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Great Wealth Transfer

My generation, the Baby Boom, has come in for a good measure of opprobrium. As a demographic dominant, pig-in-the-python population, we have jiggered the rules in our favor.¹ We’ve run up the debt by simultaneously and repeatedly cutting taxes while lavishing consumption-oriented government benefits, largely financed with debt, on ourselves (social security, Medicare, generous retirement incentives, etc.). This has been done in a way that tilts toward the affluent – through the structure of the tax cuts and uber generous retirement tax incentives that have quietly accumulated into a half-trillion/year mainly benefiting the already well-off (see here). While government spending that is growth enhancing, such as that on research and education, has been cut in the name of largely trivial budget offsets (thanks DOGE, Project 2025, and more generally choking off discretionary spending in favor of entitlements over many years under payfor budget rules).

What calls all this to mind is media coverage on the so-called Great Wealth Transfer. The baby boom holds most of the wealth (okay, tech lords such as Elon and Thiel are not boomers) and will soon be transferring it to the next generation – typically when they kick the bucket. This is often referred to as the Great Wealth Transfer.

Analysts are trying to figure out the implications. Two recent examples:

A Visa Business and Economic Insights release, The great wealth transfer reality check that compiles and analyzes data on the amount and distributional effects of the transfer.
A Brookings piece evaluating how to tax the transfer, William G. Gale, Oliver Hall, and John Sabelhaus, Taxing The Great Wealth Transfer, which was published in December 2025, but has recently gotten play in other forums, such as the Milken Review, a short TPC blurb, and an Econofact Explainer including a podcast version.

As we boomers meet our Maker and pass our accumulated wealth on to our heirs, a sort of redemption could be realized. Imposing a reasonable tax on transfer of the largesse could help pay at least a portion, potentially a substantial one, of the bills (the burgeoning federal debt) we are leaving behind. However, the federal estate and gift taxes have been eviscerated over the last 3+ decades – explicitly by the Bush and Trump tax cuts² which increased the exclusion amounts while simultaneously reducing tax rates for those still paying and implicitly by congressional inattention to closing off a wide variety of newly developed legal devices that artificially reduce taxable transfers.³ The tax now applies to 0.1% of estates!

Some consider the federal tax to be effectively repealed for all but the wealthiest who are not mentally challenged, as Gary Cohn would say.⁴ Stepped up basis rules effectively exempt large wealth accumulations from income taxation. So, we have massive amounts of income (unrealized capital gains) that is never taxed – either under the income tax or the estate tax. For those hanging around legislative tax committees, much of the chatter is a concern about double taxation. The more common reality is no taxation at all – neither income nor estate.

Visa Report

I’m not sure what the business case Visa has for spending its time and money analyzing the wealth transfer.⁵ The publication inconveniently does not describe how it acquired and prepared the data beyond attributing it to themselves and various federal agencies (fed, Treasury, and Labor). So, there’s a bit of opaqueness involved.

Some tidbits from the publication (it’s worth skimming):

Baby boomers hold about $88 trillion (after offsetting their debts) in assets.
About one-third ($28 trillion) is held by the top 1%. The report ignores that.
The Visa analysts estimate that of the remaining $60 trillion, the boomers will spend about $16 trillion before they die (20-year time horizon), leaving $44 trillion to pass to their heirs.
Of this amount, however, over 70% will go to heirs who already have wealth in the top 10% (but excluding the top 1%!). As they note: “With most wealth transfers coming from affluent households, the heirs receiving them are disproportionately likely to be affluent as well.”
They estimate that only about $8 trillion of the total transfer will be spent by the heirs (presumably as opposed to leaving it in financial accounts and instruments).

One clear takeaway is that we can easily go back to imposing a meaningful estate and gift tax on many more estates.

As an aside, the report makes intergenerational comparisons and concludes the “kids are alright”– i.e., that Gen X and millennials are in as strong or stronger place than boomers were at the same times in their lives. I think this conclusion likely does not adjust for two important financial and economic realities:

There will be a reckoning on federal debt at some point resulting in much higher taxes, likely during Gen X and millennials’ lifetimes. The comparisons do not take into the account the relative shares of federal debt that boomers will bear compared to later generations. Put another way, they will not be able to play the same government tax and benefits self-enrichment scheme that we boomers pulled. This implicit tax overhang is probably meaningful.
Many more boomers have old fashioned defined benefit pensions than the next generation will. These pension benefits are residuals of their working in the pre-401k era when many large private employers had those plans. I doubt the comparison takes that into account. Just looking at the generations’ 401k balances understates boomers’ wealth by ignoring the present value of their defined benefit pensions. In fact, the analysis claims Gen X and millennials benefit by their earlier access to 401ks without ever mentioning the implicit pension wealth of boomers. (Government employees across both cohorts are probably about equal.) Thus, they’re understating boomers’ wealth.

Brookings Report

The Brookings report is more measured, transparent about its calculations (the appendix, for example, goes through the data and methodology used in excruciating detail), and interesting. It is 50 pages long, but reading the Econofact Explainer or Milken Review version is probably sufficient and much of the 50 pages consist of tables, charts, and methodological detail. It is explicitly about options for taxing the Great Wealth Transfer but includes interesting background information compiled from the Federal Reserves, Survey of Consumer Finance (SCF).

A few background points about the wealth transfer from the report:

We’ve gotten a lot richer. Bequeathable wealth (defined as SCF’s measure of net worth, less annuities) relative to GDP has risen by 66% between 1997 and 2021. Naturally, this heavily reflects the growth in stock market values. To provide context, I calculated the S&P 500 index value relative to GDP. It went up almost twice as much, by 117%.
The increase mainly benefited older, high-income folks. Of that increase, about 96% went to households whose head is aged 55 or older and 74% went to those households in the top income decile.
Unrealized capital gains skew even more to the top. About one-third of bequeathable wealth consists of unrealized capital gains. Not surprisingly, most of these gains (70%) are held by households with a head aged 55 or older. The top 1% of those households accounted for almost half of all unrealized gains wealth growth since 1997 as a share of the economy. (p. 15) Recall that stepped-up basis means these gains avoid income tax when the property transfers at death.
The Great Wealth Transfer has not really begun. Over the 1997-2021 period, inheritances grew just 9% faster than GDP and much less than the growth in bequeathable wealth.
Most inheritances go to well-off old people. Most inheritances go to households whose head is in the 55-74 age range and well over half go to those in the top decile. (p. 16)

The report is mainly about options for taxing the Great Wealth Transfer. It presents three structural options for doing that – expanding the estate tax, two flavors of a stand-alone inheritance tax (taxing based on the recipient rather than the estate), and taxing unrealized gains at death under the income tax. I won’t focus on or discuss the options. But here are some snippets:

Repealing the Bush and Trump estate tax cuts (i.e., going back to an indexed $1 million exemption⁶ and the old rates) would have raised $145 billion in 2021 or 7X the amount the estate tax actually raised. (Figure 16.) Crudely extrapolating to a 10-year estimate as typically is used for tax bills, that equals more than $1.5 trillion and reveals the scope of the estate tax cuts that have occurred with little to no fanfare.⁷
Revenues from the inheritance tax options and taxing gains at death are much less and obviously depend on the tax rates and exemption amounts. For example, revenues from an inheritance tax with a 15% rate and a $1 million exemption would raise about as much as the current estate tax. Taxing unrealized gains at death, also with a million-dollar exemption, would raise modestly more. (IMO it is reasonable to tax gains at death without an exemption other than those that apply to normal sales and exchanges, such as that for gains on sale of a principal residence, and to impose an inheritance tax with a $1 million exemption and a 15% or 20% rate. That combination would more double the current estate tax revenues, well short of the revenues under the pre-Bush tax cut estate tax.)
Any of the options analyzed by Brookings would be very progressive from an income distribution perspective. Most of the great wealth transfer will go to top ten percent.

This graph from the report (Figure 2) shows that we are at a low point in estate tax revenues, relative to GDP or total tax revenues, over nearly the last century:

The big point is that some sort of significantly increased taxation of this income and wealth needs to happen sooner, rather than later. The details aren’t that important but raising something like $30 billion to $50 billion/year should be doable politically. Obviously, nothing will occur until after the 2028 election.

WaPo Story Inapposite

A July 23rd Washington Post story, As the cost of aging soars, families’ wealth is evaporating, has attracted a lot of attention (i.e., it was one of WaPo’s most popular stories for a period of time). Its third and fourth graphs captures the essence of the claims:

But those estimates [of a $64 trillion to $84 trillion wealth transfer by the baby boom] might not sufficiently account for the costs of growing old.

A Washington Post analysis of the finances of thousands of seniors in the last decade of their lives found that, for many families, the cost of care eats away much of what they had hoped to pass on. And within a growing segment, elder care costs are not just diminishing their savings, but obliterating them.

The story is interesting and worth reading. It finds that a substantial share of the population will not benefit from the Great Wealth Transfer and, in fact, some will actually pay out of their own pockets to care for their parents. But its conclusions and those of Visa and Brookings reports are not inconsistent.

The reality is that Great Wealth Transfer will largely benefit those at the top. As the Post story points out:

The costs [of long-term and medical care] fell hardest on those with the least: Among the poorest fifth of Americans in the analysis, 41 percent were left with nothing after accounting for their care costs in the years before death. Overall, this group spent nearly a third of their wealth on out-of-pocket care costs in the last decade of their lives — more than 20 times the share spent by the wealthiest fifth.

Even within the top fifth or tenth of the income and wealth distributions, the high costs of elder care for those who require it for extended (multiyear) periods will eat up much or all of their wealth. But that is only a fraction of that population. Summarizing, the Great Wealth Transfer will not provide much benefit to (1) those in the bottom 80% of the distribution or (2) to those in the top 20% whose families have modest wealth and are unlucky enough to require extended, expensive elder care services. But there will still be a massive wealth transfer over the next two decades or so and it will not just benefit the uber wealthy (e.g., the 0.1% subject to the estate tax).

If anything, the WaPo story makes an implicit case for strengthening estate and inheritance taxation: the people it describes would never pay the tax, and those lucky enough to avoid having their wealth consumed by elder care costs can afford to contribute more to fund government services out of their inheritances.

Notes

That’s exactly what those who have cynical views of democracy would expect: a tyranny of the majority who takes from the minority (or maybe more accurately, the politically inactive and unaware) to benefit themselves. My view is that it is not so simple. Most people do not succumb to such crass appeals to their self-interest, especially when it implicitly or explicitly would disadvantage their progeny or lack plausible, meritorious bases for doing so. As a boomer, I doubt my generation is any more selfish than those that went before or came after. But our numbers gave us more political power.

As a species that depends on cooperation and community, humans would not have evolved and flourished, if that were the core psychology of our DNA. Humans are more like a pack of wolves or pride of lions than solitary animals like leopards or bobcats. That’s one reason why “tax the rich” is not a political winner – contrary to what many lefties think. It is too crass, opportunistic and individualistic, cutting against our pack mentality and basic communitarian psychology. At least, that’s my armchair political/psychological view.

Instead, we gradually came to this juncture through some combination of the lure of self-interested fiscal delusion – the apologists of the rich – Club for Growth et al – telling us that everything will be fine if we act in our self-interest by simultaneously cutting taxes and showering benefits on our generation. Basic economics – wonderful productivity growth unleased by investment and work incentives – will solve the problem. Of course, it’s rubbish. Rubbish that we lap up, because it’s in our self-interest and the easy path to take. ↩︎
Obama signed a bill making the $3.5 million unified credit amount and reduced rates permanent. But I think – contrary to way the media count tax cuts (looking at you Glenn Kessler) – no one can fairly call doing so an “Obama tax cut” just because he signed to get a budget deal with congressional Republicans. ↩︎
Most states have followed the federal pattern and have no tax at all. Those that do, don’t have effective gift taxes, creating a gaping hole in their transfer tax bases when it comes to the truly wealthy. Moreover, states with taxes face two big problems. First is the potential migration (real or artificial but legal) to avoid the tax if the tax bite gets big enough. The empirical evidence on this is mixed but at some level it must matter. The second is the technical challenges state face in countering the various planning dodges used by the estate tax planning community. On that front, only Congress and the IRS can effectively address it; individually few states have the resources or will to do so. Since the mid-1980s, Congress has refused to do so and the federal tax base that states are tied to has withered. ↩︎
I personally think that Cohen is overstating the case. But not wildly. If one is strongly tax averse and willing to give much of her wealth to “charities,” it can be done. ↩︎
The report analyses how much of the estimated transfer will be spent and concludes most of it will not. As it says: “The $28 trillion likely to be saved or invested creates a major opportunity for banks, wealth managers, fintechs and other financial providers over the next two decades.” That must be the rationale for Visa doing the analysis? ↩︎
Prior to the Bush 2001 tax cut, the unified credit was scheduled to increase to a level that exempted $1 million in taxable value in 2006. Indexing that amount for inflation yields about $1.7 million in 2026. ↩︎
The political or PR success of the opponents of estate taxation is truly breathtaking, in my view. For many decades, going back to the 19th century, estate and inheritance taxation was one of the most popular revenue options at both the federal and state levels. As an example, the Minnesota legislature enacted and had three different iterations of an inheritance tax struck down by the Minnesota Supreme Court in the 19th century, including one passed after the voters approved a constitutional amendment authorizing it. The fourth try was successful. The extended and determined efforts show, in my mind, the popularity of the tax. In the 1970s, Congress enacted reforms that expanded and reformed the estate tax, including enacting a generation skipping tax. It’s only in the last three or so decades that acceptance of estate and inheritance taxation has been reversed to opposition to virtually any form of “death tax.” ↩︎

tax administration

Trump v IRS update

The court has issued a stinging, 56-page order in response to the retired judge’s motion and the plaintiffs’ response, making it clear that there is no settlement and that she considers what the lawyers were doing on both sides (okay, they’re on the same side, Trump’s) as unethical. It’s not good news for Trump or his lawyers, but I’m sure this a long way from the anything like a final word.

Here’s a link to the NY Times’ story (gift link).

The court order is excruciating in detailing all the problems with the case (e.g., that SOL bars it, DOJ vigorously challenged all the other similar cases but not this one, the court lacks subject matter jurisdiction under article III principles, etc.). It’s worth reading in full. The footnotes alone are chocked full of detail. The court turns the unitary executive theory and SCOTUS’s decisions on it, as well as Trump’s executive orders, actions, and public statements on his powers into two-edge swords (see pp. 10 – 27).

The order’s conclusion (p. 55) summarizes its view of what was really going on and the consequences for the judiciary (my emphasis added):

The facts [outlined in the court’s order] lead to the inexorable conclusion that the “settlement” terms, the individuals who signed the “settlement” as well as the putative beneficiaries of the “settlement,” demonstrate a shared, unitary interest. And the unilateral revision and renunciation of the “Fund” component of the “settlement” demonstrate the fact that all Parties were aligned, and ultimately, undifferentiated. This action was never about a party seeking judicial resolution of a legal issue or a factual dispute. The nature of the suit itself and the conduct of the Parties and counsel from its filing make plain that this was an attempt to use the Court to provide some legitimacy to an agreement to confer immunity to people and entities affiliated with the President and to earmark billions of dollars from American taxpayers to redress grievances not defined in the law. The President may be the functional “dominus litus” of the Executive Branch, but as a party to a civil suit, he, as well as all the parties and lawyers before a court, are bound by the rules. Ensuring that our courts are used only for the express purpose created by the Constitution is the obligation of every judge and an obligation that this Court must discharge in light of the matter before it.

Merits – article III jurisdiction

Excerpts from the court’s order (footnotes omitted):

Lead Plaintiff and Defendants are public servants—the pinnacle of the
Executive Branch—sworn to uphold the law, faithfully perform the duties of their office, and protect the interests of the American public. The issue before the Court is whether, instead, they ignored ethical norms, court rules, and legal authority to manipulate the judicial process. The issue is whether they did so to gild their efforts to gain unprecedented access to the public fisc with the patina of legitimacy. There is nothing “ordinary” about this case; it is the very definition of sui generis. [p. 2]

…

Consequently, the Court will examine the matters raised in the non-parties’ motion under the rubric of Rule 11 because the issues are collateral and their resolution is essential to assuring the integrity of the Court’s jurisdiction and process. [p. 10]

…

Plaintiffs cannot argue before the Supreme Court that Executive Branch actors “unquestionably exercise[] executive power, and must therefore be controlled by the Chief Executive[,]” Slaughter, 609 U.S. at 27, and then here, argue that the Parties are sufficiently adverse to establish an actual case or controversy. [p. 20]

…

Most relevant to the issue of control in this matter is Section 7 of the Executive Order which explicitly addresses President Trump’s ability to direct Defendants’ conduct in litigation. Section 7 begins by declaring, “The President and the Attorney General, subject to the President’s supervision and control, shall provide authoritative interpretations of law for the executive branch.” [p. 22]

…

[T]he extraordinary award fashioned by the Parties for claims that were never litigated, and have yet to be defined, on behalf of unidentified third parties whose future remedies bear no relationship to the claims in this case, indicates that real adverse interests were never before the Court. [p. 29]

…

The gravamen of the “settlement agreement” is to fund claims premised on events including those arising from, inter alia, the Mar-a-Lago Documents Case and the events of January 6, 2021. Indeed, these two cases have been referenced as quintessential Anti-Weaponization and Lawfare claims. Instead of either recusing because of their previous representations or vigorously defending this lawsuit as required to do so by DOJ policies and procedures, these lawyers agreed to a “settlement” involving a staggering amount of money potentially benefitting former clients. Moreover, the Release Order, signed only by Acting Attorney General Blanche, extends a blanket grant of immunity to all Plaintiffs and their families and “affiliates,” and precludes all “current or possible” investigations or actions before any other agencies or departments. The Release Order also purports to bar the IRS from conducting any future tax audits of President Trump, his sons, and their entities. This provision directly contravenes 26 U.S.C. § 7217 * * *.

The explicit text of this statute prohibits President Trump and his lawyers—one of whom was former White House Counsel—from asking for or promoting termination of an audit directed toward him. [pp. 33-34]

…

Acting Attorney General Blanche’s apparent capacity to speak for both Plaintiffs and Defendants, sign a “settlement” document on behalf of all Parties to this action, and then repudiate part of that agreement, demonstrates that there was only one party whose interests were being represented throughout this case. [p. 36]

…

Notably, had President Trump (and his then-lawyers Alina Habba
and Todd Blanche) brought this lawsuit in a timely fashion while he was a private citizen, this litigation understandably might have been resolved in a 109-day time span. But that is not what happened. Instead, President Trump did not pursue his claims until he once again occupied the White House and had appointed his former lawyer, and the former lawyer of persons who are putative beneficiaries of the “Anti-Weaponization Fund” to prominent positions in the DOJ. These officials then negotiated on behalf of the United States, with his current lawyers, including his former White House Counsel to reach a “settlement.” It is risible to suggest that there was ever adverseness between the Parties. [p. 37]

Sanctions

On the question of imposing sanctions, the court concludes that the dismissal of the case by plaintiffs cannot divest the court of its authority to impose them and doing so is justified (citations and footnotes omitted):

This case concerns whether Plaintiffs’ conduct, as described supra, satisfies Rule 11’s improper purpose standard. The Court concludes that it does. “[Plaintiffs] pursued this lawsuit in bad faith for the improper purpose of dishonestly advancing a political narrative.” These efforts cannot be allowed in this Court.

…

“Improper purpose [under Rule 11] is often inferred from circumstantial evidence.” Here, the record before the Court supports such an inference. As aptly summarized by the non party movants, Plaintiffs acted in bad faith and for an improper purpose by “collusively filing a lawsuit with claims subject to multiple dispositive defenses solely to provide cover
for a collusive settlement.” The Court agrees. [p.43]

Among the sanctions ordered by the court:

It referred plaintiffs’ Attorney Alejandro Brito to The Florida Bar to determine whether disciplinary action is appropriate in light of the court’s findings and rulings.
It prohibited the parties from referring to the purported “settlement agreement,” or using or citing any of its provisions in any judicial, administrative, regulatory, arbitration, or any other official proceeding as evidence of a “settlement” reached in the case.
Under its inherent authority (i.e., not Rule 11), the court also allowed the possibility of payment of amici’s attorney’s fees (including those of the retired judges) upon application and approval by the court.

The court cited its basis for relying on its inherent authority, which requires bad faith, as follows (p. 52):

The Parties used the existence of federal litigation as a means of conferring
legitimacy upon a course of action that they were unwilling to subject to judicial review. The context of the “settlement,” the relationships of the people involved in negotiating and approving it, the ethical implications of their conduct, and the Parties’ swift efforts to dismiss this case after the Court raised fundamental jurisdictional questions all support this conclusion. Accordingly, the Court expressly finds that Plaintiffs acted in bad faith.

Tags IRS, SCOTUS, Trump, Unitary Executive

books

Books I’ve Read Recently – Furious Minds

Post author By saltspeak
Post date June 22, 2026
No Comments on Books I’ve Read Recently – Furious Minds

This is another in my series of bad high school book reports on selected nonfiction books that I have read recently. I write them to memorialize my thoughts in the vain hope that I will remember a bit more of what I read.

Author and book

Laura K. Field, Furious Minds The Making of the MAGA New Right (Princeton University Press 2025).

Field is a political theorist who held faculty positions at American University and George Washington University but appears to have abandoned teaching for writing. She currently holds a position at Brookings.

She characterizes herself as a Straussian, i.e., someone who follows the methods of the political philosopher Leo Strauss. He’s a popular figure among righty political theorists. I have not read any of his books.

The book focuses on the intellectual ideas that animate the New Right, not the popular movement or its retail political pitches but its “thinkers.” To that end, she focuses on individuals with backgrounds like her own (roughly, PhDs in political philosophy or similar) and not politicians (i.e., the JD Vances, Josh Hawleys, Tom Cottons, etc.). Thus, her discussion of the New Right reflects those elements of the movement – the elite or intellectual Right, not the politicians, activists, flaks, hacks, and similar – and what they think and espouse.¹

She thinks many of these intellectual types are waiting out Trump. They don’t want to publicly oppose him because they agree with many of his policies, although his corruption, incompetence, etc. appall them. In her view, the elite right’s “silence, acquiescence, and bad judgment allowed Trumpism to grow” by their failure to publicly speak up. (pp. 8-9) But thy are onboard with many of the aspects of Trumpism (if that is what the MAGA movement is and it’s hard to conclude otherwise). Some of them explicitly were motivated by a goal of providing intellectual justification for or defense of Trumpism.

Why I read it

I read this in my ongoing quest to better understand the thinking and philosophy that underlies or motivates the current iteration of the political Right, inexplicable as it seems to me.² The number of books I have read in that effort is now in double digits.

I had read a few of Field’s pieces in the Bulwark and the Atlantic and was impressed by her insights into what she calls the New Right in the book. My impression was that she comes at the topic with a somewhat more sympathetic perspective (well, she was trained in some of the same traditions that New Right thinkers follow, even if she doesn’t share their values) than the more lefty commentators I’ve read (John Ganz and Corey Robin as two examples). That led me to think she’d have better insights into and understanding what is going on.

What I found interesting

Field describes her book as a story of “ideological radicalism.” I think that captures what is going on – both based on her expertise and my casual, amateur observations. Key elements or catalysts, she thinks, were Obama’s election and the legalization of gay marriage. Thus, it’s largely about cultural and social issues. Put another way, its roots do not lie in an economic crisis (e.g., the Great Recession or stagnation of working-class wages).³

Typography. She divides the New Right into three camps or groups, recognizing that the boundaries between them are fuzzy and views overlap (a la a Venn diagram). She devotes a chapter or more to describing each, including:

Claremonters – individuals associated with the Claremont Institute founded by students of Henry Jaffa, a Straussian political philosopher. Michael Anton is probably the most recognizable figure of the group (being famous for the Flight 93 essay). They attempted during the 2016 campaign to formulate an intellectual defense of Trumpism with tones of paleo-conservatism (largely anti-immigration and social conservatism) and accepting of more government intervention in economics than classic conservatives.
Post-liberals – representative individuals included Patrick Deneen, Sohrab Ahmari, and Adrian Vermeule. An animating idea is that liberal democracy with its emphasis on individual autonomy, pluralism, and tolerance unraveled the social fabric, which depends on core moral principles (i.e., Christian morals for an integralist) that the state needs to promote. Crudely, it rejects tolerance of libertine and pagan values. It’s probably not strictly theocratic but edges toward it for sure. It’s a fine line but the distinction is between religious authorities ruling and religious principles motivating governance and rules.
National Conservatives (Nat Cons) – representative examples include Yoram Hazony and Chris Demuth. Nationalism is the core – in the sense that “nation” (and hence nationalism) reflects ethnic or tribal identity, rather than a core set of foundational Enlightenment values derived from the Declaration of Independence, Constitution, Federalist Papers, etc. These guys are the most interested, as far as I can tell, in economics and are comfortable with deviating from classic hands-off, limited intervention in markets that characterized the views of conservatives over most of my life.

One of her most interesting chapters covers the figures in what she characterizes as the “ugly underbelly of the New Right” – i.e., the likes of Bronze Age Pervert (Costin Alamariu), Richard Spencer (a Nazi adjacent type), and Curtis Yarvin, among others. As she puts it, these are the guys (they’re all men) who normalized racialist and anti-feminist views on the Right.

A big element of the movement’s thinking relates to masculinity (e.g., a reaction to feminism) and concerns about how modern (Western) culture has somehow neutered men by emphasizing feminine virtues. Field titles the chapter on the subject as “The End of Men.”⁴ The hyper masculinity of some of these fringe figures (e.g., the Raw Egg Nationalist, even though he’s British) seems almost comical to me but obviously the ideas they espouse and the tactics they use are not. Helen Lewis has an interesting Atlantic article (The Men Who Want Women to be Quiet) that expands on Field’s account.

General observations. The book is useful in introducing and illustrating some of the theoretical thinking underpinning aspects of the MAGA movement – Christian Nationalism, Common Good Constitutionalism, the attack on institutions (e.g., higher education, CRT, DEI, etc.), integralism, etc.

It serves nicely as a sort of Field Guide to MAGA theorists. It even starts with a sort of glossary of some of the key figures (“Dramatis Personae”) to help the reader as he/she ranges across the different facets and aspects of the movement.

What disappointed me

As a former academic political theorist, Field had multiple personal and professional contacts with more than a few of the MAGA figures covered by the book. She recounts some of these interactions (at conferences, meetings, and so forth) and writes about her personal thinking and its evolution, which adds some color to the account. That also gives it something of a tiny flavor of a memoir and likely makes it more readable for many. It was a bit off putting for me.

I came at that book hoping to get more of a sense of an explicit theoretical justification for the New Right’s abandonment of classic liberal, Enlightenment virtues – tolerance, civil liberties, democratic governance, etc. My goal was unsatisfied. That may be more because there isn’t a coherent or consistent rationale (just a rag tag collection of smart but oddball reactionaries fumbling around for a set of principles justifying the exorcism of social and cultural norms that they are unhappy with), rather than any failures on Field’s part.

SALT implications

The only silver lining in all this is that these guys are leaving tax pledges, Grover Norquist, drowning government in a bathtub, etc. in the dust. They just don’t care about limiting government, and all that jazz that should go with tax cuts, because following through would limit their popular political appeal. The bad news is that also means they don’t care about fiscal responsibility and are fine with unfunded tax cuts, $1776 billion dollar slush funds, building ballrooms and arches, paying businesses to not do green energy, and so on. We’re fiscally up-the-creek, when this passes for conservatism, leaving the nation to depend on the progressives who want government to do more to provide as the only practical fiscal brake on runaway deficits. Sheesh.

Notes

As a result, the book does not address what has made Trumpism and the MAGA a successful popular, political movement. That is certainly not the stock-in-trade or comparative advantage of a political philosopher. So, her approach is understandable. ↩︎
I have stopped calling or thinking of it as conservative because its ideas are so divorced from what I grew up considering conservative, i.e., a classic, Burkean style governing philosophy. An approach defined by caution about making radical or abrupt changes without careful vetting for fear of unintended consequences, has respect for institutions and traditions, and so forth was what I always considered to be the essence of a conservative approach to politics and government. By contrast, the MAGA world throws that to the wind, focusing on, advocating for, and making radical changes without careful consideration. I assume that they justify it as a restoring an old order (e.g., that of the 1950s, 1920s, or the 19th century) and so caution is not needed. Or they just are not prudential conservatives but rather radical reactionaries. ↩︎
Tea Party movement is largely credited with being stimulated by the combination of the Great Recession and the bailouts of banks, big corporations, and over-extended mortgage borrowers. I personally thought the cultural leavening provided by the first black president was a big component of the Tea Party reaction. The S&L bailout in the early 1990s stimulated no similar backlash FWIW.
With regard to economic policy, I’d also observe that the left has tended to focus much more on economics, endlessly debating strategies for lifting the poor out of poverty or aiding them in some way. Some of that is undoubtedly the influence of Marxism, which traditionally influenced lefty views.
By contrast, the MAGA Right, is not much animated by economic concerns, other than pushing back against the classic conservatism’s economic views (e.g., libertarianism or neo-liberal policies). Put another way, the MAGA Right’s ideas on economics are largely negative, breaking with the old-line conservative elites. That’s largely a popular political sop to defuse economic related messaging by the left, in my jaundiced view of things. Trump’s and MAGA’s governance, of course, follows much of the old tax and spending cut playbook, but crucially deviates from “limited government” and relying on private markets when it comes to tariffs, helping or hurting private businesses based on loyalty or whims, and so forth. Exactly, in other words, what you would expect from a rent-seeking, authoritarian regime. Peronist economics. ↩︎
The title of a Tucker Carlson video. ↩︎

Tags MAGA, Trump

books

Books I’ve Read Recently – Capitalism and Its Critics

Post author By saltspeak
Post date June 7, 2026
No Comments on Books I’ve Read Recently – Capitalism and Its Critics

Author and book

John Cassidy, Capitalism and Its Critics (Farrar, Straus and Giroux 2025).

Cassidy is a journalist (i.e., not an academic economist), a staff writer for The New Yorker (translation: his policy priors are lefty). He wrote a well-received book about the 2008 financial crisis (How Markets Fail), which I have not read. Capitalism and Its Critics is a loose history of economic and related social thinking and trends from the late 18^th century to the present. Cassidy characterizes it as a history of industrial capitalism (I’m not sure exactly what capitalism is, much less industrial capitalism). The late 1700s is a natural starting point if you think about when the Wealth of Nations was published (1776). It’s the transition from mercantilism (Smith’s term for the old order) to capitalism, using another frame.

Each chapter covers one or two thinkers, most frequently economists (e.g., Adam Smith, Keynes, Marx, Hayak, Friedman, etc.) or less frequently a social critic type (e.g., Anna Wheeler and Sylvia Federici). They’re conveniently listed on the dustjacket. One chapter is on a movement, the Luddites, rather than an individual thinker or two.¹ It’s written for a general audience with little to no economics training, very breezy and easy to read. It bears some resemblance to The Worldly Philosophers (a favorite of mine) but is not a history of the progression and development accepted economic thought, but a broader account that ranges outside of academic economics to encompass social and political movements and criticisms. For example, important economists like Ricado, Marshall, and Bates Clark don’t merit chapters and are only covered indirectly. His focus, I think, is on the big social and political challenges to the economic order, rather than the development of received economic theory.

Although he isn’t an economist (neither am I), he seems to have a good understanding of the basics of the discipline and can convey them in simple and easy to understand ways.

Why I read it

The book fits squarely into my areas of interest, history, finance, economics, and politics. When I saw a couple of favorable reviews by actual economists and heard Cassidy on one of their podcasts, I put it on my reading list.

What I found interesting

The book was a fun and easy read – a sort of historical account of the yin and yang of the last 250 years of economic events through the lens or perspectives of a variety of economists and social critics. It’s an account of how capitalism² has morphed, adapted, and survived largely due to political/government interventions and partial corrections of those market failures. The book is sort of a graphic novel or simplistic version of Slouching Toward Utopia, although not pretending to be a defining account and attempting to be a true economic analysis. It’s journalism, not economics.

Several recurring themes and challenges across the book’s account of the past 250 years and that – per the structure of the book, stimulated critics of capitalism and/or required legal or institutional adaptions for capitalism to survive:

Inequality – both within and across countries, including slavery and less dramatic but still very bad exploitation of labor, imperialism, etc.
Depressions, recessions, etc. – the business cycle
Concentrated economic power – monopoly, monopsony, etc.
Market failures, most glaringly the failure to account for public environmental costs

As one would expect, extended economic downturns and jarring technological development were the engines that drove critics and political adjustments. The oft predicted collapse (by Marx and others) never occurred because of the adaptability of western political systems as informed by some of critics and thinkers chronicled in Cassidy’s account. Luck or the contingency of history, put another way, was also likely a factor.³

The book introduced me to more obscure economic theorists and critics I was unaware of and provided more details on those I was aware of. That was particularly true of the early 19^th century ones. I was only vaguely aware of the pre-Marx, utopian socialism movement (e.g., William Thompson etc.).

Cassidy is British and book has details about features of the British Empire – its relationship (rank exploitation) of India, South Africa, etc. – that I was unfamiliar with and how that entered into economic thinking of various theorists. I found that history very interesting.

His accounts and summaries of 20^th and 21^st figures covered stuff I was more familiar with, but I still found them useful and interesting – refreshing my memory and provide additional detail and information. For example, it is good to revisit/recall Thorstein Veblein, given the current conspicuous consumption by the billionaire class these days. Reading the book provided interesting details about the long-running spat between Joan Robinson and Bob Solow that I had not known. Cassidy gets down into the weeds to cover stuff like the dispute about measuring inequality between Piketty, Saez, et al and Auten and Splinter. I can’t imagine many general readers are aware of that sort of inside-baseball empirical dispute.⁴

A bunch of the figures he covers I was unfamiliar with (Paul Prebisch, Eric Williams, Celso Furtado, etc.).

What disappointed me

The book was probably a little longer than it needed to be. At one level, I felt a couple of chapters or figures were simply included to make points about flaws he perceives politically important given his POV, rather than for their historical significance. But that’s likely more a matter of my taste, preferences, or viewpoint than a legitimate criticism. Because he’s not an academic or professional economist, a downside of the book (at least to me, as an amateur) is that his evaluative observations and analysis didn’t add much, if any, value to me. Of course, I knew that would be the case going in.

Notes

My guess is that including the chapter was inspired by the challenges presented by AI.

I found it one of the more interesting chapters. Like most folks, I thought of Luddite as a pejorative label for technophobes, stuck in the past, or something similar and knew little about the actual people and the movement. The chapter details how the first stages of industrialization replaced craft work that supported a middle-class lifestyle with sweatshops heavily using child labor, mostly female. In short, it was a pretty horrific change from a social and human perspective with many of the more obvious productivity benefits redonning to owners of the factories. The reality, course, that consumers of clothing and textiles were also large beneficiaries as a group, but the price benefit was diffuse and small on individual bases. After a generation or so, some of the productivity benefits led higher wages, due in part to political changes. ↩︎
I will hazard a loose definition: an economic order driven by decisions under a rule-of-law order that largely relies on Smith’s hidden hand, albeit often corrupted by a wide variety of market failures. ↩︎
The low quality and lack of adaptability of Russia’s and China’s political institutions likely also explain the failed experiment of the communist revolutions and the resulting, real-world socialism. This is not a subject of the book, just my observation. ↩︎
Maybe I’m understating that, since it was the subject of a Noah Smith blog post. ↩︎

Tags economics

tax administration

Nice Try

This is yet another update on Trump v. IRS. The district court dismissed the suit after the plaintiffs filed a notice exercising their right to do so (with prejudice) before the defendants had made an appearance. The court went out of its way to make it clear that:

Because the Notice does not reference any settlement or include a stipulation of settlement, there is no settlement of record.

Judge Williams obviously did not want anyone to think she was complicit in the administration’s purported $1.8 billion “settlement” that creates the ~~Trump slush~~ anti-weaponization fund and attempts to immunize the plaintiffs (him, family members, and business entities) from some ill-defined set of criminal and civil liability, including potential federal tax liability relating to previously filed tax returns.

Retired judges join fray

I had assumed that this was the end of the story with regard to court proceedings in Judge Williams’ court. Wrong. A group of 35 retired federal judges filed a motion in the case under Rule 60 or as amici seeking the court to set aside the suits’ dismissal and to start an inquiry into the purported settlement, which it characterizes as a fraud on the court because the lawsuit was a pretext to access the DOJ’s judgment fund, etc.¹

Text of the motion
WaPo’s story
Kim Wehle in the Bulwark
List of the judges – most are Senate confirmed retired district and court of appeals judges, but a few are magistrate or bankruptcy judges – appears in the Appendix to the motion. Judges J. Michael Luttig and Nancy Gertner are the first two listed and were the likely organizers. No surprise, since both have been vocal in the media regarding their concerns about the administration’s erosion of norms and the rule of law. Luttig, a Bush appointee, is a well credentialed conservative and Gertner, a Clinton appointee, is a liberal.

The Rule 7.1 certification from the motion has a nice touch of sarcasm:

Counsel for Movants have made reasonable efforts to confer with all parties given the circumstances. In light of the extraordinary circumstances of this case, any conference would be futile. Nevertheless, counsel for Movants still provided the parties with notice, and sought their position, by emailing Plaintiffs’ counsel and the Chief of the Civil Division for the United States Attorney’s Office for the Southern District of Florida shortly before filing this motion on May 27, 2026.

Prediction

I don’t like to make predictions because I’m usually wrong. But this is one case in which I’m not at all sanguine about the prospects of nixing the fund either via this effort or more realistically in Congress.

Court case

The obvious issue is does an ordinary citizen (I assume that is how one must characterize retired federal judges) have legal standing. The likely answer is no IMO. The judges say a court of appeals case, Kem Mfg. Corp. v. Wilder, 817 F.2d 1517 (11th Cir. 1987), stands for the proposition that a nonparty (presumably w/o standing) can bring a Rule 60 motion:

based on fraud on the court, and further recognized that in “extraordinary circumstances,” the non-party need not prove his or her “interests are directly affected by the final judgment[]” to do so. Page 7.

I can’t imagine that holds up in a non-case like this where presumptively the parties are not adversarial and there is no article III case in controversy at all. Standing is a constitutional doctrine to keep the courts from making decisions that are not judicial nature (i.e., resolving live disputes between adverse parties). Waiving it based on a civil rule (that’s what the judges are arguing for), where there is no article III case to start with seems inapposite.

In the alternative, the judges assert correctly IMO that the court itself (sua sponte, as they say) could investigate the alleged fraud and issue an order to void the settlement of the ginned up case, which almost certainly was filed after the SOL had run and did not meet Article III’s adversity requirements. The administration seemed fairly clearly to be (mis)using the court process, given the post-dismissal event of creating the settlement fund. Under those circumstances, the court must have some authority to protect its integrity. In essence, the retired judges want the court to proactively pick a constitutional fight with the executive branch over misuse of the judicial process. I suspect most judges will not want to pick that fight but why not try?

That path to voiding the settlement has some serious huddles to clear, any one of which will disqualify the effort:

Judge Williams must agree. I have no knowledge of her, but that requires some serious cojones/feistiness. That goes against the typical judicial grain, which is to stay in a narrow lane and only decide what is before you.
A panel of the 11th circuit court of appeals must also agree. DOJ/Trump would surely appeal.
If the first two hurdles are cleared, SCOTUS must agree. I can’t imagine finding five justices willing to do so. If the lower courts decline, discretionary review will be denied. If – wonder of wonders – both lower courts agree to take on the executive branch/president, the natural tendency, which is not wrong, is that this is fundamentally Congress’s responsibility to police. There are already some signs of life that Congress may consider the settlement fund a bridge too far, which (even if they are unsuccessful) gives the Court a natural, not-my-job, out. Standing and case-in-controversy rules are all about constraining judicial power, not provoking constitutional disputes, yada, yada. It will be an easy decision for a Court that has been exceedingly deferential to this president.

Congressional action

I would guess there are mildly better prospects that Congress will somehow rein use of the fund in, if not outright prohibit it. But the problem is that use of the judgment fund (or whatever its proper name is) means that Congress must pass a law to do so. That means Trump has to agree to it (unlikely) or they have to pass it over his veto (even more unlikely).

One might assume that the reconciliation bill under consideration in Congress now is must-pass legislation that gives Congress leverage over Trump. I doubt that is true because the only agencies that have not been funded are ICE and CBP, whose operations can continue under the generous appropriations in OBBBA for those functions. Moreover, congressional Republicans have been remarkable supine when it comes to Trump’s demands and ICE and immigration enforcement are particularly susceptible to his demagoguing of the Republican base. I will be surprised if more than superficial limits are placed on the fund, which will give it a congressional imprimatur against other legal challenges. That’s my two cents.

5/29 Update

The probability that the first hurdle will be cleared has increased substantially. Judge Williams issued an order in response to the retired judges’ motion, reopening the case. So, she must be up to the task of taking this on. I’m also sure that Trump was hoping to draw Ailene Cannon when the suit was filed. Thankfully, that didn’t happen.

Excerpts from her order:

A court is empowered to investigate serious misconduct as a collateral issue within the purview of Rule 11 and determine “whether an attorney has abused the judicial process.” * * *

…

Here, the non-party movants advance grievous allegations that Plaintiffs voluntarily dismissed this litigation solely to avoid judicial scrutiny of a lawsuit that “was collusive from the start” and was only filed to provide the imprimatur of legality for an unlawful settlement. They point to the fact that the settlement in question includes a “three-paragraph addendum . . . [that] purports to ‘forever bar[] and preclude[]’ the United States from pursuing claims that could have been [otherwise] asserted against] Plaintiffs,” and highlight the fact that Defendants did not “even try[] to defend against Plaintiffs’ claims” despite their active opposition to nearly identical claims in other litigation. Finally, the non-party movants assert that Plaintiffs’ claims were “clearly untimely” and therefore untenable.

Accordingly, it is ORDERED AND ADJUDGED that Plaintiffs shall file a response to the Motion on or before June 12, 2026, detailing their position on the matters set forth in the Motion, including (1) the charges of collusion and whether the Parties are truly adverse; (2) the assertion that the dismissal in this case was premised on deception by the Parties; and (3) the question of whether the case should be reopened because the Court was the “victim of a fraud.” [Citations and footnotes omitted.]

Link to NYTimes coverage; WaPo article.

Stay tuned to see what comes of this. I hope that Todd Blanche or some other DOJ political appointee gets grilled in open court on the particulars and how there can be a legitimate settlement here. Conversely, I hope that this is not an excuse for Congressional Republicans to cowardly take a pass – as in “the courts will handle this, so we can (once again) look the other way.”

Note

See Adam Liptak’s newsletter for interesting background on retired judges filing amicus briefs. ↩︎

Tags IRS, OBBBA, Trump

income tax tax administration

Audit Immunity

The speculation proved correct. A one-page addendum to the “settlement agreement”¹ of Trump v. IRS, washed away the ongoing tax audits of Trump, the family businesses, and Eric and Don Jr., as well as any potential audits for tax returns filed before May 19, 2026 (gee, I wonder if they filed for extensions for tax year 2025?).

The NYU Tax Law Center has an explanator on the lawsuit and settlement agreement, including why it likely violates various provisions of federal law. Of course, because of standing rules, enforcing the law via court action is another matter.

The tax audit protection appears as a minor after-thought or concluding feature (a la Steve Jobs’ “one more thing”) of a broad attempt to provide sweeping immunity for a broad, but ill-defined set of criminal and civil actions – past and apparently future.² The language (for a legal document) is convoluted and odd (e.g., “matters that * * * could have been raised * * * could be pending” incorporates what can only be characterized as speculation or conjecture).

Here’s the language:

FWIW, Lawfare and Weaponization as defined in the settlement agreement, which the addendum means:

the sustained use of the levers of government power by Democrat elected officials, political and career federal employees, contractors, and agents in order to target individuals, groups, and entities for improper and unlawful political, personal, and/or ideological reasons (“Lawfare” and “Weaponization”). Other well-known examples of Lawfare and Weaponization include the Biden Administration’s abuse of the FACE Act, the Biden Administration’s wrongful labeling of certain parents as domestic terrorists, and the IRS’s targeting of groups based on improper ideological criteria.

Note that only “Democrat elected officials” can conduct defined lawfare, along with federal employees, contractors, and agents. The last clause regarding IRS targeting for “improper ideological criteria” appears to be an invitation to the Tea Party groups whose tax-exempt determination letters were delayed during the Obama administration to apply for compensation.

The creativity of this administration in finding new ways to line the pockets of Trump family, friends, and supporters knows no limit.

Media coverage

Excerpts from the WSJ story:

The IRS is part of the executive branch, but the agency has historically tried to keep its enforcement operations free from political interference, and even the appearance or prospect of blurred lines caused controversies during the Nixon and Obama administrations. The agreement between Trump as a taxpayer and the Trump administration is an unprecedented blending of personal and governmental interests, with a Trump-appointed official agreeing to remove the president, his family and his businesses from tax enforcement.

…

Tuesday’s addendum includes broad language in which the U.S. pledges to cease pursuing any matters that are or could be pending with the IRS and with other agencies or departments. The statement includes family members and “related or affiliated individuals,” although it doesn’t clearly define those terms.

“I am unaware of a single precedent where the IRS has agreed in advance to permanently forgo examination of previously filed tax returns for a specific person or business,” said Danny Werfel, who was IRS commissioner under former President Joe Biden. “People expect the same tax rules and enforcement framework to apply to everybody.”

…

The tax code prohibits the president and the heads of executive agencies—except the attorney general—from directing audits or the termination of audits. Violating the law is a crime punishable with prison time. It isn’t clear whether and how that prohibition would apply to the settlement addendum released Tuesday.

Also uncertain is whether anyone would have standing to challenge the agreement in court. Congress could step in, but such a move likely would require Republican votes over Trump’s objections.

The NY Times story (written by the Adam Liptak, the SCOTUS reporter for the Times) on the overall issue covers more sweeping ground, touching on the constitutional issues raised, the source of funds (the judgment fund), and historical precedent. Excerpts from the story:

The whole enterprise was a jarring shock to the conventional understanding of the constitutional system, raising what legal experts said were profound questions about presidential power. If the arrangement is allowed to stand, they said, Mr. Trump will have managed simultaneously to thwart Congress’s power of the purse and the ability of the courts to police the separation of powers.

Indeed, Tuesday’s addendum [Trump’s tax forgiveness/immunity] flirted with a grave question with no settled answer: Can the president pardon himself?

…

“It is really difficult to think about how to frame a judicial challenge to what the president has done here,” said Samuel R. Bagenstos, a law professor at the University of Michigan. “That doesn’t mean people aren’t trying, and that doesn’t mean something might not succeed.”

Legal challenges are indeed starting to roll in. Two police officers who defended the Capitol on Jan. 6, 2021, sued the Trump administration on Wednesday in an attempt to block the new fund, though it is not clear that they have standing to challenge it.

…

Professor Bagenstos, who served as the general counsel of the Office of Management and Budget and of the Department of Health and Human Services in the Biden administration, wrote in January about the danger posed by the Judgment Fund.

“An administration that wished to spend money on projects or beneficiaries not authorized by Congress,” he wrote, “could simply encourage its desired recipient to bring a lawsuit against the United States and then settle that lawsuit (no matter how frivolous) by making a payment from the Judgment Fund.”

…

And the suit was palpably collusive, ordinarily a reason for a judge to toss a case.

Tuesday’s addendum to the settlement, the codicil purporting to immunize Mr. Trump and his family, raised its own legal questions.

“It’s a really extreme and shocking kind of document,” Professor Bagenstos said.

Even under the Supreme Court’s 2024 decision conferring broad immunity on Mr. Trump for his official acts, purely private conduct, as the filing of a tax return would seem to be, is fair game for prosecution after a president becomes a private citizen. It is not clear whether the addendum could block a future administration from pursuing such a claim.

A series of settlements by the Obama administration that involved dipping into the same fund Mr. Trump now wishes to use illustrate the dynamics of Congress’s open-ended delegation.

Take a lawsuit brought by Native American farmers in 1999 over what they said was discrimination by the Agriculture Department. A judge denied class certification for monetary claims, meaning the government probably did not face a risk of a large court judgment. Still, after more than a decade of litigation, the government in 2011 agreed to settle the suit.

When not enough Native Americans submitted claims, the government paid out only $300 million of $680 million it had agreed to set aside. It redirected the balance to nonprofit groups serving Native Americans.

An appeals court allowed the payment to be made. In a dissent, Judge Janice Rogers Brown of the U.S. Court of Appeals for the District of Columbia Circuit said the majority had taken perverse pleasure in letting the administration do as it wished.

“Perhaps one day, I will possess my colleagues’ schadenfreude toward the executive branch raiding hundreds of millions of taxpayer dollars out of the Treasury, putting them into a slush fund disguised as a settlement, and then doling the money out to whatever constituency the executive wants bankrolled,” she wrote. “But, that day is not today.”

That settlement, though, bore only a superficial resemblance to the deal announced this week. It arose from actual litigation. And Mr. Obama did not stand to directly gain from it.

My catty comments

This whole episode – in particular the use of the judgment fund – illustrates how laws are typically written that presume basic good faith and norm following practices by government officials, but that can be exploited by unscrupulous executive branch officials. Trump and his people are unusually creative in finding those gaps and using them for their personal and political benefits.
We’ll see if Senate Republicans actually have a red line. Majority Leader Thun was quoted as saying he wasn’t “a big fan” of slush fund/settlement agreement. I guess that’s a condemnation in a world in which upsetting the dear leader risks being treated like Cassidy or Massie. As tiny evidence of a backbone, the Senate appears to be showing some resistance. How? By leaving town, of course. We’ll see if they follow form and knuckle under when they return or if they’re actually willing to put limits on the slush fund. I wouldn’t be surprised if they abandon the reconciliation bill (making ICE and CBP rely on the OBBBA’s money) rather than taking a series of tough votes on Democrats’ amendments during the vote-a-rama.
We didn’t need any more evidence of the administration’s or the GOP’s utter lack of concern about out-of-control government spending (as they typically put it) or the growing federal debt, but this provides it. That was the asserted reason for DOGE cuts (taking medicine and vaccines away from poor individuals in third world countries, cutting medical and scientific research midstream, laying off civil servants, etc.). Now, if the widespread assumption is true that pardoned J6ers are a prime beneficiary of this largesse,³ we’re handing out government to people convicted of beating police officers and sacking the US capitol.
Payments from the settlement fund likely are taxable to the recipients under general tax law rules in most cases. Good luck with DOJ issuing 1099s. The Tax Law Center makes the plausible argument that the entire fund allocation is taxable to the plaintiffs (i.e., Trump et al).
Given the likely insider trading in oil futures that appears to be based on information derived from the administration sources as well as Trump’s prescient stock trades, I wonder if hyper aggressive tax returns were filed last month in anticipation of the audit immunity by Trump, Don Jr., Eric, and/or the businesses. It would be consistent with appears to be the practice.
Gift tax returns may have been filed and the ability to challenge the reported valuations, which may also govern subsequent estate tax returns, will have evaporated if this is legal.
Similarly, the various enterprises they have been engaged in (consider the funding of their crypto operations as one example), there are sure to be a host of opportunities to under report income and so on. No worries, you have an Audit Immunity card.
Continuing to think about the implications of all this makes my mind melt down.

Notes

It’s hard for me to characterize something as a settlement when the same person is ultimately calling the shots on the putative dispute that is being settled – hence, my scare quotes. ↩︎
If this were legal, it’s better than a pardon. I assume that the Trump (following and likely going Biden one better) will issue blanket, sweeping pardons to a host of family, friends, and supporters just before the end of his term. But pardons (I presume without doing the legal research) can only be issued for past actions. The addendum appears to apply to future actions, including stuff happening after Trump leaves office. Moreover, what happens if Trump drops dead before he can issue pardons? One wouldn’t want to count on Vance to do so, I suppose. My natural assumption is that this cannot be legal, at least with regard to actions happening after the effective date. ↩︎
For comic relief, read this Bulwark piece on the fight among the lawyers who have been representing J6ers in their efforts to get reparations that the settlement agreement has touched off. The media and Democrats in congress have assumed that the capitol rioters are intended to be principal beneficiaries of the fund. That is why current and former capitol police officers have quixotically sued to invalidate the fund. Act AG Todd Blanche, in his congressional testimony, refused to say who specifically will qualify to be compensated by the fund, of course. ↩︎

Tags IRS, Trump

tax administration

Update: Trump v IRS

5/18 Update

Plaintiffs have dismissed the case, which they have the right to do since defendants have not made a filing in the case, per this notice. So much for getting a judicial patina for their slush fund. They could read the judicial tea leaves as clearly as any of us.

The district judge’s likely plan to dismiss the case (probably done with a stinging memorandum that unmasks the corrupt enterprise) must have convinced them that cutting and running was the best course of action. Unfortunately, that may not mean that we won’t still see the fund appear. Here’s an excerpt from the NYTimes story on the dismissal (my emphasis added):

President Trump withdrew his lawsuit demanding at least $10 billion against the Internal Revenue Service in an effort to skirt oversight by the judge in the case as he moves toward arranging a fund to funnel taxpayer money to his allies and supporters.

The dismissal is the latest legal turn in an extraordinary attempt by Mr. Trump to win billions of dollars in damages from a government agency he controls.

Administration officials have in recent days considered creating a roughly $1.7 billion fund to compensate political allies, but not Mr. Trump directly, who say they were wronged by the Biden administration. That fund appears to be part of private deal, reached outside the purview of the court, to resolve both Mr. Trump’s I.R.S. lawsuit and his separate administrative claims against the Justice Department, according to people familiar with it who described it to The New York Times last week.

The move by Mr. Trump was a remarkable end-run around the legal system, effectively stripping Judge Kathleen M. Williams, who has been overseeing the case in the Southern District of Florida, of her normal role in approving a formal settlement agreement. By dismissing the case in its entirety, Mr. Trump essentially freed his hand to reach a deal with administration officials without any judicial oversight.

I assume that must mean they have a theory that an implied or otherwise preexisting authorization and appropriation permit them to spend the money. IMO this is the converse of DOGE reneging on spending money under specific authorizations and appropriations (e.g., for USAID operations). So much for Congress’s once vaunted power of the purse. It appears POTUS can spend or refuse to spend pretty much without much limit.

A few minutes after I wrote the above, DOJ announced the creation of the fund with the catchy $1776 million amount. It cited the precedent of Obama’s compensation for victims of racial discrimination by USDA, SBA, and other agencies. Here’s the quote from the DOJ press release:

There is legal precedent for such a Fund, most notably the “Keepseagle” case where the Obama Administration created a $760 million fund to redress various claims alleging racism against the federal government over a period of decades.

In Keepseagle, hundreds of millions of dollars remaining in the fund were distributed to non-profits and NGOs that never made claims, whereas any money remaining in The Anti-Weaponization Fund will revert to the federal government. The Obama DOJ settled by putting $680 million from the judgment fund into a bank account for a single claims administrator to dole out. In Keepseagle the remaining money—which ended up being over $300 million—was distributed to the entities that had not even submitted claims.

In addition, establishing the settlement fund appears to have caused the Treasury Department’s general counsel to resign. Per the NYTimes:

The top lawyer at the Treasury Department stepped down on Monday in the wake of the creation of a $1.8 billion “anti-weaponization fund” that could soon make payments to President Trump’s political allies, according to three people familiar with the move.

Brian Morrissey, the Treasury’s general counsel, resigned from the position seven months after he was confirmed to it by the Senate and just hours after the Trump administration announced the fund on Monday.

That seems like an appropriate response to legal looting of the treasury like this.

Original Post

Media coverage (e.g., NYTimes, ABC, Bulwark) speculates that the court’s order directing the parties to file memoranda addressing whether the court has jurisdiction will stimulate a settlement of the case. The court issued its order, I think it is fair to say, because that is what it was concerned would happen: the defendant (IRS/DOJ/US government) had not filed an appearance, while the plaintiffs (Trump, his businesses, and two elder sons) had requested a global extension to facilitate settlement discussions. The court explicitly mentions that motion in its order.

As noted in my April IRS update, another factor was likely the court’s sua sponte motion to appoint amici to weigh in the jurisdictional issue (i.e., given Trump’s potential control of both sides of the lawsuit, is there an article III case and controversy?). That memorandum has been filed. Some excerpts from it (citations and footnotes omitted):

This case is unprecedented: A sitting president seeks monetary damages for alleged harm to his personal interests from an executive agency that he controls. That presents significant Article III subject matter jurisdiction concerns.

While this scenario is novel, the governing legal principles are not. The question at hand is whether the circumstances of this litigation present the kind of real and genuine dispute that is suitable for judicial resolution in an Article III court. And the Constitution and the applicable case law indicate that the Court should answer that question by conducting a fact-specific inquiry focused on (1) the relationship between the parties, and in particular whether they are sufficiently independent of one another, and (2) whether the Court could enter a judgment in this case that would have any concrete effect.

…

The Supreme Court has looked to principles of control in the context of a suit between a sitting President and a component of the Executive Branch. In United States v. Nixon, the Court held that a dispute between two executive-branch actors—the President and the Special Prosecutor appointed to investigate Watergate matters—could be heard by a federal court. The Court found adequate adversity because the Special Prosecutor was sufficiently independent.

…

With respect to these Defendants specifically, the President’s capacity for control is extraordinary. As a member of the President’s cabinet, the Secretary of the Treasury “is and must be the President’s alter ego in the matters of that department where the President is required by law to exercise authority.” Likewise, the IRS Commissioner is appointed by the President to a five-year term, and “[t]he Commissioner may be removed at the will of the President.” And President Trump has shown he is willing to exercise that authority. In August 2025, two months after IRS Commissioner Billy Long’s confirmation, President Trump removed him without providing a reason.

…

There is also reason to believe that the President is, in fact, exercising his control over the Defendants in this litigation. President Trump’s own statements suggest that he believes he has control over the Defendants and the DOJ lawyers charged with defending this case. On January 31, 2026, two days after President Trump filed the Complaint, a reporter asked him, “what it’s like to be on both sides of a lawsuit.”8 He responded, “It’s very interesting. I have another one where, you know, I virtually won the Mar-a-Lago break-in suit, and, you know, I have to work out some kind of a settlement. I’m supposed to work out a settlement with myself.” When asked on February 4, 2026 whether he could direct the Attorney General and the Treasury Secretary to pay him, President Trump responded: “[W]hat I would do, tell ‘em to pay me, but I’ll give 100% of the money to charity. I don’t want any of that money.”

The contrast between Defendants’ conduct here and the government’s conduct in related litigation also suggests that the President may have control over DOJ’s litigation conduct. The parties are engaged in settlement negotiations in this case, even though DOJ has asserted substantial defenses in other cases stemming from Mr. Littlejohn’s disclosures of tax information—including cases litigated during President Trump’s current term. For example, DOJ has argued that, because Mr. Littlejohn was a government contractor rather than an officer or employee of the United States, sovereign immunity was not waived.

…

Although President Trump sues here in his individual rather than official capacity, that does not affect the control analysis. The personal nature of the lawsuit is a notable point of distinction from United States v. Nixon, where the Supreme Court treated the dispute as one between the Special Counsel and the President in his official capacity. * * * [T]he fact that President Trump is a Plaintiff in his personal capacity does not diminish his ability to control the Defendants here in his official capacity as President; rather, President Trump enjoys ample actual and practical authority to control the Defendants. These indications of control are in stark contrast with Nixon, where the legal and practical independence of the Special Prosecutor, enshrined in regulation and evidenced by the litigation conduct of the parties, was central to the Supreme Court’s decision that the dispute before it was justiciable.

…

Because the relationship between the parties is essential to the adversity inquiry, it could be useful for the Court to obtain additional information about the degree to which Defendants and their lawyers are insulated from the President. The Court might request information from the parties about what measures, if any, they have taken to ensure that Defendants and the DOJ lawyers assigned to this case are free to exercise independent litigation judgment and act solely in the best interests of Defendants. It is particularly important to evaluate whether they have any protection if they take steps that could result in the defeat of the President’s claims. Any such measures must be considered against the backdrop of the President’s public assertions of direct control over the government defendants and their attorneys, as well as his previous public statements regarding his control over this particular matter.

I can see why Trump’s lawyers (and the political appointees at Treasury, IRS, and DOJ) would want to expedite a resolution. I doubt that they want a pesky federal district court judge asking questions about the relationships between the WH, DOJ, and IRS and whether defendants’ lawyers, assuming they present a vigorous defense (as FWIW, they are ethically obligated to do) which would likely defeat the claims,¹ will be protected from retaliation.

I suspect there is also a high probably that the judge would dismiss the case because she does not have jurisdiction. That would eliminate the option (a main purpose, I assume, of the litigation) of putting a judicial patina on the misappropriation of the government funds to benefit the family and MAGA supporters.²

Based on the Times and ABC news articles, the speculation about a settlement appears to be twofold:

Creation of a $1.7 billion fund to compensate victims of the Biden Administration’s weaponization of the US legal system, such as the prosecution of January 6^th defendants. The sky’s the limit here in defining who victims are – at least, if Trump’s doling out pardons is any guide of what is likely to be considered meritorious (such as corruption convictions or financial crimes) and victims of the Biden administration.
Resolution of the IRS audits of Trump and his business entities. That is something that has been off the radar for a while. This Tax Law Center blog post points out that DOJ does not have technical legal authority to do that. If that is what the WH wants, IRS leadership likely will make it happen – whether as part of a settlement or otherwise. I also suspect if it happens, it will be leaked to the media.

ABC’s description of the fund:

While the exact terms of the settlement are still being finalized, sources have described the proposed compensation fund as a hybrid between a victim compensation fund — similar to the civil claims process that followed the 2010 Deepwater Horizon oil spill — and a truth-and-reconciliation-style commission. Examples of truth and reconciliation commissions in other countries include governmental acknowledgment of wrongdoing related to apartheid in South Africa and Canada’s Indian residential school system.

Over the last year, the Justice Department has utilized a so-called “Weaponization Working Group” to examine what it has described as abuses of power by the Biden administration, identifying cases of alleged anti-conservative and anti-Christian bias — claims that are disputed by former officials.

Trump’s proposed commission is expected to be composed of five members who would issue monetary awards based on a majority vote, and the process for awarding money and the identities of the recipient could be kept private, according to sources.

Any remaining funds would be turned back over to the government shortly before Trump leaves office, sources said.

This appears intended to set up a formal process to award money to folks like Mike Flynn and Ashli Babbitt’s family without the need to file a lawsuit to obtain a settlement. The former’s prosecution and the latter’s shooting were both done during the first Trump administration and so could not be considered Biden administration weaponization, I guess.

Notes

It seems pretty clear that the claim is barred by the SOL without even getting to the merits. ↩︎
At least Hunter Biden (blatantly corrupt as he was) stuck to grifting from private foreign businesses, rather than looting the treasury itself. See Isaac Saul’s extensive list (but not comprehensive) of the administration’s self-dealing and corruption. ↩︎

Tags IRS; Trump

tax administration

April IRS Update

Trump proposes more budget cuts

The Trump administration’s budget for FY 2026 proposes $1.4 billion in more budget cuts for the IRS, according to Bloomberg:

“The Budget proposes to streamline IRS operations utilizing technology improvements to help focus the IRS on providing high-quality customer service while ensuring the tax laws are fairly administered,” the document said. The administration also highlighted its decision to end the IRS’s free filing tool Direct File and the almost 30% workforce cuts.

Most of the roughly $9.8 billion in proposed annual funding for the IRS is divided into three buckets: $3.13 billion for taxpayer services, $4.1 billion for enforcement, and $2.6 billion for technology and operations support.

Taxpayer services was the only category with a slight increase, from $3.04 billion in 2026, while enforcement and technology saw drops, according to the appendix.

The $1.4 billion cut would be larger than the $1.1 billion cut that Congress imposed on the agency last fiscal year. But it is less than what Trump or the House Republicans proposed to cut. So, one can choose between whether the glass is half full or two-thirds empty.

The article also reports that the administration proposes to cut the Inspector General’s (TIGTA’s) budget by $27 million or 16%.

The Tax Law Center described the budget as a continuation of “this Administration’s chaotic, self-contradictory, and damaging approach to tax administration.”

House’s proposed IRS budget

The House Republicans are on the same page, naturally.

On April 16^th, the House Appropriations Committee released its budget for the IRS. It would reduce the FY 2027 funding by $1.4 billion over the 2026 level, about matching the administration’s proposed cut. Most of the cuts would, of course, fall on enforcement with taxpayer services being held constant (i.e., they would eat both inflation and the augmentation from IRA funding used in 2026). Here’s how Thompson Reuters describes the proposal:

Taxpayer Services: The fiscal ’27 bill would maintain the current funding level of nearly $3.04 billion for taxpayer services. The Trump administration had asked for a small boost to $3.13 billion. The bill also maintains the combined $86 million allocations to the Tax Counseling for the Elderly Program, low-income taxpayer clinic grants, and the Community Volunteer Income Tax Assistance Matching Grants Program, and funding for the Taxpayer Advocate Service at $271 million.

Enforcement: House Republicans would cut enforcement funding to $3.6 billion. The fiscal ’26 bill had allocated nearly $5 billion for enforcement, while the Trump administration requested $4.1 billion for FY 2027. The House bill directs $35 million in funding to the Criminal Investigation Division for investigative technology.Technology and Operations: The fiscal ’27 bill boosts tech and operations funding to $3.6 billion for FY 2027, well over the $3.16 billion provided for FY 2026. The House proposal also exceeds the Trump administration’s request of just $2.6 billion. Of that, the House would set aside $1 million for “research,” and $10 million for equipment acquisition and facility construction, repair, and renovation.

As usual, any partial salvation of the revenue collection and enforcement functions will depend upon the Senate.

Consequences of cuts

On April 13, the Yale Budget lab put out an estimate of the effects of the IRS budget cuts on revenue collections. They estimate that the almost 28k reduction in employees (3,600 revenue agents) and $20 billion budget reduction, in combination, will increase the budget deficit by $861 billion over ten years. Their estimate is more aggressive than that used by CBO in its official estimates, because they include deterrence and other effects. They described this as “conservatively estimate[ing] the return to deterrence to be 2.5 times each dollar recovered directly through audits.” Not sure how they’re sure that’s a conservative estimate.

They point out the obvious that the additional complexity of many of OBBBA’s provisions and expanded data sharing (i.e., the IRS reneging on its confidentiality pledge to ITIN filers) will also have negative effects on revenues.

Plan to fire whistleblower

Tax Notes (no paywall) reports that the IRS will fire a high-profile special agent who is leading efforts to audit abuse of Puerto Rice tax incentives and Maltese pension plans. IRS Seeks to Fire Lead Agent in Malta, Puerto Rico Probes:

The IRS has begun the process of firing a special agent leading investigations into abuse of Malta pension plans and Puerto Rico’s Act 60 tax incentives, raising questions about the future of those enforcement efforts.

A source familiar with the matter indicated that Brian J. Visalli’s termination was not just expected — it was scheduled.

…

One tax professional, who spoke on the condition of anonymity, said they had heard of the agent’s pending termination and that there is a sense of relief among those representing clients in the investigations. The source added that the agent was known for holding the line.

Michael Welu, who retired from the IRS in 2022 as a fraud enforcement adviser, said that while employees at the agency normally “go after the low-hanging fruit because it’s easy,” Visalli has pursued cases against large businesses and wealthy taxpayers who cheat on their taxes.

“He’s the only one really going after the big fish,” Welu said.

…

In a statement to Tax Notes, an IRS-CI spokesperson said: “Federal law prohibits the IRS from commenting on personnel issues. What we can say is that IRS Criminal Investigation continues to aggressively pursue tax schemes involving offshore entities, Maltese pension structures, and Puerto Rico Act 60 incentives. IRS-CI continues to dedicate resources, including coordinated enforcement efforts, to address abusive tax arrangements.”

…

The development follows a Tax Notes investigation into Treasury Assistant Secretary for Tax Policy Kenneth Kies’s work on behalf of advisers’ Malta pension plans.

Before Kies joined the second Trump administration, his firm, Federal Policy Group LLC, was engaged by a company, Water Structures LLC, that offered Malta pension plans. Kies strategized with advisers about how to resist IRS efforts to curb abuse of the structures.

Trump lawsuit

Trump is in settlement negotiations on his $10 billion lawsuit against the IRS. FWIW: he ultimately controls both sides of the negotiation, so he’s negotiating with himself. And the liability (i.e., the illegal release of his tax information) was done by a contractor of the IRS that he controlled (in his first term). So, if you’re a true believer in the unitary executive theory (John Roberts, et al), this is world championship level self-dealing. I hurt myself, so I deserve compensation in an amount I will determine.

Excerpt from Reuters story:

Lawyers for Donald Trump and the Internal Revenue Service are in talks to settle the U.S. president’s $10 billion lawsuit against the tax ‌collection agency for leaking his tax returns to the media in 2019 and 2020.

In a Friday filing in Miami federal court, the lawyers asked a judge to put the case on hold for 90 days “while the parties engage in discussions designed to resolve this matter and to avoid protracted litigation.” A pause “could narrow or resolve the issues efficiently,” they added.

The White House declined to comment. The Department of Justice, which represents the IRS, declined to comment.

A delay would give Justice Department lawyers more time ⁠to address conflicts of interest posed by the case, given that Trump is suing his own government.

Justice Department lawyers report ultimately to the president, while the IRS and the Treasury Department, which is also a defendant, are part of the executive branch.

A court order in the case raises an interesting question. Judge Williams, sua sponte, expressed concerns as to whether the court has subject matter jurisdiction and appointed some blue-chip lawyers (Don Verrilli is one) from three separate law firms as amici to assist her in deciding. Since Trump is on both sides of this dispute, that seems an obvious threshold jurisdictional question: is there really an article III case and controversy here? Stay tuned, the amici’s memorandum is due on May 21st.

Bisignano and the boxer(s)

The WSJ has a story (paywall) about Frank Bisignano, the de facto head of the IRS (Bessent appointed him CEO). He’s into sports memorabilia in a big way and is in litigation over ownership of a pair of fight-worn Mohammad Ali boxing trunks (I assume that’s the analogous term to game-worn for football, baseball, and basketball jerseys):

Eric Inselberg, a sports memorabilia buff and entrepreneur, said he gave the prized gear to his former friend Bisignano years ago as collateral for a $500,00 loan. Inselberg said he settled the debt but Bisignano has nonetheless refused to return the trunks, which he estimates are now worth $800,000.

Bisignano claims he didn’t receive them, wasn’t friends with Inselberg, and the trunks are worth that much anyway.

The story casts Inselberg’s side as follows:

Inselberg, in a deposition, described Bisignano as an “apex predator” who is holding on to the shorts out of spite. “He’s vindictive,” Inselberg said. “He thinks he can do whatever he wants.”

Bisignano, he said, is a huge sports fan who spends big on memorabilia but is ashamed to admit it.

The case turns on whether and when Inselberg can prove he gave the trunks to Bisignano. The trial was set to begin in March but is delayed until September.

The story describes a tour of Bisignano’s home (a “mansion”) in New Jersey that included a “replica of J.P. Morgan’s ornate personal library as well as a urinal in a bathroom.” (IMO: weird consumption preferences + too much money.) A witness claimed to see Ali’s trunks in Bisignano’s “man cave” on the tour. The trial (assuming there actually is one) supposedly will turn on the credibility of the witness’s testimony.

None of this instills confidence in Bisignano’s personal qualities to lead and manage complicated government agencies (he’s running both the Social Security Administration and the IRS), as far as I’m concerned.

Phone service

The Center for Taxpayer’s Rights did some testing of the IRS phone service during the 2026 filing season, randomly calling the various different phone lines (>100X times) to see how long the wait times were, as well as the number of “curtesy disconnects.” This Tax Notes article (no paywall) by Nina Olson, board member of CTR and former Taxpayer Advocate, describes the results. The IRS’s own statistics show a significant decline from the 2025 filing season, which is no surprise given the agency’s staffing losses.

Olsen herself independently in early April did some checking:

In a particularly benighted (read, masochistic) effort, on Friday, April 3, I called each of the 8 lines we were testing. I spent 5 hours and 31 minutes on hold with the IRS on that day. The TAC line answered within 3 minutes, the NTA [National Taxpayer Advocate] line within 7 minutes, and the AQC [Automated Questionable Credit] line disconnected me within 2 minutes. The ACS [Automated Collection Service] business and individual lines, on the other hand, tormented me with music and messages for 2 hours and 3 minutes, and 2 hours and 1 minute, respectively.

This simply confirms what must be the obvious effects of budget cuts and chaotic personnel policies this administration has adopted. As context, it is useful to keep in mind that taxpayer services has been cut much less than other agency functions, such as enforcement, IT services, and so forth. This is bad news for the fisc.

Getting in the anti-fraud biz

On April 22^nd, the IRS put out a Whistle Blower Alert (a new category of IRS alerts, I think), Report misuse of federal funds and grants. My reading of the alert suggests that the IRS is going after fraud in use of federal government grants generally, that is, not necessarily related to tax law violations or other things under the traditional purview of the IRS.

The IRS is seeking information from the public regarding the misuse, diversion or fraudulent use of federal funds and grants by tax-exempt organizations, individuals, and businesses.

To be fair, many items listed under “What You Can Report” are arguably tax law related but some are very general. For example, the first six items on the list do not appear to be necessarily related to tax-exempt orgs, over which the IRS has supervisory responsibility, or tax law matters:

False statements or misrepresentations in grant applications.
Misuse of federal funds and grants including the diversion of funds for personal use.
Self-dealing or undisclosed conflicts of interest.
Improper payments to insiders, officers, or related parties.
Failure to perform required services or deliver promised outcomes.
Falsified reporting to federal agencies.

My observation is that if “failure to * * * deliver promised outcomes” under federal grants (5^th bullet) is reportable, then, some very high percentage of federal grants are likely in play. Given the stresses on the agency, putting them in this sort of open-ended business of detecting government fraud under the whistle blower statute is imprudent, at best. But I guess that’s the world the federal government is now operating in.

2026 filing stats

The 2026 filing season report statistics show the effects of OBBA, but I seriously doubt that this will bail the GOP congressional candidates out of from possible revenge by an electorate that is increasingly unhappy (according to polls) with the current state of the affairs. The average refund increased by 11.3% but the $333 amount will only go so far to cover the increase gas and other prices resulting from the Iran War, I’d guess, in most voters’ minds.

As of 4/17/2026:

Return or Refund Category	2025	2026	% Change
Total returns received	140,633,000	140,222,000	-0.3%
Total returns processed	138,057,000	138,567,000	0.4%
Total number of refunds	86,021,000	90,411,000	5.1%
Total amount refunded	$253B	$296B	17%
Average refund amount	$2,942	$3,275	11.3

Tags IRS, IRS funding, OBBBA, Trump

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

This is what you would expect when Congress has largely abdicated its duty to protect the tax base from exploitations of gaps in law. In the 1980s and early 1990s, it did this routinely, enacting technical corrections bills and revenue raisers that closed new fissures. Anyone paying attention to federal tax policy recognizes that has not been happening in the last 25+ years. Ray Madoff makes that point in her book, The Second Estate. (Madoff’s focus is the failure to address estate and gift tax avoidance; the revenue effects for the income and corporate taxes are almost certainly larger.) It’s a sure recipe for reducing the tax on capital income. That is so because financial engineering can easily reconfigure income from investments and business operations to take legal forms that minimize its taxation. Aggressive regulations and judicial interpretations can staunch only so much of that. The real solution is for Congress to regularly tweak the Code’s language to foreclose the worst of those efforts. ETFs’ use of heartbeat trades is a classic example. See this law review article for detailed explanation of how a seemingly innocuous provision enacted in 1969 became a multi-billion-dollar tax break for ETF investors and providers. The article contends that Congress needs to fix the provision. I agree but now that the tax break has become embedded in expectations and there is more than a cottage industry benefitting from it, Congress will almost surely do nothing. It took Congress years to even partially close down syndicated conservation easements, most of which could only accurately be considered a scam. ↩︎
In 2021, Senator Wyden proposed changes (see section 17) that would repeal tax-free in-kind redemptions for mutual funds. It went nowhere. I’m not sure it was even formally introduced. He also proposed in 2025 limiting the ability to create designer ETFs that allow individuals with concentrated portfolios (classic example would be founder stock in a successful tech startup) to diversify their holdings using designer ETFs. ↩︎
Unlike S corps and partnerships, the pass-through treatment is crimped or partial. Losses are not passed through but retained in the fund and offset future gains. Short gains are passed through as dividends, so they can’t be offset by capital losses. ↩︎
The shareholder will receive a distribution of money or fund shares (if the shareholder has elected to reinvest dividends or capital gain distributions), of course. If reinvested her basis in the fund will increase accordingly. ↩︎
A typical mutual fund shareholder who requests a redemption would be shocked to receive portfolio securities instead of money. ↩︎
The change was likely stimulated by the 1969 Act’s start of limitations on the rule in General Utilities – i.e., the ability of corporations to distribute appreciated property to shareholders without recognizing gain. See the text of the Colon article at notes 84 to 93 for possibilities as to Congress’s rationale. It’s clear no one thought at the time there would be significant revenue consequences to the 1969 change or when it was confirmed in the Tax Reform Act of 1986, which repealed the General Utilities doctrine. ↩︎
Matt Levine, who writes a great free Bloomberg newsletter on financial markets, characterizes ETFs as mutual funds that don’t pay taxes, as well as an easy way to package trades. This combination explains their explosive growth. I highly recommend subscribing to his newsletter, if only for its entertainment value. ↩︎
Tax savings are irrelevant to retirement funds and other tax-exempt entities, but ETFs’ generally lower fees are important. Retirement funds, like 401(k)s, may violate their sponsor’s fiduciary duties to participants if they don’t select/offer lower fee funds. A plethora of lawsuits have challenged employers whose 401(k) plans offer higher-fee funds. ↩︎
I have personally benefited from the tax savings this structure provides. We have held three traditional Vanguard mutual funds in taxable accounts for a long time. They are based on narrower indexes and typically generated a modest amount of capital gain distributions until the ETF share classes were added. After that, the capital gain distributions totally stopped – now for well over a decade. That is so, even though the funds track indexes with stocks regularly being added and dropped from the indexes, while the value of the stocks they hold have appreciated substantially. The revised version of the Moussawi, Shen, and Velthuis article documents that my personal observation is the case for the Vanguard funds with ETF share classes. They have totally stopped distributing capital gains. See Appendix C. ↩︎
The two lines are unlikely to converge – i.e., that ETFs will not totally replace traditional open-end mutual funds. There are investment reasons to prefer traditional mutual funds under some circumstances, such as liquidity issues. Moreover, the tax advantage doesn’t matter for retirement accounts or other tax-exempt investors, although ETFs’ typically lower fees do. On that front, fund complexes will not like their low fees (= lower profits and manager compensation) and so will drag their feet in moving all their AUM to the ETF structure. In addition, SEC rules require much more frequent disclosure of the portfolio holdings of ETFs compared to traditional mutual funds. This can be a disadvantage for actively managed funds that do not want to disclose their investment strategies, particularly as they are adding to or shedding holdings. ↩︎
For example, with regard to the share class strategy, the article (p. A-20) cites a Bloomberg estimate, which I had not seen, that its use reduced Vanguard shareholders’ realized capital gains by $130 billion through 2018 (well over $20 billion in federal tax). Absent a favorable SEC decision, the share class strategy likely could not have been implemented. ↩︎
The paper assumes that ETFs are index type investments. It treats active funds and ETFs as mutually exclusive categories. That appears to be less likely to be the case now, since 2025 and 2026 data show many more active ETFs, even though they may mainly be algorithm-based strategies and not classic manager-picked active funds. ↩︎
In 2021, JCT staff preliminarily estimated that Wyden’s proposal (completely repealing tax-free in-kind redemptions) would have raised $206 billion. I’m sure they estimated a healthy rate of growth in the use of ETFs, but I doubt it was close to what is actually happening. The 2025-26 surge has surprised most observers, including industry sources. ↩︎

Tags capital gains