On Thursday, ProPublica continued its investigative series on how America’s billionaires avoid paying taxes with an apoplexy-inducing look into the finances of Silicon Valley’s resident comic book villain, Peter Thiel. Based on leaked IRS documents, the site reports on how the PayPal and Palantir co-founder managed to spin a Roth IRA that was worth less than $2,000 in 1999 into a $5 billion “tax-exempt piggy bank.” Again, that’s $5 billion, with a B.
Roth IRAs are supposed to be a vanilla retirement savings vehicle for the middle class. Unlike a 401(k), you can only deposit income into them after you have already paid taxes on it. But you can invest and grow your savings, then withdraw them after age 59 1/2 without taxes or penalties. The accounts also come with seemingly strict limits designed to prevent wealthy Americans from turning them into tax shelters—back in 1999, only individuals making under $110,000 a year could use them, and contributions were capped at $2,000 annually.
But Thiel, a libertarian who generally seems to view taxes as theft, figured out a loophole that allowed him to create his own personal, tax-exempt hedge fund. As ProPublica reports, Thiel only earned about $73,000 in salary at PayPal in 1999, with most of his compensation coming in the form of stock. Since he was under the earnings threshold, that allowed him to take $1,700 and buy 1 million shares of his company for well under a penny a piece. Once PayPal went public, the value of that stake exploded. Over time, he’s sold the shares and invested them elsewhere, all tax-free, and the Roth account has grown into a 10-figure Smaug-like gold hoard. Thiel has dipped into some of the money on occasion, but if he waits until 2027 to withdraw any more, he’ll be able to avoid paying taxes on the rest.
Was this actually legal? ProPublica suggests it was certainly a bit shady, explaining that “Thiel’s unusual stock purchase risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters.” The man did somehow survive an audit in 2011, though we don’t know exactly what the IRS was investigating. But regardless, Thiel isn’t the only plutocrat to pull a version of this maneuver. You may recall that during his 2012 presidential run, it was revealed that now Sen. Mitt Romney had done something similar with a traditional IRA. ProPublica found that Berkshire Hathaway founder Warren Buffet has a $20 million Roth sitting around; notorious hedge funder and Donald Trump backer Robert Mercer has $31 million in his; Randall Smith of hedge fund Alden Global Capital—which has made a business of chewing up and spitting out newspapers—has one worth $252 million. It goes on.
Anyway, I personally think it would be nice if these people paid some more taxes. I’m guessing you agree. And so do at least some Democrats. A few years ago, Oregon Sen. Ron Wyden, who now chairs the Senate Finance Committee, proposed a fix for these kinds of abuses that would have capped Roth IRAs accounts at $5 million and forced owners to withdraw anything over that amount so that it could be taxed. In light of Thursday’s report, Wyden issued a statement saying he’s thinking of bringing that proposal back to life:
IRAs were designed to provide retirement security to middle-class families, not allow mega-millionaires and billionaires to avoid paying taxes. I released a discussion draft in 2016 that would have cracked down on massive Roth IRA accounts built on assets from sweetheart deals. As we continue to look at ways to make the tax code more fair and finance critical investments in the American people, I’ll be revisiting this proposal.
An additional thought: Given that Democrats are trying to pass an ambitious legislative agenda paid for with taxes on the rich, and there is an ongoing series of articles about how the wealthiest Americans essentially live in an alternate dimension where they are exempt from paying the IRS jack, maybe now would be a good time to haul a few rich guys to Capitol Hill for some hearings where they can be cross-examined about their finances? Especially the tech billionaire who has literally argued that democracy and freedom aren’t compatible? It seems that would be a good way for someone to build momentum for some much-needed reforms.
