately put it on my reading list. I have had a longstanding interest in the paradox it addresses, notably exemplified by popular opposition to the estate tax. Political acceptability is a core consideration in making tax policy in legislative bodies, where I spent my career working.1 Legislators are very interested in voters’ preferences on taxes (beyond the usual “I don’t want to pay”).

Politicians have strong instincts about this and parties and interest groups poll on it regularly.2 The conventional wisdom is that people’s views reflect their personal interests, captured by the aphorism attributed to Russell Long: “Don’t tax you. Don’t tax me. Tax that guy behind the tree.” Public officials tend to act on that assumption when they have no other alternative and need to raise revenue. That explains Dems (the only party now willing to raise taxes) resorting to “tax the rich,” corporate taxes, or narrow taxes that relatively smaller percentages of the population pay (e.g., on tobacco or weed) to raise marginal revenues.3 But they still are very skittish about doing so. Polling backs up that skittishness.

I also thought that this book might provide more data-based insights on the speculative thesis of Ray Madoff’s The Second Estate. Madoff’s hypothesis is that better tax design (e.g., taxing inheritances under the income tax rather than the estate tax) and better promotion of progressive taxes will fix the public’s opposition to our current progressive taxes. I’m skeptical. Campbell’s book reinforces that skepticism.

What I found interesting

My priors: I’m not a fan of survey and polling data for a variety of reasons not worth repeating. But to determine attitudes (other than classic revealed preferences based on behavior – not an option in this context), that is what you’re stuck with. The book is essentially an extensive analysis and discussion of survey results.

After a chapter that provides an overview of US tax history and basic tax policy,4 Campbell attempts to explain what she describes this as a “principle policy gap”: the paradox of public support for progressive taxation in the abstract, while opposing its implementation by specific taxes and tax features.

Self-interest, partisan identity, and ideology aren’t the explanation.

The book has several chapters that dispatch the typical explanations for the paradox:

  • self-interest (e.g., people oppose taxes based on how it affects them personally)
  • partisan identity (e.g., antitax sentiments are largely a Republican thing)
  • ideology (e.g., limited government principles are important)
  • tax knowledge (e.g., people just don’t understand that the estate tax only applies to a tiny percentage of the most affluent people)

Campbell finds none of these explain much. (It’s not worth going through the careful way she does that in structuring her survey questions and analyzing responses, including statistically controlling for various demographic and other characteristics, and so forth.) She does find some weak correlations and tendencies that align with conventional wisdom but far from much of a plausible explanation for the paradox.

Some of her findings will likely surprise the uninitiated (i.e., those who have not spent much time reading survey results on tax attitudes), such as:

  • Partisan identification and ideology (e.g., supporting limited government or favoring expanded government) are not always a significant factor in the tax context. (p. 131)
  • Republicans and Democrats agree on the taxes they dislike most – income and property taxes. (p. 135)
  • “Among lower income respondents [bottom half of the distribution], Republicans and conservatives do not have different preferences compared to Democrats and liberals, with the one exception that conservatives are more likely to say the gas tax is unfair.” (p. 141)
  • Independents (crucially excluding “leaners”) are more anti-tax than either flavor of partisan. (p. 144) This one surprised me. Campbell suspected they particularly distrust government but not have robust enough data to test that.
  • State sales and payroll (FICA) taxes have the least opposition across all groups, even though they are regressive. This is verified in Minnesota by voter approval of multiple sales tax increases – the legacy constitutional amendment and myriads of local sales taxes (w/ few failures to pass them).

It’s important to note, of course, that tax policy and incidence are very complex. That makes knowledge, intelligence, and attention important in forming attitudes on taxes, including judgement about whether a tax or feature is really progressive. FWIW, Campbell tests tax knowledge and finds it is not much of a factor.5

The overall pattern was not surprising to me. But I was modestly surprised by some of the details and the consistency of her findings across multiple surveys and the use of regression analysis to tease out correlation effects.

Race and racial attitudes are a big deal.

The book’s most important findings, as suggested by its title, are in chapters 6 and 7: race matters. Specifically, whites’ tax attitudes are most strongly shaped by racial resentment (chapter 6) and minorities (especially Blacks) tend to have antitax attitudes that mirror those of conservative whites (chapter 7). Both were revelations to me. The former probably shouldn’t have surprised me and is profoundly depressing. The latter after reflection makes some sense. I just hadn’t thought about it.

The following quote (p. 158) captures the essence of Campbell’s findings regarding whites:

[R]acial resentment is the strongest factor in whites’ tax attitudes – more influential than income, party identification, ideology, or other correlates that we might think would structure tax preferences.

To reach this finding, Campbell characterizes survey respondents based on indexes of both symbolic racism and old fashion racism.6 Whites who score high on this index also score high on all taxes being unfair, even after controlling for demographic variables. (p. 172)

The likely explanation is the linkage between taxes and government spending. A more extensive poly sci literature on attitudes toward government spending mirrors Campbell’s finding: racial attitudes were 4X more powerful than self-interest (income level) in explaining opposition to general government spending, according to one of those studies. (p. 162) Apparently, there is a general perception (shockingly contrary to reality) that government spending mainly benefits minorities (the proverbial tax eaters to the racially resentful part of the population). That translates into a general opposition to general fund taxes, including progressive ones like the income and estate taxes. I guess if you believe you don’t benefit from the spending, the fact that the better off pay disproportionately more does not matter. If you think the recipients are undeserving, you’d oppose any funding. If Robin Hood hands the booty over to a bunch of sponges, your sympathies are with the sheriff of Nottingham.

Social Security and Medicare are exceptions. They are perceived apparently as benefiting the general population relatively even-handedly.7 That likely explains the lower opposition to the regressive federal payroll taxes that fund those programs.

Campbell also probes attitudes on tax expenditures. They follow the general views on both spending and taxes:

[R]acial resentment structures white attitudes toward indirect spending through tax expenditures much as it does attitudes toward direct expenditures.

That translates to support for supposed middle class breaks for homeowners and opposition to the EITC and CTC which are perceived to benefit mainly minorities (wrongly, especially for the CTC).8

Blacks, by contrast, have more liberal or progressive views on general government spending (e.g., more than 20 to 30 percentage points higher than whites in supporting social welfare spending). But that does not translate into positive attitudes toward the taxes that pay for that spending. Their tax attitudes track more closely to those of conservative whites. Campbell concludes that this results from their long history with the nasty effects of coercive government (slavery, Jim Crow, legally sanctioned discrimination and so forth) and the higher effective tax rates they typically pay.

In her conclusion, Campbell assesses how these attitudes play out politically and their effects. In an understatement she observes how this asymmetry of American tax and fiscal attitudes makes it “exceeding difficult” to finance federal spending. The political scales are heavily tipped toward an antitax agenda, since a large core of the Dem base (i.e., minorities) share conservatives anti-tax views. These attitudes, along with the GOP antitax agenda and abandonment of a conservative fiscal ethos, are a big explanation of the intractable problem of growing federal debt.

What disappointed me

My biggest disappointments with the book were sins of omission.

Campbell fails to explore or test the effects of horizontal equity on tax views of specific taxes. I think “equal treatment of equals” is often more powerful than vertical equity for many people, even though politicians rarely talk about it. Knowing that someone in similar circumstances pays the same or about the same tax is you do likely is more important than those better off paying at higher rates. That may explain the affinity for sales taxes. Their structure and application may lead to perceptions that they are horizontally fair. Everyone who buys stuff pays the same rate. Never mind, that differences in consumption preferences and scads of exemptions lead to quite different effective rates. That’s too deep in the weeds.

I’d also like to see testing of attitudes on tax compliance (or lack of it), evasion, and enforcement and how that tracks with the general views she covers. But that is probably expecting too much.

SALT connection

Although the book’s focus is primarily on federal taxes, it does address SALT as well – attitudes to state sales, income, and gas taxes, as well as property taxes. I would speculate that the tax and spending nexus – i.e., the perception that everyone benefits more from state than federal taxes – is less of a driver of antitax attitudes at the state and local level. The closer government is to them, the more people likely trust money is being spent well. As a result, they probably have less antipathy to SALT than federal taxes. This only goes so far, of course. They still don’t like state income taxes. A halo effect?

My Take

Reading Taxation and Resentment was depressing. I’m not totally convinced that the central hypothesis (racial resentment drives antitax attitudes) is correct, because of my inherent skepticism about putting too much stock in survey data. But it is carefully done and more than just plausible. If accurate, it underlines just how much the US version of slavery (with its racial tie in and the racism it fostered) is the country’s original sin that colors so much policymaking. I hope that’s wrong but fear it is not.

Moreover, it emphasizes the degree of difficulty of resolving America’s under taxation problem, caused by the right-wing (fiscally idiotic) anti-tax movement of the last 5+ decades. The country needs to enact a VAT and make many basic reforms in the income and corporate taxes, if we are going to maintain our current level of federal government services. But as Campbell points out (p. 156), enacting a VAT is “difficult to imagine” given tax attitudes. This been a wrenching political experience for countries enacting VATs in the last half century or so (Canada and Australia come to mind where both governments lost elections after enactment and their countries’ politics were not infected by the Grover Norquist anti-tax virus).

The book also verifies my doubt of political and policy prescriptions like those in Second Estate – better tax design and messaging making tax progressivity clear to the masses – will not fix the problem. Antitax attitudes have deeper roots that must be dealt with. Focusing on how we all benefit from spending is a better place to start.

The fact that the sales tax generates the least opposition explains not only the right-wing promotion of the FAIR Tax but also why the legislature needs to carefully husband use of the sales tax revenues for core government functions – using it for frills (the Minnesota practice with the Legacy Amendment and city sales taxes) puts basic government funding at risk IMO.

Reviews

Joe Thorndike, the tax historian, reviewed the book in Tax Notes (no paywall). He has a modestly different take on the book that I do. I assume (based on the acknowledgements) that he was helpful to Campbell in reviewing her chapter on tax history and probably other elements of the book.

Notes

  1. Regardless of what they said, you could always tell it was top of mind for legislators when they requested revenue raising ideas or suggested remedies for flaws in their own proposals. ↩︎
  2. Unfortunately, those private polls are not publicly available; a few legislators told me about their results, but I never saw the wording of questions, a key issue, or crosstabs. ↩︎
  3. My favorite example is the big tax increase Minnesota enacted in the 2013 session – adding a new income tax rate on high income individuals, a corporate tax increase, and a hefty cigarette tax increase – to eliminate the large deficit caused by the Great Recession. The payers of these taxes – smokers, high income earners, and corporations – are the quintessential guy behind the tree. That was enacted by a DFL trifecta, of course. ↩︎
  4. I had a few quibbles about tone, emphasis, and so forth but generally found it a good introduction for someone who has little background in tax history or policy. ↩︎
  5. My take on her knowledge questions is that they are more indicative of tax interest and awareness than the kind of knowledge necessary to many incidence questions. ↩︎
  6. Old fashioned racism is obvious. Campbell’s and others’ measure of symbolic racism has four elements: essentially a view or attitude that minorities (1) no longer face much prejudice, (2) fail to advance because they don’t work hard enough, (3) demand too much too fast, and (4) have gotten more than they deserve – all as revealed in response to survey questions. ↩︎
  7. It’s worth noting that the lower life expectancy of the Black population results in those two program disadvantaging Blacks as a simple actuarial matter, FWIW. ↩︎
  8. Also, the perception that the mortgage interest deduction is a middle-class tax break is now false (maybe less so when the relevant surveys used by Campbell were done). Accord to TPC, less 9% of tax filing units benefit and 84% of the benefit goes to those with incomes > $200K. I suspect that most people presented with those facts would not consider it a middle-class tax benefit. ↩︎
Categories
tax administration

February IRS update

Data cases

Two cases are working their way through the federal courts challenging the Memorandum of Understanding (MOU) between the IRS and DHS to allow sharing of return information for immigration enforcement purposes (prior posts: here and here).

The DC Court of Appeals upheld the MOU in the first case. It rejected the contention that the MOU was contrary to the statutory authority to share return information (specifically the current address of the taxpayer) under the federal criminal enforcement exception. Centro de Trabajadores Unidos v. Bessent (D.C. Cir. 2026).  It also rejected the argument that the IRS’s reversal of its policy was arbitrary or capricious because the agency did not follow the APA procedures. This case has received little media coverage and is a facial challenge to the MOU. Because of that, it is unclear what if any effect it will have on the other case which challenges the actual practices the IRS has used in disclosing information to DHS.

In that case as I previously described, the district court the IRS implemented the MOU in a way that violated the law. That decision is on appeal and the district court’s order stayed. But in the meantime, the district court has issued an order stating it would supplement the record if it still had jurisdiction of the case  – based on the IRS’s subsequent admission that it violated the statute by disclosing data to ICE in response to requests that were legally incomplete or insufficient. (The court left to the Court of Appeals whether this allows the plaintiffs to conduct discovery while the case is on appeal.)

WaPo covered that ruling:

The ruling finds that DHS did not follow this law. The judge wrote that the vast majority of the nearly 47,300 taxpayer addresses the IRS shared with Immigration and Customs Enforcement in August were disclosed without the IRS confirming that ICE provided a valid address for the person whose records it was seeking.

“The IRS violated the [Internal Revenue Code] approximately 42,695 times by disclosing last known taxpayer addresses to ICE … without confirming that ICE’s request set forth the ‘address of the taxpayer with respect to whom the requested return information relate[d],’” the judge’s opinion stated.

My guess is that on appeal the MOU will be upheld but the IRS will be required to actually follow its terms, which means that DHS will need to (1) supply an address for the undocumented individual that matches an address the IRS had (if not the current one) and (2) the individual must be under criminal investigation, for the IRS to provide the current address. I wonder in how many of the over million submission it made, ICE actually met requirement (2) since many immigration violations are civil in nature (e.g., overstaying a visa).1

Another WaPo story (2/11/2026) reveals the IRS released confidential tax data to DHS before it had entered the MOU:

Before the agreement was struck down, DHS requested the addresses of 1.2 million individuals from the IRS. The tax agency responded with data on 47,000 individuals, according to court records.

When the IRS shared the addresses with DHS, it also inadvertently disclosed private information for thousands of taxpayers erroneously, a mistake only recently discovered, said the people familiar, who spoke on the condition of anonymity for fear of retribution.

Unauthorized disclosure of tax return information entitles the taxpayer to $1000 in damages for each disclosure, which the WaPo article alludes to. I.R.C. § 7431(c)(1)(A). I wouldn’t worry too much about the administration revealing to the victims that their information was disclosed or paying them the damages they’re entitled to (I’m not as confident about Treasury resisting paying the Trumps, though, for the disclosures to ProPublica).

Meta litigation – new transfer pricing enforcement tactic?

Jesse Drucker reports, I.R.S. Tactics Against Meta Open a New Front in the Corporate Tax Fight (NY Times, 2/24/26), that the litigation over Facebook’s transfer pricing reveals that the IRS is attempting to use a new technique to fight transfer pricing abuse in which (typically) big tech and pharma companies artificially shift US profits to foreign tax havens.

Excerpts from the story:

A multibillion-dollar dispute between Meta and the Internal Revenue Service is signaling a major shift in how the agency targets tax dodges used by big companies that push profits offshore.

After years of struggling to stop firms like Amazon, Microsoft and Coca-Cola from shifting trillions of dollars to island havens, the I.R.S. is deploying new legal tactics in a court battle with Meta, the owner of Facebook and Instagram. If successful, some tax advisers say, the agency could recover hundreds of billions in taxes from multinationals.

…

I.R.S. auditors have been pursuing Meta for about a decade, contending the company lowballed the price of trademarks, customer agreements, software licenses and other rights it moved offshore. Their new argument is based on Meta’s overseas profits since then: They say the company failed to report roughly $54 billion in income and owes nearly $16 billion in back taxes and penalties.

…

When Meta moved those rights offshore, its Irish unit agreed to pay its U.S. parent about $6 billion for those rights. In theory, that amount equaled the future profit that Meta expected to generate in most overseas markets attributable to the various technologies and business lines already developed in the United States.

Now the I.R.S. is pointing to the reality that, in the years since 2010, Meta earned tens of billions more than its projections.

US multinational corporations (MNEs) artificially convert US/domestic income to foreign source/low taxed income by transferring IP (patents, trademarks, etc.) to subsidiaries entities domiciled in low-tax foreign countries for an agreed upon price under a cost sharing agreement (CSA). The MNEs then pay royalties or other compensation to the foreign entities resulting in foreign-source income. That arrangement only works (i.e., artificially converts domestic to low-taxed foreign income) if the CSA undervalues the IP relative to those subsequent payment flows. That, of course, is routinely what happens.

The IRS is stuck in an asymmetrical arrangement in the setting of this value – the company certainly knows more about the profit potential of the IP and it has a strong incentive to undervalue the IP in the CSA. The IRS, according to the article and this chief counsel memo, is now asserting that the second sentence of I.R.C. § 482 and the regs (probably more important) allow it to revisit that value if actual profits (i.e., the payments for the IP) prove it to be too low. The statutory language seems ambiguous, although the JCT Bluebook and the regs support the newly asserted IRS view.2

My take: Will this survive the court’s textualist review of the statute and regs, post-Chevon? I would not bet much on it. If the IRS persists and its approach is upheld (two big IFs), it will likely be truly revolutionary. But it will take years to play out and will be a boon to state corporate taxes if IRS prevails. Loper Bright means that not much deference will be given to the regs, which also seem ambiguous.

GAO on paid preparers

The GAO put out another report (2/24/2026) reiterating prior recommendations that:

Congress could improve federal oversight of paid preparers by granting IRS authority to establish professional standards for paid preparers and security requirements for IT systems of paid preparers, as we previously recommended.

I didn’t see any new information in the report (i.e., beyond what prior GAO research had uncovered) about the systematic errors unregulated paid preparers make (i.e., those other than enrolled agents, licensed CPAs, and so forth). I guess it’s good to remind Congress of this issue. Of course, we all know they won’t do anything. The courts struck down prior efforts by the IRS to regulate preparers without legislation and the potential climate in the courts and Congress for that is even worse now.

TIGTA reports

TIGTA reports (2/6/2026) that the IRS is making very little progress in digitizing tax returns (p. 8 of pdf):

Contractors were only able to scan 517,000 (5 percent) of the 9.8 million paper-filed Forms 940, 941, and 1040 received during the 2025 Filing Season as of May 2025. Similarly, the interim ZPI contractor only scanned approximately 425,000 (7 percent) of the 5.7 million paper-filed Forms 940, 941, and 1040 received from May 19, 2025, through August 9, 2025. Two factors affect the volume of tax returns that contractors can digitize: 1) the contractor’s ability to hire sufficient staff, and 2) the IRS’s ability to timely provide required clearances to contract staff, once hired.

This does not look good for the zero-paper initiative. It may explain the plan to outsource scanning for the 2026 filing season to contractors. I wonder if that too will run into the snag of slow processing of clearances for contractor staff, thwarting it as well.

Onboarding of employees hired under the IRA funding did not look to go well according to this February 19th Report with many the new hires not getting laptops and statements of what they were expected to do on the job:

Based on the results of a sample we reviewed, we estimate that 7,505 (40 percent) of the 18,901 employees hired in FY 2024 received their laptop more than 5 workdays after their start date. Without their laptop, an employee cannot effectively perform their work. For example, a tax examining technician may be unable to review and analyze internal documents and taxpayer returns, one of their major duties. (p. 7)

…

Based on the results of our sample, we estimate that 8,253 (44 percent) of the 18,901 employees hired in FY 2024 did not receive their CJE [critical job elements] form within 30 calendar days of their start date. When managers delay the discussion and completion of the CJE form, the employee may not clearly understand the supervisor’s expectations and the level of performance needed to achieve a specific rating. (p. 9) [notes omitted.]

Almost half of a billion dollars in erroneous recovery rebates were paid out to more than 300K ineligible individuals according to a February 23rd TIGTA report. Most of the money ($317 million) went to 225,028 nonresident aliens (i.e., helping other countries recover from the pandemic?). The next largest category ($177 million) were payments to people who had already received the payment. This does not help build confidence in the agency – of course, it was under enormous pressure to quickly get these pandemic payments out.

Staffing crunch hits

Government Executive reports on the reassignment of IRS employees to deal with the filing season and it does not sound good:

The Internal Revenue Service is asking seasoned employees without any direct tax experience to perform entry-level tasks of answering phones and processing tax returns, a step impacted staff call unprecedented as the agency scrambles to prepare for filing season. 

The reassigned workers, who are being detailed out on an involuntary basis, are coming from the IRS human resources and, potentially, the IT departments. Some employees reported that supervisors first asked for anyone who had experience in the front-line fields to consider the roles, but they ultimately chose many individuals with no prior experience working directly on tax issues.

…

The divisions in IRS that process tax returns and provide telephonic and in-person customer service, as well as other duties related to filing season, have lost 8,300 workers, or 17% of their staff, the IG found. 

The IRS division tasked with processing original and amended tax returns has hired just 50 employees in anticipation of the 2026 filing season, or 2% of its authorized level. It can take up to 80 days to train new employees, the IG said, meaning employees hired now may not be ready to assist during filing season at all. Accounts Management, which handles IRS customer service, has hired just 66% of the filing season employees for which it has been authorized. 

The IG warned the shortfalls could lead to delayed returns and slow service for taxpayers in the upcoming season and said the impacts have already been felt. Tax return backlogs were still elevated as a result of the pandemic, the IG said, but have soared higher due to staffing losses in IRS. The total now stands at 2 million, up 33% from a year ago. 

…

One employee whose office is sending staff to fill the details noted it has never backfilled after the deferred resignation program and the temporary details would therefore have an outsized effect on efforts to fulfill normal duties. Another employee said the entire ethics team, with the exception of one person, is being detailed to taxpayer services. 

“They are leaving one person to deliver ethics training for the entire agency,” the employee said. “It’s an impossible task for one person.” 

The same worker added employees in charge of recruiting and hiring are being detailed out, making it more difficult for IRS to bring on the staff the IG said it is failing to hire.

Notes

  1. That would be bad news for encouraging undocumented individuals to file returns. But that effect of data sharing pales by comparison to likely effect of ICE ‘s enforcement tactics on any kind of cooperation with the federal government by undocumented individuals, including filing and paying taxes. ↩︎
  2. The language requires the two amounts of income to be commensurate. Whether that allows periodic revaluations or adjustments in light of actual later income flows is the issue. ↩︎
Categories
Uncategorized

Compare and Contrast

Minnesota is in the throes1 of the administration’s crack down on illegal immigration.2 It has resulted in the federal government shooting and killing two Americans under (the most favorable characterization) questionable circumstances.

This effort is being financed, in part, by OBBBA’s massive increase in DHS’s funding. That caused my tax-centric mindset to compare the signature discretionary spending increases for federal agencies under the Biden and Trump administrations:

  • Biden’s Inflation Reduction Act’s (IRA) IRS funding for tax compliance (most of which has now been undone)
  • Trump’s One Big Beautiful Bill Act’s (OBBBA) increase in the DHS funding for immigration enforcement.

I’ll compare the two efforts using a few different measures. I think they are revealing of the differences and some similarities in the character, ideology, and tactics of the two parties.

Dollars committed

The table compares the respective spending increases for the two agencies. To adjust for inflation, I converted the IRS funding baseline and the IRA authorization to 2025 dollars. (OBBBA was enacted in 2025, so I used its nominal amounts.) The baseline amounts are from IRS and DHS budget documents (for FY2022 and FY2025 respectively). I used their total resources, which include fees that agencies can spend in addition to their appropriations.

For DHS, I limited the baseline to that for Immigration and Customs Enforcement (ICE) and Customs and Border Enforcement (CBP), which filters out unrelated DHS spending, such as that for FEMA and TSA. Similarly, I excluded the IRS increases for taxpayer service (about $3 billion) and the amount for DHS increases to reimburse state and local governments for their costs (about $26 billion). Doing that was a crude effort to focus on the increase in agency enforcement-related spending.3 I used TIGTA numbers for the IRS and CFRB numbers for the DHS increase.  Because the increases were to be spent over different periods (10 years for the IRS and 4 years for DHS), I converted the increases to annual amounts to give a roughly comparable magnitude measure. All amounts are in billions of 2025 dollars.

IRA’s and OBBBA’s Signature spending initiatives
 IRSDHS
Baseline spending$15,291$33,514
Total $ increase83,300150,000
Annual increase $8,33037,500
Annual increase %54.5%115.9%

It’s clear that immigration enforcement received a much larger increase, both in absolute and percentage terms – more than twice as large.

The table amounts are a crude measure of enforcement efforts for both agencies. They include IRS spending on operations support, system modernization and so forth and DHS spending for the border wall, neither of which most would think of as enforcement.4 Getting beyond that requires a more granular knowledge of the agency spending than I have for DHS.

That said, the Congressional Research Service has estimated that the IRA funding (before rescissions) increased IRS enforcement by 69% or about $4.6 billion/year. The CFRB numbers that are more clearly related to ongoing ICE and CBF enforcement are $99 billion or $25 billion/year, which is a more modest 75% increase that is in the ballpark with the IRS enforcement increase per CRS. But if you focus exclusively on the ICE component with its much more modest baseline (a little more than $10 billion) and its much larger share of the increase (border funding was mainly the wall), then the increase balloons to 185%. That is probably is closer to the appropriate comparison – again, more than twice the increase for the IRS.

It is safe to say the immigration crackdown funding is at least twice the amount Congress original authorized for tax compliance in the IRA on an annualized basis. It’s probably much higher. For example, Wikipedia asserts that OBBBA “increases the funding for Immigration and Customs Enforcement (ICE) from $10 billion to more than $100 billion by 2029, making it the single most funded federal law enforcement agency.”  I have no idea if that’s right (it’s Wikipedia after all) but that would be close to 20X the annual amount in the IRA (as passed) for tax enforcement.

Net fiscal cost

As a fiscal or budget matter, comparing outlays for the two efforts is like comparing apples and oranges, more specifically means versus ends. Expanded IRS funding was intended to raise revenues – that is, as a means to pay for other government spending (the ends). OBBBA’s expanded immigration enforcement is spending on an end (immigration enforcement) and the economic consensus is that mass deportation would be a drag on economic growth and thus on revenues from the income and corporate taxes. See e.g., this Peterson Institute working paper (pp. 8ff and Figure 1).

So, a more accurate fiscal comparison should take those differences in kind into account. I’ll ignore the negative growth effects of mass deportation because I’m not aware of a neutral source that estimated the potential budget effects without relying on (likely shaky) assumptions about how many people could and will be deported.

  • IRA’s funding of the IRS was estimated by CBO as raising $180 billion in additional revenue. Thus, after deducting the $80 billion in outlays the net effect would have reduced the budget deficit by $100 billion over ten years.
  • OBBBA’s immigration funding (ignoring the negative growth effects), by contrast, increased outlays and the budget deficit by $176 billion. But it’s worse because its spending was compressed into four years. If Congress chose to make it permanent, CFRB estimated that the 10-year cost would rise to $293 billion.

Thus, a more accurate comparison is almost a $400 billion difference in the deficit effects over the traditional 10-year period – going from reducing the deficit by $100 billion to increasing it by just less than $300 billion. And that ignores whatever negative growth effects occur from deporting hundreds of thousands of workers. Of course, there’s a reasonable chance (let’s hope) the immigration funding will be cutback at some point.

Sustainability

Both efforts clearly were long-term in nature. You can’t deport 11 to 14 million people in a year or two.5 Similarly, building tax enforcement and auditing systems is a complicated and long-term project. It requires developing both IT and human capital systems in the tax administration agency. Both bills, thus, provided multi-year funding. Of course, unspent funds can be rescinded by future Congresses.

That is exactly what happened to the IRS funding. It provided 10 years of funding but in less than two years Congress began to rescind it. Full rescission of the enforcement funding has effectively occurred with resolution of the latest shutdown, less than four years after enactment. This chart from the Bipartisan Policy Center captures what has happened. Of the $45.6 billion for enforcement only $0.1 billion remains. The IRA money that remains for the IRS is mainly in operations support and business systems modernization, not enforcement.

The jury is out on the DHS funding increase. The GOP used a strategy that is less vulnerable to rescission. It provided funding compressed into four years, which means rescissions will need the agreement of the Trump administration. Overriding a veto even if the Dems retake control of Congress would be all but impossible.6 The resulting risk is that renewal or extension will come up sooner and is vulnerable to the Dems taking control of one or more of the three crucial budgeting entities and insisting on cutbacks. But frontloading the money certainly seems likely to ensure more is spent, even if ineffectively.

Policy execution

The cliché regarding recipes and cooking – the proof is in the eating – applies to public policies and programs as well. Policy design, enactment, and funding are critical, obviously. But implementation matters as much or more. A well designed and fully funded program is worthless if it is not appropriately implemented. In this regard, there are more differences than similarities between the two initiatives.

Expanded tax compliance was undertaken as the long-term bureaucratic initiative it was – methodical planning, starting to hire and train staff, acquisition and building of IT infrastructure, etc. The IRA passed in August 2022 and as described by CRS:

Shortly after the IRA’s enactment, the Department of the Treasury promised to deliver to Congress by mid-February 2023 a report detailing how the IRS intended to use the IRA funding. The report, delivered April 6, 2023, sets forth five key objectives for using the funds and a variety of initiatives and projects for accomplishing them.

The short (2 page) CRS report describes the objectives and how the Service intended to achieve them. One can disagree with the plan (warning 150 pp long) or some of its elements, recognize that its objectives are general, strategies ambiguous, and implementation crucial, but explicit and detailed plans were made and communicated to Congress and the public. Ongoing evaluation and reports were made on implementation by the Service and TIGTA (example). Of course, the baby was killed in the cradle. So, we’ll never know whether the plans would have been implemented or worked. But it was not for lack of effort in what was at least a reasonable plan to use the money. The money that was spent (a lot) went for anodyne taxpayer service and to improve systems, (i.e., generally unobjectionable unless you want the tax collection agency to fail and undermine government credibility as a general matter; I probably should not discount that possibility in the current environment).

Implementation or policy execution of the aggressive immigration enforcement funding bonanza could not differ more. We’re less than nine months out from OBBBA’s passage but are headlong into high profile implementation. If planning was done, it must have been started before OBBBA’s enactment (possible – recall Project 2025) and it has not been communicated to the public or Congress (unless privately only to GOP members). Hiring and training processes have been truncated and standard methods abandoned for meeting daily detention or deportation quotas (note that this occurred before OBBBA’s passage).7 Enforcement has been so aggressive and rapid-fire that DOJ has admitted in a court filing that it violated 50 court orders in immigration related matters (admittedly, some of these violations were one day delays in complying, but still).

The administration is reportedly paying more than $100,000 per deportee to third countries to accept individuals whose countries of origin won’t readily take them. This makes one wonder if anyone is even thinking about, much less calculating, the marginal benefit of their actions compared to alternative approaches to deal with these individuals.

The immigration enforcement effort comes across as a secret police action whose planning was DOGE-like (cut without measuring because you’re sure you know the size needed, if you’re not right, you’ll force it to fit).8 The only way it makes logical sense is that they decided to deter migration by making the US such a miserable place that migrants will not want to come here and those already here will voluntarily leave. What they forgot is that also makes the US an undesirable place for many citizens, as well as desirable migrants. In 2023, 25% of US physicians were foreign born as an example. Where would we be without a quarter of our medical doctors?9

Rhetoric/political messaging

Both bills were the result of partisan political enterprises, passing under the reconciliation rules to avoid the filibuster on straight party-line votes. But that’s not the full story. It’s useful to do a little subjective, qualitative evaluation of how partisan and extreme they were, including the rhetoric used to support and oppose them. Once again, there are similarities and differences.

Degree of partisanship

In evaluating how extreme the two measures are, two different metrics seemed instructive to me:

  • How closely did the measure relate to each party’s core agenda?
  • How much did each of the parties need to compromise among themselves to formulate viable proposals within the party?

In relating the two measures to the parties’ core partisan agendas, the striking difference relates to means versus ends. IRS funding was a means to fund the Dems’ policy agenda, while increased immigration enforcement was the actual GOP end policy.

IRS funding is obviously not an end in itself. Rather, it was a means to Dems’ ends of funding government programs.10 Depending on how the revenue was used, one could even view it as bipartisan (e.g., for deficit reduction, an oft-expressed GOP goal). More realistically, it funded the partisan priorities in IRA such as expanded ACA coverage, refundable child credits and so forth reducing the amount of debt financing. In that view, it’s an analogue of OBBBA’s SNAP and Medicaid cuts.

By contrast, OBBBA’s increased ICE funding directly addresses a major partisan campaign issue of the GOP: more aggressive border and immigration enforcement and policies generally. Since the 2016 campaign (“Build the Wall” was a consistent mantra and by many accounts a reason why Trump won the primaries and nomination11), border enforcement and general opposition to immigration of all types have been prime agenda issues that the GOP used to differentiate itself from the Dems.

In assessing the amount of compromise needed to assemble a measure that could pass, the differences are more striking. IRS funding was the most bipartisan of revenue raising options available to the Dems, while the GOP passed close to, if not, their actual immigration policy.

In coming up with revenues to fund their policies, Dems are arrayed as follows: (1) the hard left (Bernie Sanders, Elizabeth Warren, et al as the metric) would impose extremely progressive taxes such as a wealth tax, expanded corporate taxes and higher top individual income tax rates, (2) the middle of the party (Biden budget metric) would have expanded the income tax (grab bag of stuff that hit those with incomes >$400k such as carried interest, taxing capital gains at death, etc.) and clawing back some of TCJA’s corporate rate cut, and (3) the most conservative part of the party (whatever Manchin and Sinema would accept as the metric). After struggling mightily to agree on anything, they finally settled on (3) the most conservative approach – compliance funding for the IRS, a corporate minimum tax, and some other items. One could plausibly argue that in a divided government, the GOP might have agreed to much of this in a budget deficit reduction standoff as in the pre-Trump days. That was certainly true in 2013 when they agreed to allow some of the Bush tax cuts to expire as revenue raisers.

By contrast, as far as I can tell, OBBBA passed virtually what Trump campaigned on and wanted with regard to immigration enforcement. A more modest version would have been an expanded and modified version of the proposal that Senator Lankford negotiated with senate Dems (and Biden agreed to) in 2024. That agreement provided lower funding (less than $120 billion) and allocated the money to somewhat different priorities (e.g., funding more judges to handle cases). OBBBA allocated half again as much money and allocated almost all of it for enforcement and the wall with very little for judges to handle the resulting cases.12

In sum, by the very nature of the two measures and the way in which they were assembled, ICE funding was obviously much more partisan and extreme than the IRS funding.

Rhetoric

By contrast, the political slogans, tactics, and rhetoric used to oppose the two spending packages are eerily similar.

  • Abolish ICE/IRS – The Dems’ “Abolish ICE” messaging has been ubiquitous (after some handwringing about whether it would boomerang the way Defund the Police did) but the GOP’s version is easily forgotten, if more laughable. (ICE, at least, is a relatively new incarnation in the wake of 9/11. See the section below on Context and Background. The idea of killing the federal government’s main tax collection agency is ludicrous.) But eliminating the IRS is a feature of the FAIR Tax, a longstanding GOP proposal. The most recently confirmed IRS commissioner once was an author. It provided for replacing the individual and corporate income taxes, payroll, and estate and gift taxes with a sales tax to be collected by the states on behalf of the federal government. Essentially returning the country to a feature of the Articles of Confederation, where the national government relies on the states for its revenue. (Check with Alexander Hamilton; that was the prime rationale for the constitution.)
  • Jack booted thugs – Each side has characterized the spending as funding quasi-police state tactics. It’s been a few years, so it’s again easy to forget Senator Grassley’s, then Senate Finance chair, and Senator Cruz’s rhetoric on this that was echoed by other high-level Republicans. The difference, of course, is that the immigration funding has resulted in government killings, multitudes of false arrests, confinement in awful conditions for often no or only civil law violations, etc. The threat of auditing lemonade stands (the head of the Republican Party said that) pales by comparison, even if it were reality. Making false charges may be more revealing of what you would do if you had power is all I can think. It’s no surprise that the administration’s immigration enforcement activities are closer to reflecting the Jackbooted Thugs characterization than anything the IRS did under Biden or ever.
  • Government shutdown threats – The ICE funding has resulted in a partial government shutdown (no DHS funding), as the Dems are on legal restrictions on ICE and CBP’s tactics before authorizing funding.13 Again, it’s easy to forget Senator Cruz, ever the fount of over-the-top, idiotic rhetoric, also advocated shutting down the government back in 2023 over the IRS funding.
Final thoughts

In sum, by the very nature of the two measures and the way in which they were assembled and implemented have parallels, but the ICE funding was hands-down more partisan and extreme than the IRS funding. And its actual effects were much worse than the GOP’s over-the-top rhetorical charges about the IRS funding.

I think this reflects basic differences in the character and composition of the two parties. The Dems are heterogenous bunch – reflecting widely divergent demographic groups and varying policy views, ranging from uber-lefty to centrist. The party’s tent now covers a cohort of refugees from the GOP’s extinct moderate wing. That constituency, by its nature, compels the Dems to be more moderate and normie.

By contrast, the GOP has become increasing homogeneous both demographically and in its policy views. The southern strategy, adopted in the 1960s and culminating with the 2016 nomination of Trump that de facto rejected the 2013 autopsy’s recommendations, made it more or less a party of and for whites.14 Trump’s death grip on the party and its policy agenda has also made the party unfriendly to anyone who does not hew to his MAGA populist agenda with all of its vagaries and idiosyncrasies. That has resulted in a critical mass of its base (nationally and in many localities) of xenophobes and conspiracy theory friendly types who can drive the primary result, which puts the fear of God in elected officials and potential candidates. That weird mix is the only way I can explain/understand their immigration agenda and its horrific practices in service of what seems to me, at best, idiotic economic policies.15

Contextual background info

The following provides some background information that seemed relevant to me and informed my thoughts expressed above.

History of IRS abuse. There is a long history of using the IRS as a partisan weapon – sometimes successfully (FDR going after Andrew Mellon and Huey Long) and others largely thwarted by principled opposition (e.g., IRS Commissioner Walters refusing to go along with Nixon). The most recent example was Lois Lerner and the scandal involving slow walking of the approval of tax-exempt status for Tea Party related groups (and others), which IMO was wildly overblown by GOP partisans but was still bad. There is a Wikipedia page on it.

That background makes the GOP’s over-the-top rhetoric about rebuilding IRS auditing more understandable, although still misplaced IMO.

Border patrol and ICE. As a tax guy, I was aware of the abuse of IRS powers across the years but not of the longstanding issues with the Border Patrol. See this NYTimes column by Reece Jones, the author of a book about the Border Patrol, for examples going back to its formation in the 1920s:

How the Border Patrol operates can be traced back to the agency’s origins in Wild West frontier policing. The United States Border Patrol was established in May 1924, days after the signing of the Johnson-Reed Immigration Act, which set very small quotas for immigrants from most of the world except Northern Europe. According to the Times headline at the time, the law was meant “to preserve racial type as it exists here today.”

Senator David Reed, a Pennsylvania Republican who sponsored the immigration act, explained in a 1925 Senate debate: “They [the border patrol] have no right to go into an interior city and pick up aliens in the street and arrest them, but it is just at the border where they are patrolling that we want them to have this authority.” He reassured his concerned colleagues, “We are all on the alert against granting too much power to these officials to act without warrant.”

His promises proved empty. The first agents were hired from frontier law enforcement and brought with them a frontier ethos. One agent bragged in his memoir that he had killed 27 people, but that was just whites; he didn’t bother to count Black and brown people. Another agent, angered when a smuggler shot his partner, went to the Rio Grande and indiscriminately shot at every Mexican he could see on the other side of the river.

ICE is a newer agency, created in response to 9/11. It too has had multiple issues in that shorter history. This Substack post by Garrett Graf is long but worth reading to get a flavor of issues and problems with both agencies:

ICE is an agency whose recruiting and training standards are so low that other federal law enforcement agents say pejoratively that ICE is “hired by the pound, from the pound.” And the paramilitary CBP, especially, has been uniquely callous with human life and suffers from a deeply ingrained culture of racism and misogyny, all of which is enabled by an all-but unequaled longstanding sense of impunity.

It’s no surprise, I guess, that tasking these agencies with an unprecedented with a mass deportation is generating the friction it has. (Operation Wetback during the Eisenhower Administration deported a small fraction of what Trump promised in a much different social context.) The Dems’ rhetoric and opposition are totally understandable to me.16

Fraud-fighting. This, of course, was one of the administration’s rationales for the Minnesota surge. It is a mere pretext. Minnesota does have a serious fraud problem in its social service programs and the fraud that has been uncovered is strongly linked to one of the state’s immigrant communities. But the surge is pretextual because:

  • The fraud that has been uncovered is nearly all linked to citizens or legal residents.
  • Neither ICE nor CBP have the mission or expertise to investigate white collar fraud. If fraud were the real concern, the feds would have sent white collar crime experts and investigators, auditors, and data scientists, not the equivalent of poorly trained bounty hunters.
  • Yes, Minnesota’s uncovered fraud is large – $250 million in Feeding Our Future alone and tens of millions in other cases. (Joe Thompson’s cited $9 billion IMO was purely speculative and is not based on actual evidence. It seemed to me an irresponsible assertion for a prosecutor to make.17 The report by Optum (coverage here and here), albeit commissioned by the state, seems more measured and realistic, and suggests a fraction of the amount might be fraudulent.) The evidence certainly could support well targeted federal enforcement efforts. But other states – notably Arizona’s $2.5 billion documented Medicaid fraud – have been larger and have not garnered the same attention from the feds, the GOP, or right-wing media. It’s easy to guess why. There isn’t convincing evidence that Minnesota’s Medicaid fraud is out of range with other states. There simply are reliable benchmarks that I’m aware of.

Notes

  1. As I was writing this post, the administration announced an end to it. Skeptics, including me, are withholding judgment on the extent to which that will happen. ↩︎
  2. It’s also a crackdown on legal immigration with the arrest/detention of people with TPS status, entrants with pending asylum claims, and already vetted refugees who have been confined to re-review their vetting. That says nothing of the many citizens who have been swept up because of their appearance, accents, or protest-related activity. ↩︎
  3. Some of the increased DHS spending was explicitly denominated to reimburse state and local governments for their costs, which I excluded. Much of the respective increases for both agencies was for infrastructure-ish spending – e.g., building the border wall and IRS system modernization. Also, I would note there is an asymmetry in the comparison because I did not adjust the IRS baseline to exclude non-enforcement spending such a pure taxpayer service; ICE and CBP amounts, by contrast, are more or less exclusively enforcement. ↩︎
  4. The border wall spending – over $45 billion – is IMO some combination of inefficiency and waste. There are simply more effective and less expensive ways to prevent border crossings. Consider also that the administration claims (with reasonable credibility) to have essentially stopped most illegal border crossings from Mexico without building the wall. Much of that, of course, may simply be due to making the US a much less attractive place for migrants in various ways, including the brutality that may be visited on you if you’re successful in crossing the border. ↩︎
  5. The last 2+ months in Minnesota alone reveal its impracticality, as well as its society-destroying effects. ↩︎
  6. The Biden administration did agree to the first tranche of rescissions in the IRS funding, so Trump and GOP members of Congress plausibly could agree to cutbacks. That seems unlikely given their MO. ↩︎
  7. This topic is well outside of my expertise. I based my conclusions on reading the general news media stories over the last months and Garrett Graf’s Substack post referenced in the last section of this post on Contextual background info under the heading, Border Patrol and ICE. ↩︎
  8. Along these lines, DHS has adopted what Politico describes as “a ‘mandatory detention’ push — an unprecedented reinterpretation of decades-old laws — has resulted in thousands of people, most without criminal records, being detained, even if they have lived in the country for decades without incident.” This, as one would expect, has led to a plethora of litigation and as Politico reports: “[D]istrict court judges appointed by every president since Ronald Reagan have overwhelmingly agreed, rejecting the new policy, while a small but growing minority — primarily of Trump-appointed judges — has endorsed the administration’s view. The 5th Circuit Court of Appeals has embraced that outlier view as well. But the issue is far from settled and could be on track for the Supreme Court.” The Politico article has a table that tracks the cases by the name of the judge and the president that appointed each, with links to the court orders. Here’s a link to David French’s scathing take on the 5th Circuit decision, the piece that alerted me to this issue. ↩︎
  9. See this NY Times story about a town in Alberta that resorted to paying big signing bonuses to attract seven family doctors from West Africa out of desperation. I guess that still may be possible in the US, but the Trump administration has imposed $100K fee on H1B Visas, one of the typical ways foreign physicians are legally brought to the US. So, a similar US town would need to pay that, in addition, to a signing bonus. It seems the opposition to any kind of migrants, included ones critically needed and who follow the rules, runs deep in this administration. ↩︎
  10. Sure, it could also be viewed as an end in itself, i.e., ensuring that more taxpayers pay their legal obligations, the full tax liability. It’s fairer to classify that as a desirable side effect and nowhere close to a core agenda item. ↩︎
  11. It was contrary to the general policy preferences of the GOP donor class – Club for Growth, Kochs, etc. They were more on board with the Gang of Eight immigration compromise during the Obama administration than the current Trump approach. Earlier efforts during the W administration were torpedoed by the efforts of Senator Jeff Sessions and his aide, Stephen Miller, who now is a key domestic policy advisor to Trump. Miller, by some accounts, was behind the Trump’s use of Build the Wall as a key 2016 campaign issue and contributor to his primary success. See these NYTimes and Atlantic pieces for background information on Miller and his role in Trump’s immigration policy. ↩︎
  12. This, of course, is a factor in the immigration case backlog. The DOGE-like firing of immigration judges, reported to be 100, is almost certainly another contributing factor. OBBBA increased enforcement spending by multiple factors but the number of judges by much less. That only works if the enforcers are also the de facto judges – i.e., the people detained are deported without hearings and adjudications or are detained for very long durations. I don’t know but doubt that DHS has even hired sufficient replacements for the fired judges, much less for an increase in the cohort. By contrast, hiring enforcement agents is a full go. ↩︎
  13. Count me skeptical of the negotiating power resulting from holding TSA and FEMA employees hostage, while ICE and CBP go merrily on their ways. Seems like a pure reflexive “do something/anything” reaction, much as I agree with the need for and sensibility of many of the restrictions. ↩︎
  14. They made inroads in the 2024 election with conservative Hispanics and Black males but kicked it away with their governing policies on immigration and economics. That reflects, I think, the current iteration of the party’s MAGA core philosophy. Building a large electoral majority does not seem to a big goal if it involves being friendly to more diverse constituencies.

    For a Rip Van Politico who went to sleep in the 1960s, this description of the party of Lincoln, which provided the necessary Senate votes to overcome the southern Dems’ filibuster and pass the civil and voting rights acts, would be hard to believe. I think it came about gradually by various transformations and moves necessary to capture white southern Democrats and northern blue collar “Reagan Democrats” (e.g., political messaging about welfare queens, Willie Horton, and similar) and to attract most of the conspiracy theorist “crank” element of society (accomplished by a succession of figures spouting faux populism, conspiracy theories, anti-intellectualism, and scapegoating – Gingrich, Buchanan, Tucker, RFK jr., etc.). That is now a critical mass of the party’s base – sufficient, as proven by Trump and others, to win most GOP primaries. It was fully confirmed with Trump’s freak election in 2016 and most importantly by 98% of the party’s elites’ acceptance of his characterization of the events of January 6th. That has made the party a wholly owned Trump subsidiary and excommunicated any normie, moderate element (most neocons, prudential conservatives, true limited government types and so forth) who were unwilling to always go along with whatever his wacky whims.

    This is a party that accepts the likes of Nick Fuentes and Candace Owens, while shunning Mitt Romney and Liz Cheney. It’s a truly remarkable metamorphosis for one of the nation’s two great political parties. At least, that is my analysis of what has happened as someone viewing it from the nonpartisan sidelines. ↩︎
  15. Proponents, including Trump and administration officials, frequently justify mass deportations as creating jobs for citizens and legal residents. (The real justification is likely more sinister with cultural and racial dimensions.) This is a classic Econ 101 justification that has some simplistic appeal but is contrary to reality (see e.g.). Even as a matter of common sense (economic study unnecessary), most citizens are unwilling to accept farm worker, roofer, long term caregiver and similar jobs. ↩︎
  16. IMO if Biden had followed a border and immigration policy closer to Obama’s, the 2024 election results might have come out differently. Biden’s laissez faire border policy for the first 3+ years of his administration made the Trump’s campaign focus on immigration more salient and acceptable to voters outside his xenophobic base. Moreover, it was an anchor dragging down Harris because of her assigned role in the administration (“border czar” to the Right) and the general impossibility of separating herself from the Biden policies. ↩︎
  17. A Strib article, posted after I wrote this post, supports my view WRT to Thompson’s speculations. Here’s a quote: “Several of Thompson’s colleagues noted it was unusual for a prosecutor to publicly speculate about active investigations, and several said they confronted Thompson about the remarks. Thirteen former colleagues said they believe his statements are at odds with Justice Department rules that bar prosecutors from discussing an investigation before an indictment except in “extraordinary” circumstances, such as an “imminent threat to public safety.”
    “That is what politicians do,” one former attorney said. “I think it was extremely irresponsible.”
    Thompson said politics had nothing to do with his statements. He said his comments were “fully authorized” by the Justice Department.” ↩︎
Categories
income tax tax administration

Trump’s IRS lawsuit

President Trump, his sons Don Jr and Eric, and his business sued the IRS for $10 billion in damages to compensate for the illegal disclosure of his tax returns to ProPublica and the New York Times. To put the $10 billion in context, Forbes (9/18/25) estimated Trumps’ net worth as $6.3 billion.1

Here’s a link to the CourtListener page that provides access to the complaint and other documents filed in the case.2

If he were a typical taxpayer, this would be a legit lawsuit that could result in the government paying damages.3 The law explicitly allows for these suits and provides for liquidated damages of $1,000/incident and reasonable attorney’s fees.4 The Trumps suit seeks punitive damages, of course.

For example, Ken Griffin, a hedge fund guy, sued over disclosure of his returns in the leak. The case was settled with an apology. As Tax Notes (no paywall) reports, unlike the Trumps, Griffin “did not allege that the IRS’s failure to appropriately safeguard his return information caused him pecuniary harm.”5 The Tax Notes story also notes that the IRS notified about 70,000 individuals that their information was involved.6

The following make the Trumps’ lawsuit especially unusual (among many others that make it merely unusual):

  • All presidents and major party nominees, except Trump, have voluntarily disclosed their tax returns to the public. Tax Notes archive. The one exception (Trump) is now claiming that involuntary disclosure caused him and his family massive reputational damage and entitlement to punitive damages.
  • The leak of his return information occurred while he was President and while his appointees were in charge of the Treasury Department and the IRS. One might say he was somehow responsible for the leak indirectly, the unitary executive and all that jazz. (I know, it’s just a highfalutin constitutional theory about authority and power, not accountability or legal liability.) And the conduct was so bad that punishment (i.e., punitive damages) should be meted out, the most important effect of which would be to line the pockets of the guy in charge. Translation: I or my appointed underlings made mistakes in supervising this rogue contractor who criminally released confidential tax return information. Please punish that conduct by giving me billions of dollars!7
  • Whatever one thinks of that theory, he and his appointees are now in charge. So, he will directly (unitary executive again) or indirectly be deciding whether to pay himself, his family and business and how much. That is a bit of a conflict, to the say the least. In the context of Trump’s administrative claims for damages related to the federal criminal cases, he allowed that it was “it’s awfully strange to make a decision where I’m paying myself.”8

A natural question is whether equitable defenses, like estoppel, laches, unjust enrichment and so on, will be available to the government. Probably not for liability based on a statute with exemplary damages. Of course, that assumes the more important question of whether DOJ will be allowed to contest the case at all and if doing so (e.g., some sort of damage formula in a “settlement”) will somehow be binding on the government for claims by others with clean hands and real harm to their reputations.

Of course, there is a plethora of commentary and pushback. A tiny sampling:

  • WaPo editorial (note that the new configuration of WaPo editorial board appears to be more of a WSJ editorial board wannabee than the old WaPo editorial board): “Public officials trying to dictate the amount of their own private payouts is a bad look.”
  • NYTimes editorial
  • Letter from Senators Wyden and Warren to Secretary Bessent and Attorney General Bondi
  • Motion to file an amicus brief filed by four former tax officials including John Koskinen and Nina Olson, Common Cause, and Project on Government Oversight – this is the most comprehensive lists of potential issues with the lawsuit that I have seen. It validated my instinct that there must be a statute of limitation issue with the suit. I think all of their overarching four requests for court actions make eminent sense to me.9
  • Jack Goldsmith and Bob Bauer discussed it on the Executive Functions podcast

Notes

  1. When I checked Bloomberg’s list of billionaires (2/8/2026), Trump did not crack the top 500 (cutoff was $7.43 billion). Logically, one could argue that the tax return disclosures adversely affected his net worth (i.e., more than cut it in half or something like that), justifying the damage claim. That, of course, is ridiculous. He was reelected after the disclosure and his reelection vastly increased his net worth, if only based on outright or quasi-grifting. See, e.g., the NYTimes or the CAP accounts of a tally of how that has occurred. ↩︎
  2. Note that the suit is filed in the southern district of Florida. I assume the Trumps were hoping to draw Aileen Cannon one more time. No such luck, the case was assigned to Judge Kathleen Williams, an Obama appointee. ↩︎
  3. I.R.C. § 7431 authorizes suits for damages for violations of I.R.C. § 6103. The damages for “willful inspection or disclosure” are the greater of actual damages or liquidated damages of $1k per incident. Punitive damages, which the Trumps’ lawsuit requests, are allowed but appear to apply only if the grant is based on actual damages. (Punitive damages are the only way you can get to $10 million IMO, much less $10 billion.) The inspection and disclosure were made by a contractor who admitted it was done intentionally. So, the “willful” requirement for punitive damages under the statute is likely met. I don’t know if his contractor status affects the government’s liability. I.R.C. § 7431(a)(2) authorizes suits against an individual who discloses your return information but who is not an officer or employee of the government. That is what occurred here. Other suits have been filed against the contractor, Boaz Allen & Co. Whether the ability to sue contractors protects the government from liability or just adds another liability target is unclear. ↩︎
  4. This is one instance where the statute cuts against Trump, his sons, and business. Entitlement to attorney’s fees is not allowed to individuals whose net worth exceeds $2 million or $7 million for a business. 28 U.S.C. § 2412(d)(1)(B). Notwithstanding that, the complaint (¶ 114) requests attorney’s fees. Getting to the limit in § 2412(d)(1)(B) requires following two cross references that start in § 7431(c)(3). ↩︎
  5. An obvious question is whether the settlement would allow him to refile if DOJ and IRS agree to pay the Trumps a lot of money? ↩︎
  6. The complaint (¶¶ 78 and 80) asserts that this IRS notice was what caused Eric and Don Jr. to discover the violations. Gee, were they on safari or under a rock since the news stories ran in 2023? There must be an issue of the SOL running. I didn’t bother to research the SOL, but the amicus brief referenced at note 8 makes a good case that the 2-year statute has run. ↩︎
  7. The actual perpetrator (Mr. Littlejohn, the Boaz Allen & Co. contractor) is serving a 5-year term in prison. Criminal punishment is the strongest deterrent of conduct by his likes, the direct disclosers of return information. Thus, any deterrent effect of punitive damages (here they would be paid by the government, not Littlejohn or Boaz Allen) must be directed at the people who supervise and manage the direct perpetrators, i.e., higher level officials in the IRS, Treasury, and White House. ↩︎
  8. At least, in that case he was only asking for $230 million. Of course, that claim was made before he won, and we all know elections have consequences. ↩︎
  9. The requests: “First, the Court should consider issuing an order for the parties: to show cause why this Court has jurisdiction over this case, to explain how they will address the fundamental conflict-of-interest problems with this case, to show why this case should not be stayed until after President Trump leaves office, and to show why the unjustified $10 billion damage figure should not be stricken from the pleadings. Second, the Court should consider appointing amici who have expertise on issues of tax law and separation-of-powers issues to present fulsome legal arguments on all future issues that arise in this case. Third, the Court should consider allowing participation of those amici in hearings. To treat this case like business as usual would threaten the integrity of the justice system and the important taxpayer and privacy protections at the heart of this case.” ↩︎
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