Categories
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

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

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

  1. It seems pretty clear that the claim is barred by the SOL without even getting to the merits. ↩︎
  2. 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. ↩︎
Categories
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 16th, the House Appropriations Committee released its budget for the IRS. It would reduce the FY 2027 funding by $1.4 billion over the 2026 level, about matching the administration’s proposed cut. Most of the cuts would, of course, fall on enforcement with taxpayer services being held constant (i.e., they would eat both inflation and the augmentation from IRA funding used in 2026). Here’s how Thompson Reuters describes the proposal:

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

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

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

Consequences of cuts

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

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

Plan to fire whistleblower

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

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

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

…

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

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

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

…

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

…

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

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

Trump lawsuit

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

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

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

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

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

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

2026 filing stats

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

As of 4/17/2026:

Return or Refund Category20252026% Change
Total returns 
received		140,633,000140,222,000 -0.3%
Total returns
processed		138,057,000138,567,0000.4%
Total number of refunds86,021,00090,411,000 5.1%
Total amount refunded$253B$296B 17%
Average 
refund amount		$2,942$3,27511.3
Categories
income tax

ETF Tsunami

This post updates a post I wrote over five years ago, Tax Tail Wags Investment Dog, about the tax effects of Exchange Traded Funds (ETFs). I decided an update was in order after seeing the massive flows into ETFs in the first quarter of 2026 and that the authors had updated the paper on which I based my 2021 post with four more years of data. The tax effects of ETFs are clearly happening faster and are larger than I expected.1 That is bad news for federal and state income tax revenues.

In a nutshell, the ETF structure provides a classic example of how financial engineering, the realization requirement, and step up in basis undercuts taxation of capital gain income – especially when Congress fails to constrain or limit efforts by the tax planning industry to exploit seams in the tax code. That is likely reducing federal tax revenues by over $20 billion/year and growing.

The favored taxation of ETFs is largely due to four factors:

  • An unintended effect of a provision of the Tax Reform Act of 1969
  • Favorable decisions by the SEC
  • Exploitation of the literal language of the tax law
  • Inattention by Congress

It is clear now that the effects, unless addressed by Congress, will lead to the loss of hundreds of billions of dollars in tax revenue. This has, as far as I can tell, been largely flying under the radar.2 It is also unintended and undercuts the fairness and efficiency of the tax system. But we’re stuck with it, absent a seismic change in Congressional attitudes and practices.

ETFs’ tax advantage

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

Mutual funds, which ETFs are a subset of, are subject to form of pass-through taxation. They are pooled investment funds owned by their shareholders. When the fund sells appreciated securities and recognizes gain, that income is passed-through and taxed to the shareholders.3 Thus, even though the shareholder has done nothing he/she may receive distributions of capital gains (or dividends for short term gains) reported on a Form 1099, because the fund itself has sold securities.4 Interest and dividends earned by the funds are similarly subject to pass through taxation, losses are not (they offset gains at the fund level).

For traditional mutual funds, distributions to satisfy shareholder redemptions are almost always made in money.5 However, the Tax Reform Act of 1969 included a provision that allows funds to instead provide for redemptions “in kind” – i.e., to hand over some of the fund’s portfolio securities to the shareholder. Congress’s rationale for making this minor change is unknown; there isn’t any written legislative history for it. It was done when Congress started to limit the ability of corporations to distribute appreciated property tax free (the General Utilities doctrine).

Making in-kind redemptions is rarely done by traditional mutual funds, by all accounts.6 That changed with the advent of ETFs in 1993 (i.e., 24 years later); they routinely do it as part of their general mode of operation.

ETFs trade on public stock exchanges. And, unlike closed-end funds, the number of outstanding ETF shares can go up or down based on market demand (i.e., they’re open-end funds). To keep their net asset values or NAVs (i.e., the value of the securities in the fund’s portfolio) aligned with the minute-to-minute changes in value of the aggregate value of outstanding ETF shares (again, all the relevant securities are typically trading on stock exchanges) requires use of in-kind redemptions through Authorized Providers or AP (essentially market makers for the ETF shares). The AP and the ETF swap shares back and forth to keep the two sets of values aligned. The shares being swapped are ETF shares themselves and the portfolio holdings (stocks for an equity ETF) of the ETF.

This swapping creates the opportunity for the ETF to purge its portfolio of low-basis shares and their potential for the ETF itself realizing capital gains that must be distributed to shareholders – i.e., when the ETF has to dispose of portfolio shares because of changes in its investment plans or sales/redemption of the ETF shares. Of course, that requires some minimum level of swapping and the authority to pick low-basis shares to do it. The SEC provided regulatory guidance provided the necessary leeway – i.e., allowing use of custom baskets of shares (e.g., low-basis ones) rather than requiring pro rata lots, a proportionate distribution of all the ETF’s portfolio securities.

The swapping and that guidance allowed the fund industry to develop the practice of “heartbeat trades” – essentially extra swapping with the AP to purge the low-basis securities. It’s extra swapping because it’s not necessary either to keep prices aligned or to satisfy purchases or sales of ETF shares. They’re doing for the purposes of getting rid of the low-basis holdings to insulate their shareholders from distribution of capital gains.

In addition, Vanguard came up with the idea of adding an ETF share class to a traditional mutual fund. That allowed it to use heartbeat trades to purge low basis holdings in the traditional fund as well. Vanguard patented that technique and the SEC also authorized it. The patent has expired and the SEC has provided general guidance for other funds to use the technique, which they have started doing.

Net result: Expanded use of ETFs, thus, reduces both capital gain distributions from mutual funds and dividends (short term gains are distributed by mutual funds as dividends).7 Use of ETFs has sky rocketed. Tax revenues similarly declined.

Flows

Overall

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

ETF assets are roughly $13.8 Trillion, now spread across 5,046 funds. * * * Vanguard pulls roughly $1.5B per day. VOO [Vanguard’s S&P 500 ETF] alone absorbed $39.3B YTD. * * *

And the flows are also bonkers! Year-to-date inflows ($446B) are running 64% ahead of 2025’s record pace: on track for $2T+, seven years ahead of Bloomberg Intelligence’s 2024 forecast for when we might hit that kind of number.

The post also reports that 231 new ETFs have been created in 2026 and have gathered over $37 billion in assets. By contrast, the Investment Company Institute, the industry trade association, reports traditional mutual funds have experienced outflows of more than $32 billion. Thus, in one quarter, almost half a trillion in assets flowed into ETFs while $32 billion flowed out of traditional mutual funds.

More actively managed ETFs

Actively managed mutual funds are inherently less tax efficient than index funds, because the active managers regularly buy and sell investments to maximize returns. That is what active management is all about. Indexing is a permanent buy and hold strategy with capital gain triggering selling only done if the index changes or if money is needed to pay for shareholder redemptions. Trading causes the fund to realize capital gains that are distributed to shareholders yielding tax liability.

ETFs traditionally were index funds, including those based on more exotic indexes constructed using various financial metrics (dividend history, volatility, etc.). But the according to the ETF.com post, the recent flows are often to actively managed ETFs:

A big part of this flood will be * * * [flows into] active ETFs. While we could do a lot of splitting hairs on just how “active” a lot of them are, there are indeed now more active than passive ETFs: 2,751 vs. 2,295. 84% of 2026 launches are active, with flows that mirror. Active is gaining assets at 3X its base: 12% of assets but 38% of flows.

One might naively assume that doesn’t matter. If actively managed ETFs are trading stocks and bonds, just like traditional mutual funds they will need to distribute any resulting capital gains to shareholders, typically generating tax liability. Wrong. As described above, ETFs’ ability to distribute low-basis securities to their Authorized Providers (AP) effectively can wash away many of those capital gains, especially with the ability to use “heartbeat” trades. For example, this State Street post reports in 2025 that 53% of active mutual funds distributed capital gains, while only 9% of active ETFs did. The post makes the point that tax savings are the big driver of the ETF onslaught.

Conversions

In addition to new launches, fund complexes are converting traditional mutual funds to ETFs. For example, the ETF.com post notes Dimension converted multiple of its funds to ETFs and plans to do more. I assume that accounts for some portion of the ETF in-flows and traditional funds’ outflows.

As the trend to ETFs continues, it will be harder to resist converting. ETFs not only are more tax efficient, but they also have lower fees. Those two factors should make it a no-brainer for taxable accounts to select an ETF when both flavors are available for an otherwise equivalent fund. Fund complexes still offering only traditional funds will be at a competitive disadvantage.8

Share class option

As noted above, Vanguard developed a patented structure that bolts an ETF onto a traditional fund as a separate share class, allowing the ETF’s use of heartbeat trades to cleanse the traditional mutual fund of its low-basis securities, reducing capital gain distributions for its shareholders.9

The ETF.com post describes the industry response to patent’s expiration:

The share class story is well trod at this point: the Vanguard patent for ETF share classes of traditional mutual funds expired in 2023, and by last December the SEC had granted exemptive relief to over 30 firms. Two weeks ago, on March 17th, the SEC completed the transition to this new era by issuing the final Exchange Act relief for multi-class ETFs.

(That sound you heard was a starting gun.)

About 100 applications are in, about 70 orders issued. 2 firms launched.

Longer term trend

To get a fuller picture, I went on FRED and captured data on the relative AUMs of all mutual funds and ETFs, including those holding bonds and other fixed income securities, as well as international stocks and bonds.

The following graph shows the data with the top line representing total mutual fund assets (including ETFs) and the bottom line, ETF assets. The lines are converging and likely will get much closer together. To express it in percentages, at the end of 2024 ETF assets were 49% of the total and now are closer to 58%. That’s an astounding increase in a little over a year and a quarter.10

Updated Article

I noticed via this Harvard Law School Forum post that the Moussawi, Shen, and Velthuis SSRN paper that I based my 2021 post on was updated in April of 2025. (The Harvard post is a very short summary that can be read in a minute or two.) The paper’s analysis now reflects an additional four years of data (through 2023) and more analysis (e.g., of the effect of the Vanguard share class strategy and tax-free conversions of traditional mutual funds to ETFs). Their data, of course, is still somewhat stale; it doesn’t reflect the tidal wave of ETF growth in the last year plus.

The updated article, which will be published in Review of Financial Studies, essentially presents the same story as before: the favorable tax status (i.e., deferral of most capital gains) is what is driving ETF growth. The ability to do conversions and the now general availability of the Vanguard share class strategy will only increase the amount of assets in ETFs, compared with traditional funds. The updated article has a wealth of additional information – a lot has happened in the intervening four years.11

This graph (Figure V, Panel B, p. 41) from the article illustrates the dramatic tax advantage of ETFs. It expresses realized capital gains as a percentage yield for the three types of funds:

The percentage rates are low, all under 8%. But with total AUM for all mutual funds now over $28 trillion, small percentages translate to large amounts.

The paper’s additional four years of data provides more information and certainty to its estimate of the potential effects on federal tax revenues from the migration of financial assets to ETFs. Using data through 2019, the 2021 version estimated deferral of capital gains between $400 billion and $679 billion (10-year estimate). The updated version raises that estimate to $915 billion to $1.7 trillion. (Note: the article’s data is limited to U.S. equity ETFs. Thus, it excludes ETFs that invest in foreign equity or fixed income securities. The latter generate only modest capital gains, of course.)

This is how the article (p. 32) describes the potential revenue effects:

Given that U.S. equity ETFs managed around $4.6 trillion in assets by the end of our sample period (Table A.I), it is reasonable to assume that these ETFs would contribute to the deferral of the tax on at least $915 billion and up to $1.7 trillion in short- and long-term capital gains distributions over the next decade. These projections will be much higher if we incorporate additional ETFs traded in the U.S. (other non-U.S. equity and fixed income ETFs with the in-kind redemption feature, estimated to be around $2.8 trillion in size in 2023 according to Investment Company Institute (2024)), as well as future investors’ flows into ETFs. The tax-deferral feature of ETFs also allows tax-free compounding of short- and long-term capital gains, creating larger accumulated future capital gains. Furthermore, investors can forgo paying taxes on the accumulated capital gains if they bestow their ETF shares due to the step-up in basis rule, disproportionally benefiting wealthier investors who have been migrating to ETFs in recent years.

Those numbers reflect the amount of gain deferred. To translate that to reduced tax revenue, one must make assumptions about the percentage of the deferred gains that are ultimately avoided altogether through stepped up basis (i.e., if the ETF shareholder sells, she/he will then recognize the gain based on their basis in the ETF shares) and what tax rate would have applied. Assuming 75% of the gains ultimately avoid taxation altogether and that the applicable federal rate is 15% (both of those are conservative, I think) suggests a potential 10-year revenue loss of about $150 billion.

That amount is surely very low because the paper’s numbers do not reflect:

  • The very large flows into ETFs since 2023
  • ETFs that invest in foreign equities and fixed income securities
  • The subsequent growth of active ETFs which have proportionately more capital gains when the traditional structure is used12
  • Growing use of private 351 ETFs by high-net-worth individuals to diversify holdings of concentrated direct stock holdings, such as founder stock or similar
  • Use of ETFs to avoid the wash sale rule (see Appendix).

I would not be surprised if the use of ETFs will lead to $300 billion in reduced federal revenue over the next ten years.13

The bottom line is that Congress’s failure since the 1990s to regularly update the tax code to limit these sorts of arrangements has had a major impact on revenues and the budget deficit. And this is just one example. It also helps to explain why recipients of capital income pay lower effective rates than wage earners, modestly boosting income inequality. With regard to SALT considerations, it is a cautionary tale for states who are attracted (for reasons of enhancing equity and revenue yield) by the proposals to increase their reliance on taxing income from capital. That income tends to melt away, in addition to being more volatile and harder to collect.

Appendix

The Appendix provides two anecdotes of how ETFs are used to avoid paying taxes, almost certainly inconsistent with the intent of the Code when the relevant provisions were enacted.

Tax-free T-bills?

One ETF, BOXX, provides an example of how the combination of financial engineering, the ETF structure, and a market for tax avoidance (w/ IMO questionable cost-benefit payoff) can lead to the development of exotic investment products.

This 2022 Bloomberg article, T-Bills Without Tax Bills? This Fund Says It Cracked the Code, describes how an enterprising former Marine used the ETF structure to obtain preferential capital gain taxation on what is essentially an alternative to money market investments. In other words, deferral until realization and then lower federal tax rates for long-term gains apply. Tax liability, of course, can be washed away by the step up in basis rules if the fund holding pass on death. This Morningstar article explains how the investment element works. The underlying investments are option contracts on stocks – nothing close to T-bills.

There are doubts as to whether the tax angle works technically. See Steve Rosenthal at TPC and Professor Daniel Hemel for more details. But the fund has been around for four years and, according to Morningstar, now has $11 billion in assets. That is a niche fund by most standards. As of the first quarter end, Fidelity’s government securities money market fund had over $400 billion in assets, by comparison. But it still must have a very large number of shareholders.

I have seen no reports in the financial or tax press that the IRS has attacked the tax strategy. If it does and is successful, the compliance and administrative issues will be an unholy mess, given the large number of shareholders and the multiple tax years involved. (For all I know, the promoters may have gotten a private letter ruling – I no longer have access to a databased of PLRs.)

A couple of observations, to get the favored federal tax treatment (i.e., long-term capital gains) one needs to hold the investment for at least a year. That is not ideal for one’s cash or most liquid holdings. It is more likely to work for someone who wants a longer-term investment with a cash-like return. There are plenty of good investment arguments against that. It used to be truism that holding cash was not really an investment.  However, there is some case for holding cash as a better diversifier than longer term fixed rate investments (e.g., see this column by John Rekenthaler). Second, Morningstar gives BOXX a negative rating. Its expenses are high – the fund’s operators siphon off a fair chunk of the tax savings and the fund is riskier than a money fund and certainly than holding T-bills.

SALT implications. From a state tax perspective, if the alternative is holding T-bills as suggested by the promoter, investors forgo their state tax exemption in doing so. Federal law prohibits states from taxing interest on Treasury securities. So, if investors abandon T-bills for BOXX, it’s a small plus for state income taxes without capital gain preferences (e.g., California and Minnesota). Those states will realize tax when the investor sells and realizes a taxable capital gain versus T-bill interest that is free of state tax. In addition, for million-income folks in Minnesota, the NIIT surtax applies if the gains are realized by selling the ETF. Of course, if the interests are never sold (i.e., they pass at death), there will be no state tax.

Avoiding wash sales

The wash sale rule prevents buy and selling essentially the same security within a short window of time to realize a capital loss without actually changing your position economically or financially. This would be classic gaming of the realization requirement and has been prohibited for over a century.

The proliferation of ETFs (e.g., multiple ETFs tracking the same index) creates the opportunity to avoid the wash sale limit. Sell a Vanguard ETF and buy an identical Fidelity ETF nearly simultaneously does not change one’s investments as a financial or economic matter. A recent academic study, ETFs and the Wash Sale Loophole (June 13, 2025), documents that institutional investors are routinely doing that. Here’s a quote from the abstract:

This study examines whether institutional investors use ETFs to circumvent wash sale rules. Consistent with tax-motivated demand for ETFs, incumbent ETFs both create more shares and experience more trading volume upon the introduction of nearly identical ETFs, particularly when recent returns are negative. We show tax-sensitive institutions’ investment in highly correlated ETFs has proliferated in recent years, exceeding a quarter of their AUM. Furthermore, tax-sensitive institutions holding more ETFs are significantly more likely to engage in swapping nearly identical ETFs. This swapping behavior has become widespread, with tax-sensitive institutional investors swapping $417 billion of nearly identical ETFs since 2001. We estimate that tax-sensitive institutions realized more than $84 billion dollars in losses in highly correlated ETFs associated with the swapping activity since 2001.

Those revenue losses, in the larger scheme of things, are modest. But even saving a few billion dollars matters. In 1997, for example, Congress largely foreclosed a wash sale avoidance strategy called short against the box that was widely used. (Disclosure: I used the short against the box technique a few times back in the 1990s. I have also used the ETF strategy recently and likely will again unless the law changes.) Congress largely has abandoned doing that sort of thing.

Notes

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

Incongruity

A recent Fox News poll1 finds that 75% of respondents consider “almost all or a great deal” of federal spending is wasteful:

In real world fiscal terms, half of federal spending pays for Social Security, Medicare, and interest on the debt:

Other poll results have found strong support for Social Security (see here and here) and Medicare (here). People like spending on those programs and do not want it cut and often favor spending even more. Of course, responding to a poll (it’s hard to get people to answer pollsters’ calls) does not require passing a logic or consistency test.

On a related topic, the Fox News poll also finds most of its respondents overwhelming think US taxes are too high. Despite the 2025 tax cuts enacted in OBBBA, that sentiment grew by 10 percent points between 2025 and 2026:

America’s taxes are very low by international standards. Here’s a TPC graph of the US’s tax levels compared with other countries:

What makes this perception even more off is the reality that America’s lower tax burden is also distributed much more progressively than that in most countries. The US heavily relies on a progressive income tax and has no broad-based national consumption tax unlike every other OCED country. That means average income people (i.e., those presumably responding to these polls) are paying even lower taxes than comparable cohorts in other countries. Put another way, affluent people in America are carrying more of the (albeit lighter) fiscal load. But the poll respondents still think they’re getting a bad deal.

I think these are the real-world political effects of the anti-tax political rhetoric that the American people have been relentlessly bombarded with over the last 45 years. These misperceptions cannot be easily corrected, given the polarized political and media environment. A fine mess you’ve gotten us into, Grover Norquist specifically and the Republican Party more generally.

Notes

  1. Fox News is mainly an advocacy operation, not a news organization, as revealed by the discovery in the Dominion lawsuit and detailed in the book, Network of Lies. However, the Fox News poll is generally considered a well-regarded poll that is not considered to be tinged by the organization’s clear political and partisan bias. ↩︎
Categories
income tax

Roth v traditional IRAs

Caveat: This post is about public policy not investment or personal finance tactics or strategies. As a personal finance matter, Roth accounts are a great way to diversify the tax risk of a retirement portfolio – especially for someone who is sophisticated enough (or has a sophisticated advisor) to use them intelligently. I have a significant share of our retirement portfolios in Roths for precisely that reason.

One of my pet peeves is the misperception1 by sophisticated people of a what I see as a crucial flaw in the Roth structure in how we incentivize retirement savings: the Roth structure piles tax benefits on those lucky enough to be winners in the investment race, while punishing losers. The net result likely makes the structure regressive on a permanent or lifetime income basis. I have written about this twice before in an overly long and obtuse ways here and here (see “The other Roth problems” section of the latter).

A recent X post on an unrelated topic (sequencing risk in retirement savings) and a striking graph in it (see below) provided what I think is strong, indirect evidence for this effect – investment returns can systematically vary a lot by the randomness of when you start and stop retirement investing (largely when you’re born and start working). So, it caused me to once again mount one of my old hobby horses and write this post. Apologies. You can hit delete now, if you aren’t interested in hearing me drone on about this relatively esoteric topic.

Roth versus traditional structure

The incentive or subsidy provided by Roth versus traditional IRAs varies based on whether the subsidy is provided at the point of (1) the contribution or savings (traditional or frontloaded tax benefits) or (2) the distribution or consumption (Roth or backloaded tax benefits). It is well known (pp. 9-10) – based on simple algebra – that the amount of the subsidy is mathematically identical if/when two elements are the same for the entire period of saving and retirement:

  • The tax rate on contributions and distributions; and
  • The rate of return on the investment

Of course, in the real world we know that those two things are never constant. Legislation changes effective tax rates, as well as individuals’ incomes varying over their lifetimes causes their tax rates to rise and fall. Similarly, we know that investment returns vary widely. This variance results mostly from random stuff: investment skill, luck, or pure timing.2

This post relates to the last of these, timing: even if everyone invested the same amount or percentage of their retirement savings in index funds (eliminating skill and luck as a factor), investment returns will systematically vary based on when they started saving and when they started drawing down their accounts. That variance occurs because of the business cycle, animal spirits, changing expectations, yada, yada.

Why it matters

In my view, this matters crucially on a policy basis because providing the subsidy at the point of contribution is fairer or more equitable.3 That is so because the Roth structure, all else equal, provides larger incentives to individuals who realize above average investment returns. (This gets back to the assumption of a constant rate of return to make the two mechanisms equivalent.) Thus, these lucky ducks (winners in the investment lottery, so to speak) get bigger subsidies, magnifying their higher investments returns. Put another way, the portion of their return that exceeds the average return in the assumption goes untaxed. They get bigger incentives; those with lower returns get smaller incentives on average. Second, one has to assume that folks who realize systematically better investment returns typically have higher incomes, because their accounts end up being larger on average, all else equal. So, the Roth structure makes the tax and retirement system more regressive, compared to the traditional structure.

Birth lottery

A recent interesting X post on a tangentially related subject – sequencing risk in retirement savings – provides an illustration of why this assumption is likely correct and that it is not trivial. (Note: the post is about the variance in investment returns and the effects on retirement savings, NOT taxation.) The post is by Jesús Fernández-Villaverde, a U Penn economics professor, who I had never heard of but assume is a reliable source.

Investment returns vary because of the cyclical ups and downs of the stock and bond markets. There can be long periods of good markets (e.g., the 1990s) and bad markets (e.g., the 1970s). When you start investing/saving for retirement and when you stop and begin drawing down your account matters – potentially by a lot. Fernández-Villaverde did some extensive calculations of those effects and the results are quite striking. The entire X post is well worth reading for those interested in the general topic. It’s short. Here’s his graph that summarizes his results, which show a lot of variation:

Methods and results. His calculations are for a pure stock portfolio (S&P 500 index) for the period 1945-2024. He calculated real returns (i.e., he took inflation out of them). Here’s his description of the results (my emphasis added):

Over this 80-year period, the S&P 500 delivered a geometric mean real total return of about 7.5% per year. That is an impressive number. But this average return masks a lot.

Imagine a worker who starts investing at age 22 and retires at age 68. That gives them 46 years of contributions. In their first year, they contribute $1. Each subsequent year, they increase their contribution by 1% (roughly keeping pace with real wage growth). Every dollar is invested in the S&P 500. They never touch the money until retirement. No panic selling, no market timing, no strategy switching (and no management fees!). Textbook investing and waiting.

I ran this exercise for every possible cohort for which the data allow. The first cohort starts investing in 1945 and retires in 1991. The second starts in 1946 and retires in 1992. And so on, all the way to the last cohort, which starts in 1978 and retires in 2024. This yields 34 cohorts, each investing for 46 years, making the same contributions and investing in the same index. The only difference among them is which 46-year slice of historical returns they happen to live through.

The most fortunate cohort, the one that started investing in 1954 and retired in 2000, had $607 on the day of retirement (remember, all in real terms), with a real annual return of 8.82%. The unluckiest cohort, the one that started in 1963 and retired in 2009, accumulated $210, with a real annual return of 4.83%. Same contributions. Same index. Same strategy. Same investment horizon. Yet the luckiest retiree ended up with 2.9 times more wealth than the unluckiest. 4

The typical retirement account is not invested 100% in stocks, which provide a higher rate of return than bonds or cash. Conventional wisdom warns against an all-stock portfolio, especially as retirement approaches. So, his assumption exaggerates the difference between the highest and lowest returns. He redid it using a target date fund. This reduced the 2.9X difference to 1.6X.5 That is still a large difference.

He also points out that in the real world, the ones with unlucky timing relative to the business cycle will suffer more than just subpar investment returns:

In fact, sequencing risk is even worse because poor returns in the stock market are correlated with weak labor markets: you have a much higher probability of losing your job (or seeing your wage income fall) precisely when the market is doing poorly, preventing you from saving when prices are low and equities are most attractive. However, let me set that point aside today to simplify the exposition.

Policy implications. To me, this illustrates one policy reason why the Roth structure is flawed as a retirement incentive: it piles larger tax benefits on those lucky enough to realize above-average investment returns (investment skill, pure luck, or as here when they started and ended their retirement savings) who need it least. Higher returns are almost certainly correlated with higher retirement incomes, probably strongly correlated.6 This undoubtedly makes the tax and retirement systems less progressive. It persists across age cohorts, if you look at the pattern of the graph.

I can think of no countervailing policy reason for giving more to investment winners and less to investment losers. It does not incent desirable behavior (like savings or careful investing), rather random luck. Moreover, Fernández-Villaverde’s calculations make it clear what we’re often rewarding is simply timing, mainly the timing of one’s birth which no one controls. If anything, a better policy is to offset the effects of bad luck. The traditional IRA structure does that by the government assuming some of the risk of random variance in investment returns, while the Roth structure works in the opposite direction.

We’d have been much better off if Senator Roth and President Clinton had never started us down path of using the Roth structure. Unfortunately, it’s now too late. Because the Roth structure allows Congress to game the measurement of fiscal cost, it makes further movement to Roths fiscally irresistible as Congress almost surely enacts future editions of the Great American Retirement Fraud. (See my summary here.)

Of course, there are a host of other reasons for criticizing the retirement incentive system. It’s too complex, too expensive, gives a lot of help to those who don’t need it, is tilted to the affluent, etc.

Notes

  1. Maybe systematic ignoring would be a fairer way to characterize it. ↩︎
  2. See the classic book, Burton Malkiel, A Random Walk Down Wall Street for chapter and versus. Reading it in the early 1980s transformed my approach to investing and put me on the path to prosperity in retirement FWIW. ↩︎
  3. There are IMO a host of other flaws with the tax incentive system for retirement savings. Among them: Requiring people to choose between Roth and traditional structures creates immense complexity and adds a lottery effect to the amount of the benefit received. The Roth structure encourages policy makers to undercount the fiscal cost of providing retirement incentives compared to the traditional structure, because it pushes cost outside the budget window. Because the size of incentives rise with tax rates, both types give bigger incentives to individuals with higher incomes and tax rates, those who are less likely to need them. Affluent people typically save without incentives. That only scratches the surface of the policy problems with our system of retirement incentives. ↩︎
  4. Of course, comparing the worst and best case provides an exaggerated view of the difference. A more balanced approach would look at the statistics measuring the dispersion or variance in the return. Because this is a post on X, he didn’t provide that type of detail. The graph appears to show a lot of variance, and the pattern of the bars show that some age cohorts are systematic losers or winners. I personally happen to be in age cohort winners FWIW. ↩︎
  5. My observation is that his glide path allocation much more aggressively shifts to bonds than the typical one used by Fidelity, Vanguard, etc. He has the stock allocation at 20% at the time of retirement. Vanguard and Fidelity’s target 2025 funds have their stock allocations set between 50% and 60%. So, the actual reduction is probably smaller than he suggests. ↩︎
  6. This is what I would like to see data analysis on to potentially validate my inferences. ↩︎
Categories
Uncategorized

Fraud Framing

A prime focus of the 2026 legislative session has been on the problem of fraud in social services programs. Absent the distraction (to put it mildly) of the ICE surge, the Republicans likely would have succeeded in making fraud the dominant session issue. This has an obvious political dimension: they hoped to ride it to electoral success in November. But it is clearly also a serious policy problem that needs to be addressed.1

Trump and the national Republicans have accommodated those efforts by making fraud in Minnesota programs a national issue. The Right-Wing media have reinforced that effort with a constant drumbeat of stories. The large dollar numbers (about $250 million) from the Feeding Our Future, COVID food assistance fraud, along with fraud in newer MA-funded programs for autism and housing assistance made Minnesota an easy target. Add to that, the former acting US Attorney threw out ridiculously large and speculative, at best, estimates ($9 billion) of additional fraud.2

I have no expertise in the workings and structures of social service programs, potential fraud in them, or how to reduce or minimize it. But as I watch the debate from the sidelines, my tax centric perspective may provide useful context, as well as an idea for detection/mitigation based on what works in the world of tax compliance.

Context: $ amount

Putting aside Joe Thompson’s numbers, reliable numbers (i.e., from court proceedings, charges, and so forth – not speculation or guesses) are well under $1 billion for Minnesota social service fraud (Strib came up with $218 million from court records back in December). As has been occasionally reported, Arizona had a series of related Medicaid fraud cases that were many multiples (>$2 billion), but it has not garnered anywhere the national attention.3

A billion dollars in fraud is large (to say the least), but to provide useful context federal tax evasion cases involving owners of one closely held obscure company, Vista Equity Partners that provides software to auto dealers, likely also defrauded taxpayers of an equal or potentially larger amount:

  • The IRS charged the principal owner, Robert T. Brockman, with fraudulently failing to report $2 billion in income.
  • Brockman died before the criminal case could be tried, but his estate settled with the IRS, paying $750 million in taxes and interest in December 2025.
  • The company’s CFO and another founder of the company, Robert Smith, settled with DOJ agreeing to pay $139 million in back taxes and penalties, as well as abandoning a refund claim for $182 million. His case led to the Brockman case.

It’s very easy to infer that taxpayer losses equaled or exceeded a billion or close to it from tax fraud by those two owners of Vista Equity. This attracted minimal public attention beyond the financial press and the tax world.

The cases were brought and settled during the Trump administrations. Beyond putting out the usual DOJ press releases, they did not make a big deal about it. Instead, they have been systematically dismantling and hobbling the IRS, the agency that fights tax fraud.

Moreover, Trump has pardoned a significant number of the perpetrators of tax fraud.4 An AI search turned up a list of notable pardons for tax crimes including these examples:5

  • Todd and Julie Chrisley: The reality TV stars were pardoned for convictions including bank fraud and tax evasion related to a $30 million loan scheme and failure to file tax returns.
  • Michael Grimm: A former Republican Congressman pardoned after pleading guilty to tax fraud for underreporting $900,000 in restaurant revenue.
  • Paul Walczak: A Florida businessman pardoned after pleading guilty to willful failure to pay over $10 million in federal taxes.
  • Jeremy Hutchinson: A former Arkansas state senator pardoned following convictions for bribery and tax fraud, specifically filing false tax returns.
  • Joseph Schwartz: A nursing home executive pardoned after pleading guilty to a $38 million Medicaid and tax fraud scheme.
  • Charles Kushner: Pardoned for convictions including assisting in the filing of false tax returns.
  • Paul Pogue: Pardoned after pleading guilty to underpaying taxes by more than $400,000.
  • Albert J. Pirro Jr.: Pardoned for conspiracy and four counts of tax evasion.

There is a basic asymmetry in the administration’s, and more broadly the public’s, perception of tax fraud as a lesser evil than bilking direct spending programs. (Note that some of these cases did not exclusively involve tax fraud.) This probably has something to do with the psychology of loss aversion – failing to pay taxes you owe simply is not as bad as defrauding direct spending programs. But money is money and committing tax fraud is not economically or financially different than fraudulently getting a government grant-in-aid – in terms of its effects on the federal fisc and taxpayers. That is why loss aversion is a fallacy.

It also demonstrates the administration’s hypocrisy and political opportunism. This isn’t about the integrity or the cost of government programs. It’s politics.

Context: tax system social welfare benefits

Federal and state governments increasingly have turned to the tax system to deliver social welfare benefits. This is typically done through refundable tax credits, such as the earned income tax credit (EITC), child tax credit (CTC), working family credit, dependent care credit, and so forth. Many billions of dollars of benefits are delivered through the tax system. For example, the tax expenditure for the EITC is about 2X the outlays for TANF, the main direct spending federal welfare program (income support, rather than in-kind benefits like SNAP and Medicaid).

The policy/political thinking behind the refundable tax credit approach has several rationales. It takes advantage of the existing tax system infrastructure, is cheaper and less intrusive, delivers benefits with less social stigma, is better suited to encouraging or requiring work as a condition of benefits, and so forth. So, there are some definite advantages but also drawbacks; neither is the point I want to make.

This system relies on the recipients themselves to determine whether they are eligible and to claim benefits. That often means private advisors (tax preparers) effectively function as the social workers administering the programs because the recipients consider themselves unable (often correctly) to navigate applying the rules and filing the necessary returns. Tax preparers are only lightly overseen by the IRS and state tax administrators.6

The Center for Taxpayers Rights recently published an excellent study on non-credentialed tax preparers, specifically how accurately they claimed the EITC and CTC on behalf of their low-income clients. They did this by mystery shopping – i.e., having returns prepared and seeing how well a series of non-credentialed preparers complied with the law.7 The results were not pretty. They found:

Non-Credentialed Preparers … did not understand basic aspects of filing status, refundable and other credit requirements, cash income reporting, and deductible business and home office expense rules.

Of the 28 returns that they had successfully prepared claiming social welfare type benefits (EITC, CTC, etc.), only 2 were correctly filed. The wrongly claimed refunds varied widely, both too and high and too low, but more often too high. (No surprise – that’s what market economics would predict.) The amounts were, in some cases, large (e.g., $9k). Some of the reporting behavior pretty clearly was intentional or negligent overclaiming.

The scenarios presented were not easy (to say the least). Putting it in academic terms, they were difficult exam questions. But that is often the case in the real world, where unmarried couples live together and raise children who often also have other parents. The credit rules are complex and not easy to apply in those circumstances. It illustrates both the difficulty of using the tax system to deliver these types of benefits and how open that is to mis-claiming, if not outright fraud. On a systemwide basis, the erroneous and fraudulent amounts are undoubtedly large, and the IRS and state tax authorities are woefully understaffed to address the problem.

The whole piece is worth reading. Low-income sole proprietor returns were no better and probably were worse. Low-income recipients pay a material amount for these tax preparation services and over 60% used paid preparers or purchased software (about half of those used non-credentialled preparers).

The policy point is that federal and state money could be saved and fraud reduced by better education and regulation of preparers. It’s not obvious to me that the return on investment (ROI) on efforts along those lines would not be higher than attempts to reduce fraud in direct spending social welfare programs. It’s simply less eye-catching and glitzy.

Tax compliance insights

Again, I have no expertise in social services or health care programs. Nevertheless, I’ll venture to suggest a tactic for fraud detection or mitigation, based on tax compliance rubrics. (The more obvious approaches that should be pursued first have been widely discussed: replace the creaky old IT systems, improve management, invest in human capital, etc., all of which make sense but are outside my expertise.)

A core insight from the tax world is that compliance materially rises when critical data is reported to the government by trusted third parties. For example, 1099 reporting of interests and dividends by financial institutions result in >93% compliance, while the overall voluntary compliance rate is <85%. IRS Publication 5869 (Rev. 10-2024). It might be possible to apply that insight to develop a compliance-enhancing reporting features for some Medicaid funded programs.

I’m thinking of programs where nontraditional entities (i.e., other than classic, regulated health care providers like hospitals, nursing homes, and clinics) need to use employees to provide services, like home health care, personal care attendant, long-term care, or autism services, to individuals covered by MA, Minnesota Medicaid program. Many accounts suggest that these types of programs have high potential for fraud.

Based on media stories, one pattern of fraud by these types of entities goes like this:

  • Fraudsters establish an entity (a nonprofit corporation or for-profit entity like an LLC) to provide the funded services. The entity applies for funding, representing it will provide services to eligible individuals and receives approval.
  • Entity finds or recruits eligible individuals (family members, friends, individuals taking kickbacks, etc.) who it uses to claim reimbursement for services that it asserts to have provided but doesn’t actually provide.
  • State reimbursements are diverted to the founders’ bank accounts and used for lavish lifestyle purchases, unrelated investments, gambling, foreign remittances, etc. rather than to provide services.

A variant is a legitimate service providing organization and the owners or managers cross over to the dark side and claim sizable reimbursement for services never provided. The owners again divert the money to their own uses, rather than paying employees who take care of MA enrollees.

A key commonality is that MA reimbursements are going to the fraudsters personally, not being used to pay employees to take care of, provide therapy, or other services to elderly, disabled, or autistic MA recipients. The key question is: can trusted third-party reporting be used to reveal that failure? The failure is not actually paying employees at a level necessary to deliver the services purported to be provided.

A natural first response would be to have the MA recipients certify and regularly report on whether and/or how often they receive services. (Maybe this is already done or is being proposed – again, my ignorance is on display.) However, that type of reporting may be unreliable for a variety of reasons – in the worst case, the recipients are complicit in the fraud (b/c they’re friends or family, are receiving kickbacks, etc.) or more generally, their incentives are not properly aligned. They may feel compelled to stay on the good side of their providers if alternatives for them to get services are scare. In short, recipients may not be trusted third-party reporters for those reasons.

The solution that occurs to me: focus on whether wages are being paid to employees. It should be feasible to set a minimum percentage of MA reimbursement, based on the type of service (personal care attendant, autism therapy or whatever.), that is typically paid in wages.8 If trusted third-party reporting reveals that the minimum levels of wages are not being paid, an audit or other investigation would be triggered.

Federal tax law requires employers to pay FICA and Medicare taxes quarterly or more frequently for their employees. These taxes are a fixed percentage of wages. The money must be paid over to the federal government. That is, it cannot be easily faked – the employer must provide social security numbers for the employees and pay the tax. In short, paying the tax and pocketing the net as fraud proceeds won’t be easy to do and ultimately would be uncovered. So, trusted third-party reporting of the payment of varying threshold amounts of federal payroll taxes would seem to be a good fraud backstop.

The gold standard would be to have the IRS report regularly on the amount of payroll tax paid by the MA provider. Providers could be required to authorize disclosure of their tax information by the IRS (i.e., waiving their confidentiality rights). But even with that, a federal statutory change would be required to permit the IRS to disclose this information to the state. Obtaining a federal law change might be a bridge too far, even when the hyperfocus by Republicans nationally on fixing fraud in social service programs. The administration’s push to use IRS data for immigration enforcement would seem to be a good argument for a more targeted use in this context. But getting anything through a polarized and gridlocked Congress is a heavy lift.

Another alternative would be to require payroll providers (most businesses use big independent firms like ADP or Paychex) to regularly report this information for MA providers to the state. The requirement that this reporting is done would be written in the MA providers’ contracts to qualify for MA reimbursement.

There are likely good reasons why something like this is not feasible, but it is the type of approach I would look at based on my tax related experience.

Notes

  1. What is unclear to me is whether the problem is worse in Minnesota than elsewhere in the country. I have seen no credible estimates – i.e., based on multistate analyses of reliable data – that Medicaid fraud is proportionately higher in Minnesota than nationally. What is clear is that the administration’s focus on Minnesota is political, not an evenhanded or neutral effort. Arizona, for example, has a larger documented Medicaid fraud case ($2.5 billion admitted by the state for one Medicaid funded program) that did not trigger a similar state-specific enforcement effort by the federal government. Arizona’s politics likely did not provide a sufficiently tempting political target, unlike Minnesota. The appropriate federal response is to treat this as a national problem that needs to be systematically and thoughtfully analyzed and addressed with forward-looking policy solutions, as well as backward-looking enforcement. Good luck with the folks in DC doing anything like that. ↩︎
  2. Only time will tell obviously if I’m right about my instinct that his $9 billion number is simply a wild guess, a generalization from abuse levels in one program to many. So far, no support has come out from the administration. That to me is damning, given their propensity to make up bogus stuff to support their political positions. If they had real evidence, they surely would be putting it out and it would be showing up in the Right-Wing media ecosystem in a steady stream. I do wish Thompson could be held responsible for what may have been fabulizing to gain favor with the WH. In my mind, this is contrary to the spirit of DOJ’s ethical guidelines as to how US Attorneys are to deal with the media. His $9 billion number is now routinely cited by responsible MSM outlets like the NY Times (always with qualifying adjectives like “reported” or “suggested” as in this Times article). That repetition gives credibility to and a false reality to the number. Many assume it is true when it is likely little more than a bad guess. ↩︎
  3. Acknowledged to be at least $2.5 billion by the Arizona authorities. ↩︎
  4. Trump has pardoned many regular (i.e., non-tax) fraudsters, most of whom likely were tax chiselers as well. This NY Times article (3/19/2026) describes pardons of 70 individuals convicted of fraud, one of which involved $1.3 billion in Medicare and Medicaid funds. This ProPublica story describes one sorry example. The only logical conclusion is that his fixation on social service fraud in Minnesota is highly selective and fundamentally hypocritical. ↩︎
  5. I also did a quick search of the DOJ’s Office of Pardon Attorney’s database and turned up more cases of pardons for tax crimes that AI must not have considered “notable” – including Darryl Strawberry, the former Mets and St. Paul Saints baseball player who pled guilty to tax evasion. Go figure why he’s not notable to AI. ↩︎
  6. They are not licensed or explicitly regulated by the IRS, being only subject to civil and criminal penalties for violations. The IRS promulgated regulations that attempted to impose regulations, but its efforts were struck down in the Loving case by the DC Court of Appeals and not appealed to the Supreme Court. Minnesota has some additional legal rules that apply to preparers and provide enforcement authority to DOR. But they are not licensed or directly regulated in Minnesota. A few other states do that. ↩︎
  7. Most preparers are non-credentialed – i.e., they are not CPAs, licensed attorneys, or enrolled agents, just someone who hung out a shingle and are providing tax preparation services. They have gotten a PTIN from the IRS, but that’s it. ↩︎
  8. Adjustments would need to be made for firms that have revenues from material sources other than MA reimbursement or provide a variety of different types of MA services. There are likely a host of other technical details that would need to be worked out, which is surely an understatement. ↩︎
Categories
income tax tax administration

March IRS update

Trump lawsuit

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

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

…

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

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

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

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

Previous blog coverage

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

Trump Accounts

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

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

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

No decline in quality of tax court advocacy

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

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

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

NSPM-7

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

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

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

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

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

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

Bye to Bessent

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

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

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

Bye to basis shifting reporting

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

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

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

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

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

…

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

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

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

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

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

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

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

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

GAO Report on 2025 filing season

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

Some excerpts from the report:

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

,,,

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

,,,

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

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

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

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

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

Notes

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

Tariff Case

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

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

Prediction accountability

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

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

Economic effects

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

Reduced tariff rates

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

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

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

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

Refunds as stimulus

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

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

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

Political effects

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

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

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

Constitutional significance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Some random observations:

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

Concluding thoughts

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

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

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

Notes

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

Books I’ve Read Recently – Taxation and Resentment

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

Author and book

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

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

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

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

Why I read it

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

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

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

What I found interesting

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

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

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

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

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

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

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

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

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

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

Race and racial attitudes are a big deal.

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

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

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

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

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

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

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

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

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

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

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

What disappointed me

My biggest disappointments with the book were sins of omission.

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

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

SALT connection

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

My Take

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

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

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

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

Reviews

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

Notes

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