CAUSES OF MASSIVE UNEMPLOYMENT INSURANCE FRAUD

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

The massive unemployment insurance (UI) fraud that occurred during the pandemic was caused by a failure to invest in public infrastructure (broadly defined). Three types of public infrastructure were not adequate to accurately perform and police the distribution of enhanced unemployment benefits that were put in place due to the high job losses of the pandemic.

States’ unemployment computer systems that pay out UI benefits are, in general, antiquated.
Law enforcement capacity to detect and punish UI fraud is inadequate.
Government regulation and oversight of Internet platforms, as well as detection and punishment of Internet-based criminals, has lagged far behind their explosive growth and sophistication.

The convergence of these three failures to invest in public infrastructure allowed as much as $400 billion in fraudulent UI claims to be paid – a staggering loss for taxpayers. This is perhaps the largest wave of fraud in U.S. history. Fraudulent claims for UI benefits occurred through:

The use of stolen identities,
The use of false identities, and
The filing of multiple claims for the same identity, usually in multiple states.

Warnings of weaknesses in states’ UI systems, which often use aging or obsolete technology, have been on-going since a 1998 federal Labor Department’s Inspector General’s report about the proliferation of UI fraud. In 2002, a subsequent report highlighted the use of stolen or fake identities to apply for UI benefits and the repetitious use of an identity across multiple states. A 2015 report, detailed systemic weaknesses that made states’ systems vulnerable to fraud. Both the Obama and Trump administrations proposed efforts to boost information sharing among states and with the federal government to reduce fraud, but Congress failed to enact their proposals. [1] Despite over 20 years of warnings, needed investments in this public infrastructure haven’t been made.

State funding for UI administration has fallen in recent years, in part because unemployment was low. At the start of 2020, as the pandemic hit, states’ funding for UI administration was at a 30-year low and states had cut funding to detect fraud. Federal regulations require states to cross-check UI benefit applicants against other state and federal databases to determine eligibility and to detect fraud. However, many of the states’ systems do not have the technological capability to do those cross-checks efficiently and electronically. Furthermore, the surge of UI claims during the pandemic overwhelmed the capacity of state systems from both a technological and a human resources perspective. As a result, 20 states did not perform all of the required cross-checks and 44 states did not perform all the recommended ones.

Budget cuts have also occurred at the federal level. Between 2012 and 2020, the number of criminal investigators at the Labor Department declined by 28%.

It is projected that from March 2020 to September 2021 (when enhanced federal UI benefits expire) roughly $1 trillion in UI benefits will have been paid out – which is done through state UI systems using state and federal funds. A very conservative estimate is that $100 billion of this will represent fraudulent payments and some experts think the number could be as high as $400 billion.

Multiple Internet platforms host forums and ads explicitly offering tips and techniques, often for a price, for obtaining UI benefits fraudulently. For example, the messaging app Telegram, hosted dozens of chat forums, some of which had thousands of participants, that provided state-specific instructions on how to file fake UI claims and how to avoid fraud detection efforts. These guides provided lengthy step-by-step instructions, with screenshots, on how to enter information. One Telegram user, with the handle “VerifiedFraud,” provided regular updates to his 1,300 chat room participants on how to file state-specific claims and avoid fraud detection as states enhanced their anti-fraud efforts.

In addition, these Internet sites also regularly offer stolen identities for sale. Ads would offer an identity for sale for $70 along with $200 for detailed instructions on how to use the information to defraud a specific state’s UI system. (Incidentally, the chats also reflected serious concerns about fraud by the sites, e.g., that the instructions purchased might not work.)

This UI fraud represents part of an explosion of Internet-based crime that has occurred over the past 25 years. Much of this criminal activity is based on the use of stolen or fraudulent identities, which are often used to file claims for public benefits. From 2010 to 2019, over 2,000 large-scale data breaches of business and government sites have occurred that have accessed 6.9 billion records with personal identities. In 2020, nearly 400,000 complaints of identity theft were reported, up from 13,000 in 2019. Law enforcement needs to be beefed up, both in capacity and sophistication, to reduce identity theft and Internet-based crime.

The scale of the UI fraud is truly mind-boggling. During the pandemic, the number of UI claims far exceeded the number of jobs lost. From March to December of 2020, the number of UI benefit claims was over 110 million while 38 million workers were out of a job or underemployed at the peak of the pandemic. (A small piece of this discrepancy is explained by the fact that if a person lost more than one job during this period, they could legitimately claim UI more than once.) In five states, the number of UI claims was larger than the entire civilian workforce. Maryland reported detecting 508,000 fraudulent UI claims in the six weeks from the beginning of May through mid-June of 2021. In Vermont, 90% of claims in some months were determined to be fraudulent. In Rhode Island, 43% of claims in March were suspected cases of fraud. California confirmed that 10% of its UI payments were fraudulent and it is investigating another 17%. In Washington State, auditors have identified 250,000 potentially fraudulent claims costing $1.1 billion.

The most fraud-prone piece of UI benefits was the federally funded Pandemic Unemployment Assistance (PUA) program, which funded 39 weeks of benefits for workers typically outside of UI systems such as self-employed individuals, “temporary” contractors, and gig workers. Congress did not require the normal verification of prior income and employment for the PUA program, so it was ripe for fraud. Pennsylvania estimated that 84% of its PUA claims were fraudulent and California found that 95% of its confirmed cases of fraud were PUA claims.

The Biden Administration is taking steps to reduce fraud in UI claims. The Labor Department’s Inspector General’s office is getting increased access to states’ UI payment date so they can more quickly and efficiently look for fraud. The $1.9 trillion coronavirus stimulus bill passed in March contains $2 billion to help states modernize their UI systems. There have been some prosecutions of individuals who are repeat offenders, often not just of UI fraud but also of tax and other fraud. Furthermore, a company called ID.me, which verifies claimants by having them submit pictures to match to those in identifying documents, has been hired by 27 states since mid-2020 and the Biden Administration is providing $1 billion to expand its services to other states. The experience with ID.me has highlighted the degree of fraud. In New York, new claims under the PUA program fell by 89% after ID.me was implemented in late March. Data from five states indicated that 50% of UI claimants did not respond when asked by ID.me to submit a picture to confirm their identity.

So, investments in this public infrastructure are being made – better late than never – to improve fraud detection and reduction in state UI systems and to enhance law enforcement. However, the regulation and oversight of Internet-based entities seems to be largely unaddressed. Although some platforms and sites have been shamed into taking some steps and shutting down some users by unfavorable publicity, this is not a long-term or efficient solution. The federal government needs to enhance its regulation and oversight of Internet-based entities whose explosive growth and sophistication resulted in massive fraud in the UI system during the pandemic.

[1] Podkul, C., 7/26/21, “How unemployment insurance fraud exploded during the pandemic,” ProPublica (https://www.propublica.org/article/how-unemployment-insurance-fraud-exploded-during-the-pandemic) This blog post is primarily a summary of this article.

THE RADICALS ON THE SUPREME COURT STRIKE AGAIN

The current “conservative” majority on the Supreme Court is actually a group of ideologically-driven, radical, judicial activists who have no intention of honoring precedents, despite their promises during confirmation hearings to do so. Although some of their radical precedent-breaking decisions get covered by the mainstream media, such as the recent voting rights case and the upcoming decision on pregnancy termination, many of them do not.

A recent Supreme Court case, known as Cedar Point Nursery vs. Hassid, involves the ability of union organizers to visit farms to talk to farm workers (as allowed under a 1975 California regulation). It’s a very significant decision that got very little attention in the mainstream media. A 1975 California regulation has required corporate farmers like Cedar Point (a 300-acre strawberry farm) to allow union organizers on its property to talk to workers for up to three one-hour periods on up to 120 days out of a year (one hour each before work, at lunch time, and after work to avoid interrupting work). Cedar Point sued claiming this was a government seizure of their property without compensation and was a violation of the Fifth Amendment (which states that “No person shall be … deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation.”). Cedar Point claimed that this was a “taking” of its property because it is deprived of the “right to exclude” trespassers from its property, which, it claimed, is fundamental to true property ownership rights.

A lower court had ruled against Cedar Point, but it appealed to the Supreme Court. The Supreme Court ruled 6 to 3 in favor of Cedar Point, finding that the regulation was a “taking” of private property and therefore Cedar Point was entitled to compensation. The six radical “conservative” justices were the majority.

This ruling overturns important elements of a 1978 Supreme Court precedent. That ruling established a framework for evaluating whether a governmental restriction on personal property rises to the level of a “taking”. The framework’s criteria include the economic impact of the law or regulation and the extent of its interference with a business. The requirements of the California regulation specifically minimized these impacts and had been in place and operating since 1975.

This ruling has potentially far-reaching implications. For example, a property owner’s “right to exclude” is the argument segregationists used to defend their exclusion of Blacks from places of business and other private venues. By giving new life to this argument (which the Supreme Court rejected in 1964), Roberts and his six-justice majority are opening the door to a whole range of lawsuits against anti-discrimination laws. Sooner or later the argument will probably be made that preventing a business, a private club, or an employer from excluding men or women, pregnant women, people of color (POC), or LGBTQ+ people is a “taking” of property rights. Also, it may well be argued that fair housing laws are a “taking” because they limit landlords’ “right to exclude” people, such as POC, LGBTQ+ people, families with children, or renters with a low-income governmental housing subsidy. [1]

Furthermore, worker safety inspectors from the Occupational Safety and Health Administration (OSHA), food safety inspectors from the Department of Agriculture, and pollution inspectors from the Environmental Protection Agency could be banned from companies’ property unless the companies are compensated. Although some language in the decision written by Chief Justice Roberts would appear to allow these inspections without compensation, challenges to them are likely. The possibility of challenging endangered species laws that require landowners to protect a species’ habitat has already been raised and a challenge to anti-pollution regulations would seem to be possible as well under the Supreme Court’s redefinition of what constitutes a “taking”.

In the Cedar Point decision, the six radical “conservative” justices on the Supreme Court have again shown their willingness to toss aside well-established precedents and to prioritize the rights of property owners over the civil rights of individuals. This decision may well lead to a variety of challenges from property owners – including landowners, landlords, employers, and businesses – to laws and regulations that protect civil rights, the safety of workers and consumers, and the environment, including initiatives to counter global warming and climate change.

[1] Mystal, E., 6/24/21, “Yesterday’s union-busting Supreme Court decision was a segregationist throwback,” The Nation (https://www.thenation.com/article/society/cedar-point-court/)

HOW THE RICH GET RICHER #4

The inability of the Internal Revenue Service (IRS) to enforce tax laws has resulted in a high level of tax evasion by wealthy individuals and corporations. Some experts estimate that as much as $1 billion a year in taxes owed are not paid.

As the country’s tax collector and tax enforcer, the IRS has never been a popular agency among the public or politicians. However, the importance of the IRS’s work in enforcing tax laws, maintaining a fair and functional tax system, and collecting the revenue the government needs to operate had been broadly respected.

This changed when Republicans gained control of the U.S. House of Representatives and Newt Gingrich became the House leader in 1994. Republicans began vilifying the IRS and using “abolish the IRS” as a sound bite. Republican presidential candidates, including Sen. Lugar in 1996 and Sen. Cruz in 2016, made abolishing the IRS a central policy proposal. In 1998, Republicans introduced a bill in Congress to repeal the Internal Revenue Code (the country’s tax laws) and abolish the IRS. [1]

The Republicans have held congressional hearings on alleged abuses by the IRS. Despite the fact that in most cases investigations by the Government Accountability Office (GAO) and others have debunked the alleged abuses, the IRS’s reputation has been seriously undermined. This gave Republicans cover for passing laws weakening the IRS and its tax enforcement.

Beginning in 2010, Republicans in Congress undertook a multi-year initiative to cut the IRS’s budget and enforcement capacity. Since 2010 when its budget peaked at $14 billion, the IRS’s budget has been cut by about 20% (adjusted for inflation). Its staff has been cut by nearly one-quarter to 76,000 full-time employees and the number doing enforcement has fallen from 23,500 to 6,500, a 72% reduction. [2] It has the fewest auditors it has had since the 1940s and it has the oldest computer technology in the federal government.

The IRS recently announced a backlog of 35 million unprocessed tax returns, three times the number from a year ago and four times what it was in 2019. This means taxpayers have to wait longer for their refunds, payments from the Earned Income Tax Credit to low-income families will be delayed, and some transactions, like mortgage approvals, that require current income tax documentation will be delayed. It also revealed that only 3% of the calls to its most popular, toll-free hotline reach a real person. Despite its challenges, it has processed 137 million individual tax returns and sent refunds of more than $281 billion.

Tax obligations expire (i.e., become uncollectible) after ten years if the IRS doesn’t pursue them. In 2017, $8.3 billion of tax obligations expired, up from $482 million in 2010 (a 17-fold increase). Investigations of people who didn’t file a tax return have fallen from 2.4 million in 2011 to 362,000 in 2018 (down 85%). Similarly, collections from people who file but don’t pay have dropped dramatically. In 2017, the IRS conducted 675,000 fewer audits than in 2010, a 42% drop in the audit rate. The audit rate has dropped roughly 70% on those with incomes over $200,000 and but only about 40% for those with incomes under $200,000. This is a key contributor to increased tax evasion by the wealthy.

The impact of the IRS’s budget cuts has been exacerbated by substantial new responsibilities that it has been given under the Affordable Care Act and the response to the pandemic. In responding to the pandemic, the IRS has been tasked with distributing three rounds of relief payments, implementing changed rules on unemployment benefits and tax credits, and, most recently, sending out monthly checks to most families with children. With a significantly reduced budget and staff, it has been expected to do all of these things while trying to maintain its core business of processing tax returns. [3]

President Biden has proposed increasing the budget of the IRS by $40 billion over ten years to reduce tax evasion and generate revenue to help pay for infrastructure investments. He estimates that this increased IRS funding would raise government revenue by $140 billion over those ten years. The Congressional Budget Office (CBO) estimates added revenue of $103 billion and others have other estimates, but everyone agrees that increased enforcement would generate significant revenue. It would also make our tax system fairer by reducing tax evasion, which is largely done by wealthy individuals and corporations. However, it might well take five years to make the upgrades to the IRS’s computer systems and to hire and train the new staff needed to achieve these results.

Initially, the Republicans who were part of the bipartisan group of 21 Senators working on the infrastructure investment bill endorsed the increased funding for the IRS, but now they are backing away from it after hearing opposition from some of their wealthy backers.

Support for increased funding for the IRS has come from five former Secretaries of the Treasury, from both Republican and Democratic administrations. They state that increased funding for the IRS would “raise significant revenue and create a fairer, more efficient” tax system. [4]

The IRS and our income tax system depend, in large part, on the voluntary compliance and honesty of taxpayers. If taxpayers’ come to believe that the tax system is not fairly administered, voluntary and honest tax compliance is likely to decline. This could have dire implications for government revenue and for the IRS’s ability to do its job. It is important that the public believe that people pay the taxes the law says they owe. This encourages compliance with tax laws even if the overall perception is that the wealthy are not paying their fair share under our current tax laws. Then, the focus can be on making our tax laws fairer.

I urge you to contact your U.S. Representative and Senators and to ask them to support additional funding for the IRS so it can effectively enforce our tax laws. You can find contact information for your U.S. Representative at http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and thank him for proposing increased funding for the IRS because this will mean it can more effectively implement our tax laws. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1] Kiel, P., & Eisinger, J., 12/11/18, “How the IRS was gutted,” ProPublica and The Atlantic (https://www.propublica.org/article/how-the-irs-was-gutted)

[2] Puzzanghera, J., 7/5/21, “Aggressive IRS could help with roads bill,” The Boston Globe

[3] Stein, J., 6/30/21, “IRS faces 35 million unprocessed tax returns as backlog swells, watchdog says,” The Washington Post

[4] Puzzanghera, J., 7/5/21, see above

TODAY’S VOTER SUPPRESSION IS HISTORY REPEATING ITSELF

The efforts of states to suppress voting of Blacks (and other targeted groups that tend to vote for Democrats) are an historical repeat of what happened after the Civil War. These and other efforts that assert states’ power to restrict individuals’ rights are confronting the 14^th Amendments’ provisions (from 1868) that give the federal government the power to protect individuals’ rights in the face of state efforts to deny them. Historian Heather Cox Richardson’s daily blog puts these current events in the perspective of our history, which is a very valuable insight to have.

The Declaration of Independence, when it stated “that all men are created equal,” meant white men. Nonetheless, this was a radical concept at the time – that no man’s birthright made him better than any other man. The Civil War was fought, in effect, to maintain a system that elevated America’s white men above African Americans, Native Americans, other men of color, and even Irishmen. As in the mid-1800s, we are now facing efforts that reject the principle of the equality of all human beings and seek to recast America as a country where certain people are better than others. These efforts are being led by white men for the most part, and are empowered by a relatively small group of wealthy white men (and a few women). [1]

In 1865, the 13^th Amendment to the U.S. Constitution banned slavery in an important step toward equality. However, this did not stop white men in the South from working to establish systems that continued to make African Americans unequal and subservient to whites. These white men worked to deny African Americans the right to vote, to testify in court, and to sit on a jury. The infamous 1857 Dred Scott Supreme Court decision furthered this effort by denying citizenship to African Americans. The contorted opinion for the 7 to 2 decision was poorly reasoned and written by Chief Justice Roger Taney. These steps to institutionalize inequality occurred despite the fact that the 1870 Census would count African Americans as whole persons for the first time. Ironically, this would give the southern states more representation and power in Congress and in the Electoral College. [2]

To counter efforts to keep African Americans subservient, in July 1868, the 14^th Amendment was passed, declaring that “All persons born or naturalized in the United States … are citizens of the United States and of the State wherein they reside.” It guaranteed all citizens due process and equal protection under the law. To counter white southern men’s and the Dred Scott case’s assertion of states’ rights to write laws that determined who could vote, among other things, the 14^th Amendment gave the federal government the power to protect individuals’ rights when state legislatures passed laws that were discriminatory and infringed on those rights.

Nonetheless, two months later in September 1868, the Georgia legislature voted to expel the 33 newly elected African American state legislators. In 1870, with African American voting reduced by the terrorism of the Ku Klux Klan, African Americans were not elected. Similar events took place in other southern states. [3]

In response, the federal Department of Justice was created in 1870 with a primary mission of stopping the Ku Klux Klan (KKK) and its suppression of the rights and voting of African Americans. The KKK was a domestic terrorist group then as it is today.

In February 2021, Black legislators in Georgia opposed proposed voting restrictions noting that they reminded them of the 1870s when Jim Crow laws and lynching were used to deter African Americans from voting. Nonetheless, Georgia legislators passed the voting restrictions. Although the means have changed, they are still presented as supposedly race-blind restrictions. However, the fact that white men (for the most part) are rewriting the rules of our democracy to protect white power is unchanged. Similar actions are taking place in other states, not all of which are in the South.

There are striking similarities between the voting suppression efforts of the late 1800s and what’s happening today. For example, in 1890, the U.S. House of Representatives passed a bill empowering the federal government to oversee voter registration, voting, and ballot counting in the South. Then, Senate Democrats blocked its passage by staging the first of many southern-led filibusters that killed civil rights legislation.

The civil rights laws and court decisions of the 1950s, 1960s, and 1970s are based on the 14^th Amendment giving the federal government the power to protect individuals’ rights. For example, the Brown vs. Board of Education decision that outlawed public school segregation and separate but supposedly equal treatment of Blacks, and the Loving vs. Virginia decision legalizing inter-racial marriage, were possible because of the 14^th Amendment.

Opponents of civil rights laws and decisions revived the post-Civil War states’ rights arguments in the 1960s and 1970s. They began advocating for “originalism” in interpreting the Constitution when making court decisions. “Originalism” asserts that the Constitution should be interpreted as its writers envisioned it at the time they wrote it and that this would mean much stronger state governments and a weaker federal government, including in the establishment and enforcement of individuals’ rights.

In 1987, President Reagan nominated an “originalist,” Robert Bork, to become a Supreme Court Justice. He was rejected on a bipartisan basis. Bork had advocated for a rollback of Supreme Court civil rights decisions and of federal protections of individuals’ rights under the 14^th Amendment. As Senator Ted Kennedy pointed out, rolling back such protections would not only raise the specter of re-segregation, but also the reduction of women’s rights to reproductive health services, citizens’ protections from rogue police officers, the teaching of evolution in schools, protection from censorship, and other individual rights.

Nonetheless, today’s Supreme Court is dominated by “originalists” and the individual rights protections of the 14^th Amendment for voting, women’s and LGBTQ people’s health services, and the teaching of factual material, for example, are again being challenged by state governments, led mostly by white men.

On July 1, 2021, by a 6 to 3 vote, the Supreme Court decided that the state of Arizona did not violate the 1965 Voting Rights Act or the 14^th or 15^th Amendments with voting restrictions that disproportionately affect non-white racial or ethnic groups. President Biden stated that this “decision by the Supreme Court undercuts voting rights in this country and makes it all the more crucial to pass the For the People Act and the John Lewis Voting Rights Advancement Act to restore and expand voting protections. … Our democracy depends on it.” [4] However, to pass these bills, which have already passed in the House, the Senate will have to either eliminate or limit the use of the filibuster to block them. The Republicans have made it clear that they have no intention of providing any support for these bills.

I urge you to contact your U.S. Senators and ask them to support the For the People Act and the John Lewis Voting Rights Advancement Act, and to support eliminating or limiting the filibuster as the only way to pass these bills. The protections for voting rights in these bills are critically important to our democracy. You can find contact information for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and ask him to support eliminating or limiting the filibuster as the only way to pass these bills that he’s said our democracy depends on. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1] Cox Richardson, H., 7/3/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/july-3-2020-bad)

[2] Cox Richardson, H., 7/9/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/july-9-2021)

[3] Berman, A., 6/2/21, “Jim Crow killed voting rights for generations. Now the GOP is repeating history,” Mother Jones (https://www.motherjones.com/politics/2021/06/jim-crow-killed-voting-rights-for-generations-now-the-gop-is-repeating-history/)

[4] Cox Richardson, H., 7/1/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/july-1-2021)

HOW THE RICH GET RICHER #3

The Internal Revenue Service’s webpage on Individual Retirement Accounts (IRAs) says, “IRAs allow you to make tax-deferred investments to provide financial security when you retire.” However, they allow the wealthy to do much more.

When IRAs were first created in 1974 and then expanded to all workers in 1981, the goal was to encourage saving for retirement by offering a tax incentive, given that Americans were notoriously bad at saving. Initially, the maximum annual contribution was $2,000. It’s now $6,000 or $7,000 if one is over 50. The contribution can be deducted from one’s income, so it isn’t taxed up-front. Tax on the increased value of the investments in the IRA is deferred until the money is removed from the IRA. Money had to be taken out of the IRA starting at 70 ½ years of age (now 72) at a rate the would be expected to deplete it within the lifespan of the owner of the IRA. All earnings and any contributions that had been deducted from income up-front are subject to income tax, which for most taxpayers will probably be at a low rate due to lower income in retirement than when working. This all made good sense and was good policy.

Then came the Roth IRA in 1997. Contribution limits were the same as for the traditional IRA, but the contributions were subject to income tax up-front. However, when money is taken out of a Roth IRA there is NO income tax due on the increased value of investments nor on the contributions. There also is no requirement that money be taken out in one’s lifetime.

The wealthy and their tax / financial advisers quickly recognized that this was a huge opportunity for tax avoidance. It’s clear that some policy makers were aware of this and had no problem with it; in some cases, it may have been their intent. As a further example of how tax policy in general and Roth IRA policies specifically favor the wealthy, if a U.S. citizen renounces their citizenship they are taxed on the value of their assets, including ones that have increased in value even if they have not been sold. However, there are exemptions from the tax for certain kinds of assets, one of which is assets in a Roth IRA! [1]

ProPublica’s investigative reporting on how the wealthy pay very little in income taxes, perfectly legally, while their wealth is growing by leaps and bounds, [2] has also revealed how extensively Roth IRAs are being used for tax avoidance. Their reporting reveals that, among others, investors Warren Buffett and Ted Wechsler of the Berkshire Hathaway fund, Randall Smith of the Alden Capital hedge fund, Robert Mercer of the Renaissance Technologies hedge fund, and Peter Thiel and Max Levchin of PayPal all have Roth IRAs with hundreds of millions of dollars in them. [3]

Clearly, these mega-million-dollar Roth IRAs have nothing to do with saving for retirement and everything to do with avoiding taxes. Thiel has $5 billion in his Roth IRA. He and all the others will pay NO taxes on any money they take out of their Roth IRAs. Keep in mind that these huge IRA balances have supposedly come from contributions of a few thousand dollars a year. The huge gains on the investment of those small contributions will be subject to NO income (or other) tax when they are removed from the Roth IRAs. By the way, Thiel renounced his U.S. citizenship in 2011, allowing him to take advantage of this exemption from taxation for Roth IRA assets. (He became a citizen of New Zealand, which happens to have no estate tax.)

Recognition of the abuse of Roth IRAs for tax avoidance is not new. Forbes magazine and others have written about it since at least 2012. Senator Wyden proposed legislation to reform Roth IRAs in 2016, but it went nowhere in the Republican-controlled Senate. Simple policy changes could address the problem. For example, the dollar amount of investment gains in Roth IRAs that are exempt from taxation could be limited, to say a few million dollars. And the exemption of these gains from taxation could end when the account owner dies instead of allowing them to be passed on tax-free to heirs. [4]

One strategy for creating huge IRA balances is to put knowingly under-valued assets into them. When Thiel contributed 1.7 million shares of the company that would become PayPal into his Roth IRA in 1999, he claimed that they were only worth one-tenth of a cent per share ($0.001 per share). (They were not publicly traded at the time so a fair market value was subject to interpretation.) This meant that his contribution was under the $2,000 limit in place at the time. PayPal later admitted that this per share value was “below market value.” The shares are now worth billions.

Senator Wyden’s 2016 Roth IRA reform proposal would have addressed the problem of under-valuing assets contributed to an IRA by removing the tax exemption of any IRA that received an asset for less than fair market value. Others have proposed requiring IRAs to only receive assets that are traded on a public market so their true value is clearly established.

The financial industry opposes reforms to Roth IRAs because they make significant money from them by acting as custodians for IRAs (and other retirement accounts) and by processing the transactions that these accounts generate.

The IRA was originally designed to enhance the retirement security of working Americans, but it has become another way for the wealthy to avoid paying taxes, even when passing their wealth on to their heirs. Note that there are other types of retirement savings vehicles that also provide tax avoidance and other benefits to the wealthy. “Retirement” savings policies are one example of how the wealthy have gotten elected policy makers to tip the economic playing field in their favor. This is oligarchy in America. (Oligarchy “refers to a government of and by a few exceedingly rich people or families who control the major institutions of society and therefore have power … no one should be fooled. Oligarchs wield power for their own benefit” as Robert Reich writes in his latest book, The System: Who rigged it, how we fix it. (See my previous posts summarizing the book starting here.)

I urge you to contact your U.S. Representative and Senators and to ask them to support reforms that would end the abuse of retirement savings accounts by the wealthy. You can find contact information for your U.S. Representative at http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and ask him to support reform of retirement savings accounts. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1] Elliott, J., Callahan, P., & Bandler, J. 6/25/21, “The ultrawealthy have hijacked Roth IRAs. The Senate Finance Chair is eyeing a crackdown,” ProPublica (https://www.propublica.org/article/the-ultrawealthy-have-hijacked-roth-iras-the-senate-finance-chair-is-eyeing-a-crackdown)

[2] Eisinger, J., Ernsthausen, J., & Kiel, P. 6/8/21, “The secret IRS files: Trove of never-before-seen records reveal how the wealthiest avoid income tax,” ProPublica (https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax)

[3] Lord, B., 6/29/21, “Peter Thiel will pay zero in federal income tax on his $5 billion in gains,” Common Dreams (https://www.commondreams.org/views/2021/06/29/peter-thiel-will-pay-zero-federal-income-tax-his-5-billion-gains)

[4] Elliott et al., 6/25/21, see above