As wildfires swept through the Italian island of Sicily, fueled by an extreme heatwave, officials in one city recorded a Wednesday recorded what is believed to be the highest temperature ever recorded in Europe.
Local meteorologists in Siracusa reported that temperatures reached 48.8ºC or 119.8ºF, breaking the continent’s previous record of 118.4ºF, which was set in 1977 in Athens.
Today has provisionally seen the highest #temperature ever recorded in #Italy 🌡️ ⚠️
SIAS have confirmed that Siracusa in #Sicily reached 48.8ºC earlier this afternoon and if verified by @WMO, it will become a new European temperature record 📈 pic.twitter.com/0L8Af2lp6r
The World Meteorological Organization still needs to independently confirm the high temperature. Local reports of the new all-time record are in line with the weather extremes that have been seen in the Mediterranean region.
“The climate crisis—I’d like to use this term, and not climate change—the climate crisis is here, and it shows us everything needs to change.”
—Kyriakos Mitsotakis, Greek prime minister
Firefighters in Sicily and Calabria have carried out more than 3,000 operations in the last 12 hours. Thousands of acres of land have burned, and at least one death was reported in Calabria when a 76-year-old man’s home collapsed in flames.
“We are losing our history, our identity is turning to ashes, our soul is burning,” Giuseppe Falcomata, the mayor of the historic city of Reggio Calabria, said in a statement on social media.
Francesco Italia, the mayor of Siracusa, told La Repubblica that the area is “in full emergency.”
“We are devastated by the fires and our ecosystem—one of the richest and most precious in Europe—is at risk,” Italia said.
As Common Dreams reported Wednesday, wildfires driven by extreme heat have devastated other parts of the Mediterranean.
In Algeria, at least 65 people have been killed in wildfires in recent days, including 28 soldiers who had been deployed to battle the flames. Twelve firefighters were also in critical condition in hospitals on Wednesday.
Tunisia recorded its highest temperature ever on Tuesday, registering 49ºC (120ºF).
In Greece, most of the wildfires that have burned through the country this week were under control on Thursday. Surveying the damage, Prime Minister Kyriakos Mitsotakis called the fires “the greatest ecological catastrophe of the last few decades.”
“We managed to save lives, but we lost forests and property,” Mitsotakis said at a Thursday press conference in Athens.
The wildfires started amid an intense heatwave that lasted several days and forced officials to call on firefighters from 24 other countries across Europe and the Middle East to help fight 100 active fires per day.
Mitsotakis did not express confidence that the situation will remain under control in the coming weeks, as the country’s wildfire season continues.
“We are in the middle of August and it’s clear we will have difficult days ahead of us,” the prime minister told reporters.
“The climate crisis—I’d like to use this term, and not climate change—the climate crisis is here, and it shows us everything needs to change,”
In November 2017, with the administration of President Donald Trump rushing to get a massive tax overhaul through Congress, Sen. Ron Johnson stunned his colleagues by announcing he would vote “no.”
Making the rounds on cable TV, the Wisconsin Republican became the first GOP senator to declare his opposition, spooking Senate leaders who were pushing to quickly pass the tax bill with their thin majority. “If they can pass it without me, let them,” Johnson declared.
Johnson’s demand was simple: In exchange for his vote, the bill must sweeten the tax break for a class of companies that are known as pass-throughs, since profits pass through to their owners. Johnson praised such companies as “engines of innovation.” Behind the scenes, the senator pressed top Treasury Department officials on the issue, emails and the officials’ calendars show.
Within two weeks, Johnson’s ultimatum produced results. Trump personally called the senator to beg for his support, and the bill’s authors fattened the tax cut for these businesses. Johnson flipped to a “yes” and claimed credit for the change. The bill passed.
The Trump administration championed the pass-through provision as tax relief for “small businesses.”
Confidential tax records, however, reveal that Johnson’s last-minute maneuver benefited two families more than almost any others in the country — both worth billions and both among the senator’s biggest donors.
Dick and Liz Uihlein of packaging giant Uline, along with roofing magnate Diane Hendricks, together had contributed around $20 million to groups backing Johnson’s 2016 reelection campaign.
The expanded tax break Johnson muscled through netted them $215 million in deductions in 2018 alone, drastically reducing the income they owed taxes on. At that rate, the cut could deliver more than half a billion in tax savings for Hendricks and the Uihleins over its eight-year life.
But the tax break did more than just give a lucrative, and legal, perk to Johnson’s donors. In the first year after Trump signed the legislation, just 82 ultrawealthy households collectively walked away with more than $1 billion in total savings, an analysis of confidential tax records shows. Republican and Democratic tycoons alike saw their tax bills chopped by tens of millions, among them: media magnate and former Democratic presidential candidate Michael Bloomberg; the Bechtel family, owners of the engineering firm that bears their name; and the heirs of the late Houston pipeline billionaire Dan Duncan.
Usually the scale of the riches doled out by opaque tax legislation — and the beneficiaries — remain shielded from the public. But ProPublica has obtained a trove of IRS records covering thousands of the wealthiest Americans. The records have enabled reporters this year to explore the diverse menu of options the tax code affords the ultrawealthy to avoid paying taxes.
The drafting of the Trump law offers a unique opportunity to examine how the billionaire class is able to shape the code to its advantage, building in new ways to sidestep taxes.
The Tax Cuts and Jobs Act was the biggest rewrite of the code in decades and arguably the most consequential legislative achievement of the one-term president. Crafted largely in secret by a handful of Trump administration officials and members of Congress, the bill was rushed through the legislative process.
As draft language of the bill made its way through Congress, lawmakers friendly to billionaires and their lobbyists were able to nip and tuck and stretch the bill to accommodate a variety of special groups. The flurry of midnight deals and last-minute insertions of language resulted in a vast redistribution of wealth into the pockets of a select set of families, siphoning away billions in tax revenue from the nation’s coffers. This story is based on lobbying and campaign finance disclosures, Treasury Department emails and calendars obtained through a Freedom of Information Act lawsuit, and confidential tax records.
For those who benefited from the bill’s modifications, the collective millions spent on campaign donations and lobbying were minuscule compared with locking in years of enormous tax savings.
A spokesperson for the Uihleins declined to comment. Representatives for Hendricks didn’t respond to questions. In response to emailed questions, Johnson did not address whether he had discussed the expanded tax break with Hendricks or the Uihleins. Instead, he wrote in a statement that his advocacy was driven by his belief that the tax code “needs to be simplified and rationalized.”
“My support for ‘pass-through’ entities — that represent over 90% of all businesses — was guided by the necessity to keep them competitive with C-corporations and had nothing to do with any donor or discussions with them,” he wrote.
By the summer of 2017, it was clear that Trump’s first major legislative initiative, to “repeal and replace” Obamacare, had gone up in flames, taking a marquee campaign promise with it. Looking for a win, the administration turned to tax reform.
“Getting closer and closer on the Tax Cut Bill. Shaping up even better than projected,” Trump tweeted. “House and Senate working very hard and smart. End result will be not only important, but SPECIAL!”
At the top of the Republican wishlist was a deep tax cut for corporations. There was little doubt that such a cut would make it into the final legislation. But because of the complexity of the tax code, slashing the corporate tax rate doesn’t actually affect most U.S. businesses.
Corporate taxes are paid by what are known in tax lingo as C corporations, which include large publicly traded firms like AT&T or Coca-Cola. Most businesses in the United States aren’t C corporations, they’re pass-throughs. The name comes from the fact that when one of these businesses makes money, the profits are not subject to corporate taxes. Instead, they “pass through” directly to the owners, who pay taxes on the profits on their personal returns. Unlike major shareholders in companies like Amazon, who can avoid taking income by not selling their stock, owners of successful pass-throughs typically can’t avoid it.
Pass-throughs include the full gamut of American business, from small barbershops to law firms to, in the case of Uline, a packaging distributor with thousands of employees.
So alongside the corporate rate cut for the AT&Ts of the world, the Trump tax bill included a separate tax break for pass-through companies. For budgetary reasons, the tax break is not permanent, sunsetting after eight years.
Proponents touted it as boosting “small business” and “Main Street,” and it’s true that many small businesses got a modest tax break. But a recent study by Treasury economists found that the top 1% of Americans by income have reaped nearly 60% of the billions in tax savings created by the provision. And most of that amount went to the top 0.1%. That’s because even though there are many small pass-through businesses, most of the pass-through profits in the country flow to the wealthy owners of a limited group of large companies.
Tax records show that in 2018, Bloomberg, whom Forbes ranks as the 20th wealthiest person in the world, got the largest known deduction from the new provision, slashing his tax bill by nearly $68 million. (When he briefly ran for president in 2020, Bloomberg’s tax plan proposed ending the deduction, though his plan was generally friendlier to the wealthy than those of his rivals.) A spokesperson for Bloomberg declined to comment.
Johnson’s intervention in November 2017 was designed to boost the bill’s already generous tax break for pass-through companies. The bill had allowed for business owners to deduct up to 17.4% of their profits. Thanks to Johnson holding out, that figure was ultimately boosted to 20%.
That might seem like a small increase, but even a few extra percentage points can translate into tens of millions of dollars in extra deductions in one year alone for an ultrawealthy family.
The mechanics are complicated but, for the rich, it generally means that a business owner gets to keep an extra 7 cents on every dollar of profit. To understand the windfall, take the case of the Uihlein family.
Dick, the great-grandson of a beer magnate, and his wife, Liz, own and operate packaging giant Uline. The logo of the Pleasant Prairie, Wisconsin, firm is stamped on the bottom of countless paper bags. Uline produced nearly $1 billion in profits in 2018, according to ProPublica’s analysis of tax records. Dick and Liz Uihlein, who own a majority of the company, reported more than $700 million in income that year. But they were able to slash what they owed the IRS with a $118 million deduction generated by the new tax break.
Liz Uihlein, who serves as president of Uline, has criticized high taxes in her company newsletter. The year before the tax overhaul, the couple gave generously to support Trump’s 2016 presidential campaign. That same year, when Johnson faced long odds in his reelection bid against former Sen. Russ Feingold, the Uihleins gave more than $8 million to a series of political committees that blanketed the state with pro-Johnson and anti-Feingold ads. That blitz led the Milwaukee Journal Sentinel to dub the Uihleins “the Koch brothers of Wisconsin politics.”
Johnson’s campaign also got a boost from Hendricks, Wisconsin’s richest woman and owner of roofing wholesaler ABC Supply Co. The Beloit-based billionaire has publicly pushed for tax breaks and said she wants to stop the U.S. from becoming “a socialistic ideological nation.”
Hendricks has said Johnson won her over after she grilled him at a brunch meeting six years earlier. She gave about $12 million to a pair of political committees, the Reform America Fund and the Freedom Partners Action Fund, that bought ads attacking Feingold.
In the first year of the pass-through tax break, Hendricks got a $97 million deduction on income of $502 million. By reducing the income she owed taxes on, that deduction saved her around $36 million.
Even after Johnson won the expansion of the pass-through break in late 2017, the final text of the tax overhaul wasn’t settled. A congressional conference committee had to iron out the differences between the Senate and House versions of the bill.
Sometime during this process, eight words that had been in neither the House nor the Senate bill were inserted: “applied without regard to the words ‘engineering, architecture.’”
With that wonky bit of legalese, Congress smiled on the Bechtel clan.
The Bechtels’ engineering and construction company is one of the largest and most politically connected private firms in the country. With surgical precision, the new language guaranteed the Bechtels a massive tax cut. In previous versions of the bill, construction would have been given a tax break, but engineering was one of the industries excluded from the pass-through deduction for reasons that remain murky.
When the bill, with its eight added words, took effect in 2018, three great-great-grandchildren of the company’s founder, CEO Brendan Bechtel and his siblings Darren and Katherine, together netted deductions of $111 million on $679 million in income, tax records show.
And that’s just one generation of Bechtels. The heirs’ father, Riley, also holds a piece of the firm, as does a group of nonfamily executives and board members. In all, Bechtel Corporation produced around $2.3 billion of profit in 2018 alone — the vast majority of which appears to be eligible for the 20% deduction.
Who wrote the phrase — and which lawmaker inserted it — has been a much-discussed mystery in the tax policy world. ProPublica found that a lobbyist who worked for both Bechtel and an industry trade group has claimed credit for the alteration.
In the months leading up to the bill’s passage in 2017, Bechtel had executed a full-court press in Washington, meeting with Trump administration officials and spending more than $1 million lobbying on tax issues.
Marc Gerson, of the Washington law firm Miller & Chevalier, was paid to lobby on the tax bill by both Bechtel and the American Council of Engineering Companies, of which Bechtel is a member. At a presentation for the trade group’s members a few weeks after Trump signed the bill into law, Gerson credited his efforts for the pass-through tax break, calling it a “major legislative victory for the engineering industry.” Gerson did not respond to a request for comment.
Bechtel’s push was part of a long history of lobbying for tax breaks by the company. Two decades ago, it even hired a former IRS commissioner as part of a successful bid to get “engineering and architectural services” included in one of President George W. Bush’s tax cuts.
The company’s lobbying on the Trump tax bill, and the tax break it received, highlight a paradox at the core of Bechtel: The family has for years showered money on anti-tax candidates even though, as The New Yorker’s Jane Mayer has written, Bechtel “owed almost its entire existence to government patronage.” Most famous for being one of the companies that built the Hoover Dam, in recent years it has bid on and won marquee federal projects. Among them: a healthy share of the billions spent by American taxpayers to rebuild Iraq after the war. The firm recently moved its longtime headquarters from San Francisco to Reston, Virginia, a hub for federal contractors just outside the Beltway.
A spokesperson for Bechtel Corporation didn’t respond to questions about the company’s lobbying. The spokesperson, as well as a representative of the family’s investment office, didn’t respond to requests to accept questions about the family’s tax records.
Brendan Bechtel has emerged this year as a vocal critic of President Joe Biden’s proposal to pay for new infrastructure with tax hikes.
“It’s unfair to ask business to shoulder or cover all the additional costs of this public infrastructure investment,” he said on a recent CNBC appearance.
As the landmark tax overhaul sped through the legislative process, other prosperous groups of business owners worried they would be left out. With the help of lobbyists, and sometimes after direct contact with lawmakers, they, too, were invited into what Trump dubbed his “big, beautiful tax cut.”
Among the biggest winners during the final push were real estate developers.
The Senate bill included a formula that restricted the size of the new deduction based on how much a pass-through business paid in wages. Congressional Republicans framed the provision as rewarding businesses that create jobs. In effect, it meant a highly profitable business with few employees — like a real estate developer — wouldn’t be able to benefit much from the break.
Developers weren’t happy. Several marshaled lobbyists and prodded friendly lawmakers to turn things around.
At least two of them turned to Johnson.
“Dear Ron,” Ted Kellner, a Wisconsin developer, and a colleague wrote in a letter to Johnson. “I’m concerned that the goal of a fair, efficient and growth oriented tax overhaul will not be achieved, especially for private real estate pass-through entities.”
Johnson forwarded the letter from Kellner, a political donor of his, to top Republicans in the House and Senate: “All, Yesterday, I received this letter from very smart and successful businessmen in Milwaukee,” adding that the legislation as it stood gave pass-throughs “widely disparate, grossly unfair” treatment.
House Ways and Means Committee Chairman Kevin Brady, R-Texas, responded with a promise to do more: “Senator — I strongly agree we should continue to improve the pass-through provisions at every step. You are a great champion for this.” Congress is not subject to the Freedom of Information Act, but Treasury officials were copied on the email exchange. ProPublica obtained the exchange after suing the Treasury Department.
Kellner got his wish. In the final days of the legislative process, real estate investors were given a side door to access the full deduction. Language was added to the final legislation that allowed them to qualify if they had a large portfolio of buildings, even if they had small payrolls.
With that, some of the richest real estate developers in the country were welcomed into the fold.
The tax records obtained by ProPublica show that one of the top real estate industry winners was Donald Bren, sole owner of the Southern California-based Irvine Company and one of the wealthiest developers in the United States.
In 2018 alone, Bren personally enjoyed a deduction of $22 million because of the tax break. Bren’s representatives did not respond to emails and calls from ProPublica.
His company had hired Wes Coulam, a prominent Washington lobbyist with Ernst & Young, to advocate for its interests as the bill was being hammered out. Before Coulam became a lobbyist, he worked on Capitol Hill as a tax policy adviser for Utah Sen. Orrin Hatch.
Hatch, then the Republican chair of the Senate Finance Committee, publicly took credit for the final draft of the new deduction, amid questions about the real estate carveout. Hatch’s representatives did not respond to questions from ProPublica about how the carveout was added.
ProPublica’s records show that other big real estate winners include Adam Portnoy, head of commercial real estate giant the RMR Group, who got a $14 million deduction in 2018. Donald Sterling, the real estate developer and disgraced former owner of the Los Angeles Clippers, won an $11 million deduction. Representatives for Portnoy and Sterling did not respond to questions from ProPublica.
Another gift to the real estate industry in the bill was a tax deduction of up to 20% on dividends from real estate investment trusts, more commonly known as REITs. These companies are essentially bundles of various real estate assets, which investors can buy chunks of. REITs make money by collecting rent from tenants and interest from loans used to finance real estate deals.
The tax cut for these investment vehicles was pushed by both the Real Estate Roundtable, a trade group for the entire industry, and the National Association of Real Estate Investment Trusts. The latter, a trade group specifically for REITs, spent more than $5 million lobbying in Washington the year the tax bill was drafted, more than it had in any year in its history.
Steven Roth, the founder of Vornado Realty Trust, a prominent REIT, is a regular donor to both groups’ political committees.
Roth had close ties to the Trump administration, including advising on infrastructure and doing business with Jared Kushner’s family. He became one of the biggest winners from the REIT provision in the Trump tax law.
Roth earned more than $27 million in REIT dividends in the two years after the bill passed, potentially allowing him a tax deduction of about $5 million, tax records show. Roth did not respond to requests for comment, and his representatives did not accept questions from ProPublica on his behalf.
Another carveout benefited investors of publicly traded pipeline businesses. Sen. John Cornyn, a Texas Republican, added an amendment for them to the Senate version of the bill just before it was voted on.
Without his amendment, investors who made under a certain income would have received the deduction anyway, experts told ProPublica. But for higher-income investors, a slate of restrictions kicked in. In order to qualify, they would have needed the businesses they’re invested in to pay out significant wages, and these oil and gas businesses, like real estate developers, typically do not.
Cornyn’s amendment cleared the way.
The trade group for these companies and one of its top members, Enterprise Products Partners, a Houston-based natural gas and crude oil pipeline company, had both lobbied on the bill. Enterprise was founded by Dan Duncan, who died in 2010.
The Trump tax bill delivered a win to Duncan’s heirs. ProPublica’s data shows his four children, who own stakes in the company, together claimed more than $150 million in deductions in 2018 alone. The tax provision for “small businesses” had delivered a windfall to the family Forbes ranked as the 11th richest in the country.
In a statement, an Enterprise spokesperson wrote: “The Duncan family abides by all applicable tax laws and will not comment on individual tax returns, which are a private matter.” Cornyn’s office did not respond to questions about the senator’s amendment.
The tax break is due to expire after 2025, and a gulf has opened in Congress about the future of the provision.
In July, Senate Finance Chair Ron Wyden, D-Ore., proposed legislation that would end the tax cut early for the ultrawealthy. In fact, anyone making over $500,000 per year would no longer get the deduction. But it would be extended to the business owners below that threshold who are currently excluded because of their industry. The bill would “make the policy more fair and less complex for middle-class business owners, while also raising billions for priorities like child care, education, and health care,” Wyden said in a statement.
Meanwhile, dozens of trade groups, including the Chamber of Commerce, are pushing to make the pass-through tax cut permanent. This year, a bipartisan bill called the Main Street Tax Certainty Act was introduced in both houses of Congress to do just that.
One of the bill’s sponsors, Rep. Henry Cuellar, D-Texas, pitched the legislation this way: “I am committed to delivering critical relief for our nation’s small businesses and the communities they serve.”
Originally published on ProPublica by Justin Elliott and Robert Faturechi
“Scientists say we cannot allow this to happen. People in power stand in our way.”
Originally published on Common Dreams via Creative Commons
While heatwaves, fires, and floods produce warnings that “we are living in a climate emergency, here and now,” a scientific study suggested Thursday that a crucial Atlantic Ocean current system could collapse, which “would have severe impacts on the global climate system.”
“The likelihood of this extremely high-impact event happening increases with every gram of CO2 that we put into the atmosphere.” —Niklas Boers, PIK
The study, published in the journal Nature Climate Change, focuses on the Atlantic Meridional Overturning Circulation (AMOC), which includes the Gulf Stream. As the United Kingdom’s Met Office explains, it is “a large system of ocean currents that carry warm water from the tropics northwards into the North Atlantic,” like a conveyor belt.
Previous research has shown AMOC weakening in recent centuries. The author of the new study, Niklas Boers of the Potsdam Institute of Climate Impact Research (PIK), found that this is likely related to a loss of stability.
“The Atlantic Meridional Overturning is one of our planet’s key circulation systems,” Boers, who is also affiliated with universities in the U.K. and Germany, said in a statement.
“We already know from some computer simulations and from data from Earth’s past, so-called paleoclimate proxy records, that the AMOC can exhibit—in addition to the currently attained strong mode—an alternative, substantially weaker mode of operation,” he continued. “This bi-stability implies that abrupt transitions between the two circulation modes are in principle possible.”
In the absence of long-term data on the current system’s strength, Boers looked at its “fingerprints,” sea-surface temperature and salinity patterns. He said that “a detailed analysis of these fingerprints in eight independent indices now suggests that the AMOC weakening during the last century is indeed likely to be associated with a loss of stability.”
“The findings support the assessment that the AMOC decline is not just a fluctuation or a linear response to increasing temperatures,” he continued, “but likely means the approaching of a critical threshold beyond which the circulation system could collapse.”
As The Guardian‘s Damian Carrington reports, the collapse of “one of the planet’s main potential tipping points” would be devastating on a global scale:
Such an event would have catastrophic consequences around the world, severely disrupting the rains that billions of people depend on for food in India, South America, and West Africa; increasing storms and lowering temperatures in Europe; and pushing up the sea level in the eastern U.S. It would also further endanger the Amazon rainforest and Antarctic ice sheets.
The complexity of the AMOC system and uncertainty over levels of future global heating make it impossible to forecast the date of any collapse for now. It could be within a decade or two, or several centuries away. But the colossal impact it would have means it must never be allowed to happen, the scientists said.
“The signs of destabilization being visible already is something that I wouldn’t have expected and that I find scary,” Boers told the newspaper. “It’s something you just can’t [allow to] happen.”
It is unclear what level of global heating would cause a collapse, “so the only thing to do is keep emissions as low as possible,” he added. “The likelihood of this extremely high-impact event happening increases with every gram of CO2 that we put into the atmosphere.”
Some climate action advocates responded to the study by highlighting a science fiction movie that, as famed film critic Roger Ebert wrote nearly two decades ago, “is ridiculous, yes, but sublimely ridiculous—and the special effects are stupendous.”
This is literally the exact plot of the 2004 film The Day After Tomorrowhttps://t.co/MQRHRTq9oP
“We all laughed at The Day After Tomorrow, back in 2004,” said Guy Shrubsole, policy and campaigns coordinator at Rewilding Britain. “Turned out it was a documentary.”
The environmental advocacy group 350 Tacoma responded to the findings with a call to action.
“There are warning signs that the Gulf Stream could collapse, an unimaginably catastrophic (and irreversible) impact of fossil fuel-caused climate breakdown,” the group tweeted. “Scientists say we cannot allow this to happen. People in power stand in our way.”
The study comes ahead of a United Nations climate summit in Glasgow set to begin October 31. Last month, U.N. Secretary-General António Guterres noted the upcoming event and reminded leaders of wealthy countries that “the world urgently needs a clear and unambiguous commitment to the 1.5-degree goal of the Paris agreement,” and “we are way off track.”
Senate Finance Committee Chairman Ron Wyden said on Thursday he is revisiting proposed legislation that would crack down on the giant tax-free retirement accounts amassed by the ultrawealthy after a ProPublica story exposed that billionaires were shielding fortunes inside them.
“I feel very strongly that the IRA was designed to provide retirement security to working people and their families, and not be yet another tax dodge that allows mega millionaires and billionaires to avoid paying taxes,” Wyden said in an interview.
ProPublica reported Thursday that the Roth IRA, a retirement vehicle originally intended to spur middle-class savings, was being hijacked by the ultrawealthy and used to create giant onshore tax shelters. Tax records obtained by ProPublica revealed that Peter Thiel, a co-founder of PayPal and an investor in Facebook, had a Roth IRA worth $5 billion as of 2019. Under the rules for the accounts, if he waits till he turns 59 and a half, he can withdraw money from the account tax-free.
The story is part of ProPublica’s ongoing series on how the country’s richest citizens sidestep the nation’s income tax system. ProPublica has obtained a trove of IRS tax return data on thousands of the wealthiest people in the U.S., covering more than 15 years. The records have allowed ProPublica to begin, this month, an unprecedented exploration of the tax-avoidance strategies available to the ultrawealthy, allowing them to avoid taxes in ways most Americans can’t.
Wyden said ProPublica’s stories have shifted the debate about taxes at the grassroots level, underscoring a “double standard” that would have a nurse in Medford, Oregon, dutifully paying taxes “with every single paycheck” while the wealthiest Americans “just defer, defer, defer paying their taxes almost until perpetuity.”
Wyden said, “Now, the American people are with us on the proposition that everybody ought to pay their fair share, and in that sense, the debate about taxes has really changed a lot.”
The focus on recouping lost tax revenue comes at a critical time, Wyden and others say, as lawmakers look for ways to fund President Joe Biden’s infrastructure plan and other domestic spending.
Wyden had worried for years that Roth IRAs were being abused by the ultrawealthy. In 2016, he put forth a proposal that would have reined in the amount of money that could be stowed inside them.
“If I had my way back in 2016, my bill would have passed, there would have been a crackdown on these massive Roth IRA accounts built on assets from sweetheart deals,” Wyden said.
The proposal was known as the Retirement Improvements and Savings Enhancements Act. It would have required owners of Roth accounts worth more than $5 million to take out money over time, capping the accounts’ growth. It also would have slammed shut a back door that allowed the wealthy to move fortunes into Roths from less favorable retirement accounts. This maneuver, known as a conversion, allows a taxpayer to transform a traditional IRA into a Roth after paying a one-time tax.
Ted Weschler, a deputy of Warren Buffett at Berkshire Hathaway, told ProPublica he supported reforms to rein in giant Roth IRAs like his. Weschler’s account hit the $264.4 million mark in 2018 after he converted a whopping $130 million and paid a one-time tax years earlier, according to tax records obtained by ProPublica.
In a statement to ProPublica earlier this week, Weschler didn’t address any specific reform plan but said: “Although I have been an enormous beneficiary of the IRA mechanism, I personally do not feel the tax shield afforded me by my IRA is necessarily good tax policy. To this end, I am openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold.”
Wyden’s proposal also targeted the stuffing of undervalued assets into Roths, which congressional investigators had flagged as the foundation of many large accounts. Under the Wyden draft bill, purchasing an asset for less than fair market value would strip the tax benefits from the entire IRA.
ProPublica’s investigation showed that Thiel purchased founder’s shares of the company that would become PayPal at $0.001 per share in 1999. At that price, he was able to buy 1.7 million shares and still fall below the $2,000 maximum contribution limit Congress had set at the time for Roth IRAs. PayPal later disclosed in an SEC filing that those shares, and others issued that year, were sold at “below fair value.”
A spokesperson for Thiel accepted detailed questions on Thiel’s behalf last week, then never responded to phone calls or emails.
The RISE Act was never introduced because, Wyden said, Republicans controlled the Senate at the time and made clear they opposed the effort. The proposal was also heartily opposed by promoters of nontraditional retirement investments. One of them wrote, at the time: “Everything about the RISE Act Proposal is opposed to capitalism and economic freedom.”
Following ProPublica’s story on Roths, Sen. Elizabeth Warren, D-Mass., said the way to address the gargantuan accounts would be a wealth tax, which would impose an annual levy on households with a net worth over $50 million.
Warren tweeted a link to the story and wrote: “Yes, our tax system is rigged with loopholes and tax shelters for billionaires like Peter Thiel. And stories like this will keep popping up until we pass a simple #WealthTax on assets over $50 million to make these guys pay their fair share.”
Yes, our tax system is rigged with loopholes and tax shelters for billionaires like Peter Thiel. And stories like this will keep popping up until we pass a simple #WealthTax on assets over $50 million to make these guys pay their fair share. https://t.co/6aP6l8tG3A
Daniel Hemel, a tax law professor at the University of Chicago who has been researching large Roths, said that Congress should simply prohibit IRAs from purchasing assets that are not bought and sold on the public market.
“There’s no reason people should be able to be gambling their retirement assets on pre-IPO stocks,” Hemel said.
He added that lawmakers should go beyond reforms targeting the accounts directly and address a potential estate tax dodge related to Roths.
If the holder of a large Roth dies, the retirement account is considered part of the taxable estate, and a significant tax is due. But, Hemel said, there’s nothing to stop an American who has amassed a giant Roth from renouncing their citizenship and moving abroad to a country with no estate taxes. It’s rare, but not unheard of, for the ultrawealthy to renounce their U.S. citizenship to avoid taxes.
Under federal law, U.S. citizens who renounce their citizenship are taxed that day on assets that have risen in value but are not yet sold. But there’s an exception for certain kinds of assets, Hemel said, including Roth retirement accounts.
Thiel acquired citizenship in New Zealand in 2011. Unlike the United States, New Zealand has no estate tax. It’s not clear whether estate taxes figured into Thiel’s decision.
A spokesperson for Thiel did not immediately respond to questions on Friday about whether estate taxes factored into Thiel’s decision to become a New Zealand citizen.
In his application for citizenship, Thiel wrote to a government minister: “I have long admired the people, culture, business environment and government of New Zealand, as well as the encouragement which is given to investment, business and trade in New Zealand.”
Patching the hole in the expatriation law, Hemel said, “should be a top policy priority because we’re talking about, with Thiel alone, billions of dollars of taxes.”
by Justin Elliott, Patricia Callahan and James Bandler for ProPublica via Creative Commons.
When the federal government enacted the CARES Act in March 2020, it boosted jobless aid and expanded the benefits to include people who weren’t typically covered, like gig workers. The legislation was designed to cushion workers against the massive blow of a partial economic shutdown during the pandemic.
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But if you haven’t already buried your memories of last year, you probably remember how difficult it was to get those unemployment benefits.
Horror stories circulated about people waiting on hold for weeks, trying to get the money they needed to stay afloat. Maybe you remember spending long hours on the phone or the computer yourself. Delays in unemployment benefits heightened feelings of uncertainty that characterized much of 2020, and made the experience of losing your job even more frightening.
But as Cezary Podkul reported for ProPublica this week, this expansion of benefits also attracted fraudsters from all over the world who sought to cash in on the CARES Act. In hindsight, the millions of phony unemployment insurance claims were a large part of what clogged states’ overtaxed computer systems, delaying payments to unemployed Americans filing legitimate claims.
We don’t have a full accounting yet of how much the fraud will end up costing taxpayers. The federal government says it will be at least tens of billions of dollars, but some experts fear it may end up in the hundreds of billions. And on the micro level, every stolen identity fraudsters use to cash in belongs to a real person. If that person tried to file for unemployment themselves, it could take months for them to convince state agencies they were a real person and receive necessary support.
We talked with Cezary about how he discovered the alternate universe of stolen identities and pseudonymous fraudsters selling how-to kits for scamming state unemployment agencies on the dark web. Here’s an inside look at a massive fraud wave.
I was really curious how you went about finding these online forums where scammers were swapping their trade secrets.
So I started off by reaching out to cybersecurity firms and asking them, “Hey, where are fraudsters trading tips and advice and talking about how to do this?” That pointed me to Telegram [an online messaging app]. I got the names of a few Telegram channels where this was happening, and I started looking at those. And then from there I did my own research and found lots and lots of additional ones; it certainly wasn’t hard, because there’s just so many of them.
Did you have a strategy worked out for how you would reach out to scammers?
To be honest, I didn’t know what to expect, because I have never been to any of these forums. I realized that they’re open, public forums. I’m sure there’s some that are private, or invitation-only. But the ones that we wrote about in our story, anyone who wants to view them or access them can enter them as if you were entering a public square in a city.
There was a big learning experience involved in this in the sense that there was a lot of unfamiliar language to me. It wasn’t as if you could just jump in and know exactly what’s being said. You had to see a lot of the traffic and read a lot of messages before you learned what certain acronyms were.
For example, what does it mean for a state to be “lit”? It’s paying out state claims.
At one point, I came across a message in one of the forums that actually had a dictionary, which was super helpful. That was kind of like the Rosetta Stone, and once I came across the dictionary I could translate a lot of this stuff into plain language.
You quote one scammer’s response in the article that’s just two eye roll emojis. I was so curious what question you asked that prompted that response.
Yeah, the eye roll emoji! So that was the user who we cite in the story named “VerifiedFraud.” He was the admin for one of these channels where there was something like 1,300 participants, and he posted what’s called a “sauce.” Sauce, in the language of these forums, is the secret sauce for filing fake unemployment insurance claims in a particular state. He gave away a free sauce to his channel participants. And I asked him about that: Hey, tell me about the sauce. I noticed that you put it on your forum for participants along with the “new month prayer” wishing them luck.
When I messaged him about that I got the eye roll.
And I guess you told him you were a journalist?
Oh, yeah, absolutely. With all the people that I was contacting, I made it abundantly clear: “Hey, I’m a reporter, I’m writing a story about this. I noticed you said this or that and I wanted to talk to you more about it.” You know, “Tell me more about your ‘Fraud Bible.’ Does it work?”
Did you ever try a sauce to see if it worked? Or send it to a state agency?
No. As a journalist, I wanted to make sure I wasn’t doing anything illegal.
I did send a bunch of these sauces — the ones that name specific states that were publicly available — to the states. I sent them to Pennsylvania, New York and California, and I asked them for comments. The states declined to comment on the specifics of whether they worked or anything like that. But they did say generally that they’re aware of them, that they’re monitoring these types of messages with their law enforcement partners.
You have this quote from a scammer in the article: “Virtually all these wealthy entrepreneurs you see around 90% of them started with something illegal to make enough money to run their business.” It seems like some of these people consider themselves businesspeople, and they put some work into this. How different is what they’re doing from working an actual job?
There’s probably some people for whom this has become a full-time endeavor, where this is the main way they’re trying to make money right now because of the opportunity that has been opened up.
But there’s certainly people for whom they might have a day job doing something else. For example, one case involved a Nigerian national who ran an online shoe store. He was also accused of participating in a scheme to defraud states of unemployment insurance funds. And I think the total in that case was something like $489,000 across 15 states. [He’s pleaded not guilty to charges in the case.]
So there’s certainly people who do other things, but there’s others who I’m sure have made this sort of their full-time path. I think it does kind of run the gamut.
Did you get a sense of what percentage of people were working from outside the United States?
There’s no way to tell what percentage. But in reading the messages in these Telegram channels, I definitely got the feel that this was a very international crowd, because you do see messages from people, for example, looking to meet up to do deals in Lagos, Nigeria.
The statistic that really put a period on this for me came from one of the cybersecurity firms that we talked with. They said that one state they work with saw unemployment insurance applications coming from nearly 170 countries around the world.
So these are supposedly state residents applying for unemployment insurance, but when you trace the internet traffic, you see this application is coming from … gosh, they had countries all over the world. It was like the United Nations.
Normal people trying to get unemployment checks in the middle of the pandemic were really struggling, waiting on the line for days at a time and getting disconnected when they were trying to get their unemployment checks. Did you get any sense of if and how fraudsters were better at getting unemployment checks than real humans?
One of the things that I think maybe hasn’t been talked about as much is the interplay between this huge wave of fraudulent claims that we saw and legitimate claimants. Because the information technology on which states are running their unemployment insurance systems is, in many cases, very dated.
Like with North Dakota, they had to actually bring in computer programmers from Latvia to help them run their unemployment insurance computer system last year, because it’s so hard to find anyone who can service the technology. It’s been around for decades.
When you’re dealing with very dated technology, it doesn’t scale well. It can’t handle such huge volumes that we were seeing there during the pandemic. So when you had this huge influx of fraudulent claims, I think it did a few things.
One is it definitely slowed down processing of legitimate claims, because you just end up with backlogs of applications that the states are still struggling to get through because there’s so many people who have applied. There are legitimate claimants mixed in with fraudulent claimants and you have to kind of triage those, and figure out which ones are high-risk, which ones look like they’re very likely to be fraudulent, versus which ones are medium-risk and which ones are low-risk — and you put those through.
The other thing that it spikes is the call volumes. When I asked [Texas officials], why was it so hard for an individual that we profiled in the story to get through to Texas, it was just because they had such a massive call volume. There’s so many people calling the fraud line reporting fraud, there’s so many people calling for help, so many people seeking states’ attention, they just become overwhelmed. That has an impact on legitimate claims.
And then finally, you have legitimate claimants who are collecting unemployment insurance payments, and those payments either stop or are frozen because of suspected fraud. So someone else just stole your identity and used it to file a claim in another state, and all of a sudden you might see your benefits stop, which is what happened to Philip Payton, the individual we profiled in our story.
By flooding the system with so many fake claims, not only did fraudsters, in some cases, get away with pocketing those fraudulent payments, it really caused a lot of hardship for legitimate claimants.
The fraudsters are also probably working with the advantage of being able to send out 40 applications to 40 different states, and if they only get paid by 18 and get stuck in backlogs in the others, it doesn’t cost them very much.
Exactly. It basically comes down to a game of numbers.
Let’s say you go onto a dark web forum and you purchase some stolen identities. You pay $50, $70 for a stolen profile of someone. If you’ve got it, then it makes sense for you to file in all the different states where you think it might pay off, to all the different programs, to all the different government benefits you think that individual might be entitled to. If you don’t, you might be leaving money on the table.
One of the most shocking statistics that I came across, just on a micro level, was in one of the Department of Labor’s Office of Inspector General reports. They mentioned that one person used a single Social Security number to file fake unemployment insurance claims in 40 states, and 29 states paid up. They got something like $222,000.
I think we’re now at that point where we’re starting to realize that this has been a huge problem. And to be fair, it wasn’t just unemployment insurance. You’ve seen our coverage of people creating fake farms in places that wouldn’t even have a farm, like farms on beaches or people claiming they had an orange farm in Minnesota, to apply for PPP loans.
I’ll be curious to see if cybersecurity surrounding these leaks that led to IDs and social security numbers getting out are wrapped up in reform bills too.
If I can put in a plug: If anyone knows where all of the leaked data came from, I would love to talk with anyone who’s got information on that.
One of the terms that you see being used on these telegram chat rooms is the word “fullz.” Fullz is slang for the full suite of personally identifiable information like someone’s name, address, Social Security, driver’s license, the whole thing.
If you’re going to be filling out an unemployment insurance claim form in someone’s name, if you just know their name and their address — okay, that’s one thing. But if you have a full suite of information on a person it just makes it so much easier for you to file a claim that has a significantly higher chance of getting through the system.
So one of the questions that I was asking is: Where did all the fullz come from? This is a question that I became obsessed with in the reporting of this project, and I just couldn’t get a good answer to it. So if anyone reading this has a good answer for that, or a good theory, reach out to me and I’ll be more than happy to talk to you.
by Brooke Stephenson for ProPublica and published via Creative Commons License
Last week, ProPublica published the story of how PayPal co-founder and tech investor Peter Thiel was able to turn a Roth IRA initially worth around $2,000 into a jaw-dropping $5 billion tax-free retirement stash in just 20 years.
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The story is even more remarkable because Congress created the Roth IRA in 1997 to encourage middle-class Americans to save for their golden years. Most Americans have struggled to do even that; the average account was worth about $39,000 in 2018. But Thiel and other billionaires have managed to turn their mundane Roths into giant onshore tax shelters.
Thiel was able to launch his Roth into the stratosphere through a complicated strategy involving the purchase of nonpublic stock at bargain prices — the kind of deal most people can’t access. Experts say it risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters. (Thiel’s spokesman didn’t respond to questions.)
Other ultrawealthy Americans have used different means to build Roths worth tens or hundreds of millions of dollars. Senate Finance Chairman Ron Wyden is now looking at how to end the use of the Roth as “yet another tax dodge that allows mega millionaires and billionaires to avoid paying taxes.”
How are they able to do it while you can’t? Check out our explainer of one way the Roth works for the ultrawealthy and not for you.
by Nadia Sussman, Sherene Strausberg and Justin Elliott for ProPublica and published via Creative Commons
The number of multimillion-dollar individual retirement accounts has soared in the past decade, as more wealthy Americans use the tax-advantaged vehicles to shield fortunes from income taxes, according to new data released by Congress today.
The data reveals for the first time the staggering amount of money socked away in tax-free mega Roth accounts: more than $15 billion held by just 156 Americans.
The new data also shows that the number of Americans with traditional and Roth IRAs worth over $5 million tripled, to more than 28,000, between 2011 and 2019.
The data was requested by Senate Finance Chairman Ron Wyden, D-Ore., and House Ways and Means Chairman Richard Neal, D-Mass., following ProPublica’s story last month exploring the rise of mega Roth IRAs. The story, based on confidential IRS data obtained by ProPublica, revealed that tech mogul Peter Thiel has the largest known Roth IRA, worth $5 billion as of 2019.
In a Senate Finance hearing on retirement on Wednesday, Wyden said such massive accounts underscore the country’s inequalities. “Individuals at the very top — at the very, very top — are able to game the rules to get ahead and basically abuse taxpayer-subsidized accounts with pricey accountants and lawyers,” Wyden said. “This increases the already existing retirement inequality between retirement haves and have-nots to an extreme level.”
Roth IRAs were established in 1997 to incentivize middle-class Americans to save for retirement. Congress imposed strict limits, including a cap on how much can be contributed to the accounts each year, which today stands at $6,000 for most Americans. The average Roth account was worth $39,108 at the end of 2018.
But a select set of the ultrawealthy have managed to get around limits set by Congress and transformed the vehicle into a powerful onshore tax shelter. One way they’ve done that is by buying nonpublic shares of companies with extremely low valuations. That allows them to tuck a huge volume of shares into a retirement account. Congressional investigators have previously found that the IRS has struggled to enforce rules around these investments, including whether the valuations are legitimate.
Once money is deposited into a Roth account, any proceeds from investment gains are tax free. So, for example, a Roth owner who sells a successful tech investment for a $1 million profit gets to keep all of the money, saving a potential $200,000 in federal taxes. The savings can then be reinvested, tax free, as long as the Roth holder waits till he or she is at least 59 and a half before withdrawing the money. Owners of traditional IRAs, by contrast, enjoy tax-free growth but must pay income tax on withdrawals. The Roth is considered the more powerful tax-avoidance tool for the wealthy.
The latest numbers come from analysts at Congress’ nonpartisan Joint Committee on Taxation. They update a widely cited study from the Government Accountability Office that released figures on large IRAs in 2011.
The new figures show that, as of 2019, nearly 3,000 taxpayers held Roth IRAs worth at least $5 million. (The total of more than 28,000 people holding IRAs of that size includes both traditional and Roth IRAs.) The aggregate value of those Roth IRAs was more than $40 billion.
Both Wyden and Neal said in statements that the new figures show the need for reform. Neal said that “IRAs are intended to help Americans achieve long-term financial security, not to enable those who already have extraordinary wealth to avoid paying their fair share in taxes and deepen existing inequalities in our nation.” Neal said earlier this month, in the wake of the ProPublica article, that the Ways and Means Committee would draft a bill to “stop IRAs from being exploited.”
For his part, Wyden said, “As the Finance Committee continues to develop proposals to make the tax code more fair, closing these loopholes will be a top priority.” Wyden first proposed an overhaul of IRA rules to prevent the accounts from being used as large tax shelters several years ago. One reform that is being discussed would prohibit investors from putting assets that are not available to ordinary Americans, such as shares of startup companies, into retirement accounts.
Wyden and Neal’s push for reforms comes as Congress is considering bipartisan retirement legislation. The bills are being pitched as helping ordinary Americans save for retirement, including by proposing to automatically enroll workers in employer-sponsored retirement plans. But they also include perks for the retirement and financial industries, such as relaxing rules in ways that are seen as a boon for insurers. And buried deep inside the two complex bills are provisions that could make it harder for the IRS to crack down on the ultrawealthy who dodge tax rules.
by Justin Elliott, James Bandler and Patricia Callahan for ProPublica and published via Creative Commons License
They said Google’s decision to block advertisers from seeing “Black Lives Matter” and other social justice YouTube videos was the last straw
By: Aaron Sankin
Following a recent Markup investigation revealing a secret Google Ads blocklist that hides Black Lives Matter YouTube videos from advertisers—but allowed them to find videos related to “White lives matter”—some small YouTube creators have pledged to leave the platform.
“I will not post any further content on the platform,” Carrie the One, a drag queen and YouTuber with a few dozen followers, said in an email. “I hope that by walking away from YouTube, we can inspire others to join us and put enough pressure on them to change course and do better for all of us.”
“I understand it’s one of the largest media sharing sites,” wrote another streamer who goes by the name Jambo and is mostly on Twitch, “but morals matter, and theirs are not for me.”
Both said that the decision was not hard for them because they hadn’t dedicated much time to YouTube content and didn’t depend on its ad revenue for their livelihood.
Google would not comment on the defections.
The Markup’s two-part investigative series, published earlier this month, dug into the Google Ads portal that allows advertisers to pick specific YouTube videos and channels for their ads. We found that Google’s blocklist missed most of the hate terms and slogans we checked but blocked equivalent social justice terms.
When we took our findings to Google, the company blocked all but three of the hate terms, but it also increased exponentially the number of social justice terms it blocked for ad searches, eliminating advertisers’ ability to search for 83 percent of the terms on our list, including “Black excellence,” “civil rights,” and “LGBTQ.”
The Markup also found discrepancies in how different religions were treated. When we first tested the portal last November, we found that terms like “Muslim parenting” and “Muslim fashion” were blocked for searches, whereas “Christian fashion” and “Christian parenting” were not—nor were the anti-Muslim hate terms “white sharia” and “civilization jihad.”
Rather than lift its ban on phrases containing “Muslim,” Google Ads now also blocks those and other innocuous words in combination with “Christian,” “Buddhist,” and “Jewish.”
As the investigation traveled on social media last week, with thousands of people sharing posts about it, dozens tweeted that they’d had enough and would quit the platform.
We spoke to eight YouTubers who said they were quitting, each with relatively small followings of less than 2,000 YouTube subscribers apiece. They said their decisions to leave the platform reflect a desire to push back at a powerful tech company they believe has done a poor job of listening to their concerns.
“I was pretty disgusted that a platform would use such thinly-veiled tactics and exhibit such overt disregard for the experiences and voices of marginalized folks,” Carrie the One said in an email.
“We know that racism, homophobia, transphobia, xenophobia, and islamophobia exist and thrive within the systems and structures that our society operates within, but to see those same forces INTENTIONALLY employed by a platform that claims to protect the same folks they are targeting was more than I felt like I could tolerate.”
Google would not respond to The Markup’s questions for the original investigation about why terms like “Black Lives Matter” were blocked—or why it expanded the block.
In response to questions for this story, Google spokesperson Christopher Lawton said in an email: “We know that many brands want to reach audiences who are interested in social justice causes and we want our creators who make videos about these topics to thrive on YouTube.”
He added that YouTube “videos about topics like Black Lives Matter, Black culture and Black excellence, can and do monetize on YouTube, along with topics related to a wide range of social justice issues,” meaning that if advertisers can find these videos despite the block, the videos themselves can run ads.
Graham Jenkins, a video game streamer who uploads on the channel 170Out, said the revelations in The Markup’s investigation pushed him over the edge.
“It’s been on my mind to move from YouTube for a little while now,” Jenkins said in an email. “This isn’t the first time that YouTube has blocked phrases like this but allowed right-wing content to stay unchallenged. I think there was an issue where they blocked LGBT content previously, but are quite happy to allow anti-LGBT videos to remain untouched.”
He was referring to research in 2019 by a group of YouTube creators that showed the platform was systematically demonetizing videos that contained LGBTQ content. YouTube was also criticized for knowingly leaving homophobic content accessible on its platform.
Jenkins said he would stop uploading new content to YouTube as soon as he found another platform that is free for videos of any length.
“Sadly, there are currently not any other strong distribution options out there to compete with YouTube…”
— streamer who goes by the handle Glam Shatterskull
That might not be so easy. Other YouTubers told The Markup that the platform’s massive reach and ease of use made the choice to stop posting there more difficult.
“Sadly, there are currently not any other strong distribution options out there to compete with YouTube,” said a streamer who goes by the handle Glam Shatterskull and previously posted video gaming content to the platform.
“I would love to see Twitch flesh out its video production offerings,” he said. “In the meantime I will most likely be building out my own website to host video content.”
These content creators weren’t the only ones with harsh words for Google following revelations about its advertising blocklist.
The method Google used to add previously unblocked terms to its blocklist in response to our investigation makes future similar watchdog reporting impossible.
The blocked terms are now indistinguishable in the code from the responses the portal gives for gibberish. Because we now cannot know for certain which terms are blocked, as opposed to the platform not finding any related videos, Google has shielded itself from future scrutiny of its keyword blocks on Google Ads.
This didn’t sit right with Sen. Ron Wyden (D–OR), who authored legislation in 2019 that sought to require tech companies to audit their algorithms for bias.
“Google clearly has a lot of work to do to block hateful videos from advertisers,” said Wyden, who said he plans to reintroduce the bill. “Hiding how it screens those videos is exactly the wrong way to respond to legitimate reporting.”
Lawton, the Google spokesperson, declined to comment on Wyden’s criticism.
The Markup found industry fingerprints on at least five bills around the country—weak laws, experts say, that are designed to preempt stronger protections
By: Todd Feathers
Concerned about growing momentum behind efforts to regulate the commercial use of personal data, Big Tech has begun seeding watered-down “privacy” legislation in states with the goal of preempting greater protections, experts say.
The swift passage in March of a consumer data privacy law in Virginia, which Protocol reported was originally authored by Amazon with input from Microsoft, is emblematic of an industry-driven, lobbying-fueled approach taking hold across the country. The Markup reviewed existing and proposed legislation, committee testimony, and lobbying records in more than 20 states and identified 14 states with privacy bills built upon the same industry-backed framework as Virginia’s, or with weaker models. The bills are backed by a who’s who of Big Tech–funded interest groups and are being shepherded through statehouses by waves of company lobbyists.
Meanwhile, the small handful of bills that have not adhered to two key industry demands—that companies can’t be sued for violations and consumers would have to opt out of rather than into tracking—have quickly died in committee or been rewritten.
Experts say Big Tech’s push to pass friendly state privacy bills ramped up after California enacted sweeping privacy bills in 2018 and 2020—and that the ultimate goal is to prompt federal legislation that would potentially override California’s privacy protections.
“The effort to push through weaker bills is to demonstrate to businesses and to Congress that there are weaker options,” said Ashkan Soltani, a former chief technologist for the Federal Trade Commission who helped author the California legislation. “Nobody saw Virginia coming. That was very much an industry-led effort by Microsoft and Amazon. At some point, if multiple states go the way of Virginia, you might not even get companies to honor California’s [rules].”
California’s laws, portions of which don’t go into effect until 2023, create what is known as a “global opt out.” Rather than every website requiring users to go through separate opt-out processes, residents can use internet browsers and extensions that automatically notify every website that a user wishes to opt out of the sale of their personal data or use of it for targeted advertising—and companies must comply. The laws also allow consumers to sue companies for violations of the laws’ security requirements and created the California Privacy Protection Agency to enforce the state’s rules.
“Setting up these weak foundations is really damaging and really puts us in a worse direction on privacy in the U.S.,” said Hayley Tsukayama, a legislative activist for the Electronic Frontier Foundation. “Every time that one of these bills passes, Virginia being a great example, people are saying ‘This is the model you should be looking at, not California.’ ”
Amazon did not respond to requests for comment, and Microsoft declined to answer specific questions on the record.
Industry groups, however, were not shy about their support for the Virginia law and copycats around the country.
The Virginia law is a “ business and consumer friendly approach” that other states considering privacy legislation should align with, The Internet Association, an industry group that represents Big Tech, wrote in a statement to The Markup.
Big Tech’s Fingerprints Are All Over State Privacy Fights
In testimony before lawmakers, tech lobbyists have criticized the state-by-state approach of making privacy legislation and said they would prefer a federal law. Tech companies offered similar statements to The Markup.
Google spokesperson José Castañeda declined to answer questions but emailed The Markup a statement: “As we make privacy and security advancements to protect consumers, we’ll continue to advocate for sensible data regulations around the world, including strong, comprehensive federal privacy legislation in the U.S.”
But at the same time, the tech and ad industries have taken a hands-on approach to shape state legislation. Mostly, industry has advocated for two provisions. The first is an opt-out approach to the sale of personal data or using it for targeted advertising, which means that tracking is on by default unless the customer finds a way to opt out of it. Consumer advocates prefer privacy to be the default setting, with users given the freedom to opt in to certain uses of their data. The second industry desire is preventing a private right of action, which would allow consumers to sue for violations of the laws.
The industry claims such privacy protections are too extreme.
“That may be a bonanza for the trial bar, but it will not be good for business,” said Dan Jaffe, group executive vice president for government relations for the Association of National Advertisers, which has lobbied heavily in states and helped write model federal legislation. TechNet, another Big Tech industry group that has been deeply engaged in lobbying state lawmakers, said that “enormous litigation costs for good faith mistakes could be fatal to businesses of all sizes.”
Through lobbying records, recordings of public testimony, and interviews with lawmakers, The Markup found direct links between industry lobbying efforts and the proliferation of these tech-friendly provisions in Connecticut, Florida, Oklahoma, and Washington. And in Texas, industry pressure has shaped an even weaker bill.
Additionally, The Markup found a handful of states—particularly North Dakota and Oklahoma—in which tech lobbyists have stepped in to thwart efforts to enact stricter laws.
Connecticut
The path of Connecticut’s bill is illustrative of how these battles have played out. There, state Senate majority leader Bob Duff introduced a privacy bill in 2020 that contained a private right of action. During the bill’s public hearing last February, Duff said he looked out on a room “literally filled with every single lobbyist I’ve ever known in Hartford, hired by companies to defeat the bill.”
The legislation failed. Duff introduced a new version of it in 2021, and it too died in committee following testimony from interest groups funded by Big Tech, including the Internet Association and The Software Alliance.
According to Duff and Sen. James Maroney, who co-chairs the Joint Committee on General Law, those groups are now pushing a separate privacy bill, written using the Virginia law as a template. Duff said lawmakers “had a Zoom one day with a lot of big tech companies” to go over the bill’s language.
“Our legislative commissioner took the Virginia language and applied Connecticut terminology,” Maroney said.
That industry-backed bill passed through committee unanimously on March 23.
“It’s an uphill battle because you’re fighting a lot of forces on many fronts,” Duff said. “They’re well funded, they’re well heeled, and they just hire a lot of lobbyists to defeat legislation for the simple reason that there’s a lot of money in online data.”
Google has spent $100,000 lobbying in Connecticut since 2019, when Duff first introduced a consumer data privacy bill. Apple and Microsoft have each spent $124,000, Amazon has spent $116,000, and Facebook has spent $155,000, according to the state’s lobbyist reporting database.
Microsoft declined to answer questions and instead emailed The Markup links to the testimony its company officials gave in Virginia and Washington.
The Virginia model “is a thoughtful approach to modernize United States privacy law, something which has become a very urgent need,” Ryan Harkins, the company’s senior director of public policy, said during one hearing.
Google declined to respond to The Markup’s questions about their lobbying. Apple and Amazon did not respond to requests for comment.
Oklahoma
In Oklahoma, Rep. Collin Walke, a Democrat, and Rep. Josh West, the Republican majority leader, co-sponsored a bill that would have banned businesses from selling consumers’ personal data unless the consumers specifically opted in and gave consumers the right to sue for violations. Walke told The Markup that the bipartisan team found themselves up against an army of lobbyists from companies including Facebook, Amazon, and leading the effort, AT&T.
AT&T lobbyists persuaded House leadership to delay the bill’s scheduled March 2 hearing, Walke said. “For the whole next 24-hour period, lobbyists were pulling members off the house floor and whipping them.”
Walke said to try to get the bill through the Senate, he agreed to meetings with Amazon, internet service providers, and local tech companies, eventually adopting a “Virginia-esque” bill. But certain companies remained resistant—Walke declined to specify which ones—and the bill died without receiving a hearing.
AT&T did not respond to questions about its actions in Oklahoma or other states where it has fought privacy legislation. Walke said he plans to reintroduce the modified version of the bill again next session.
Texas
In Texas, Rep. Giovanni Capriglione first introduced a privacy bill in 2019. He told The Markup he was swiftly confronted by lobbyists from Amazon, Facebook, Google, and industry groups representing tech companies. The state then created a committee to study data privacy, which was populated in large part by industry representatives.
Facebook declined to answer questions on the record for this story.
Capriglione introduced another privacy bill in 2021, but given “Texas’s conservative nature,” he said, and the previous pushback, it doesn’t include any opt-in or opt-out requirement or a private right of action. But he has still received pushback from industry over issues like how clear and understandable website privacy policies have to be.
“The ones that were most interested were primarily the big tech companies,” he said. “I received significant opposition to making any changes” to the status quo.
Washington
The privacy bill furthest along of all pending bills is in Washington, the home state of Microsoft and Amazon. The Washington Privacy Act was first introduced in 2019 and was the inspiration for Virginia’s law. Microsoft, Amazon, and more recently Google, have all testified in favor of the bill. It passed the state Senate 48–1 in March.
A House committee considering the bill has proposed an amendment that would create a private right of action, but it is unclear whether that will survive the rest of the legislative process.
Other States
Other states—Illinois, Kentucky, Alabama, Alaska, and Colorado—have Virgina-like bills under consideration. State representative Michelle Mussman, the sponsor of a privacy bill in Illinois, and state representative Lisa Willner, the sponsor of a bill in Kentucky, told The Markup that they had not consulted with industry or made privacy legislation their priority during 2021, but when working with legislative staff to author the bills they eventually put forward, they looked to other states for inspiration. The framework they settled on was significantly similar to Virginia’s on key points, according to The Markup’s analysis.
The sponsors of bills in Alabama, Alaska, and Colorado did not respond to interview requests, and public hearing testimony or lobbying records in those states were not yet available.
The Campaign Against Tougher Bills
In North Dakota, lawmakers in January introduced a consumer data privacy bill that a coalition of advertising organizations called “the most restrictive privacy law in the United States.” It would have included an opt-in framework, a private right of action, and broad definitions of the kind of data and practices subject to the law.
It failed 75–19 in the House shortly after a public hearing in which only AT&T, data broker RELX, and industry groups like The Internet Association, TechNet, and the State Privacy and Security Coalition showed up to testify—all in opposition. And while the big tech companies didn’t directly testify on the bill, lobbying records suggest they exerted influence in other ways.
The 2020–2021 lobbyist filing period in North Dakota, which coincided with the legislature’s study and hearing on the bill, marked the first time Amazon has registered a lobbyist in the state since 2018 and the first time Apple and Google have registered lobbyists since the state began publishing lobbying disclosures in 2016, according to state lobbying records.
A Mississippi bill containing a private right of action met a similar fate. The bill’s sponsor, Sen. Angela Turner-Ford, did not respond to an interview request.
While in Florida, a bill that was originally modeled after California’s laws has been the subject of intense industry lobbying both in public and behind the scenes. On April 6, a Florida Senate committee voted to remove the private right of action, leaving a bill substantially similar to Virginia’s. State senator Jennifer Bradley, the sponsor of Florida’s bill, did not respond to The Markup’s request for comment.
Several bills that include opt-in frameworks, private rights of action, and other provisions that experts say make for strong consumer protection legislation are beginning to make their way through statehouses in Massachusetts, New York, and New Jersey. It remains to be seen whether those bills’ current protections can survive the influence of an industry keen to set the precedent for expected debate over a federal privacy law.
If the model that passed in Virginia and is moving forward in other states continues to win out, it will “really hamstring federal lawmakers’ ability to do anything stronger, which is really concerning considering how weak [that model] is,” said Jennifer Lee, the technology and liberty project manager for the ACLU of Washington. “I think it really will entrench the status quo in allowing companies to operate under the guise of privacy protections that aren’t actually that protective.”
This story was originally published by ProPublica.
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In 2007, Jeff Bezos, then a multibillionaire and now the world’s richest man, did not pay a penny in federal income taxes. He achieved the feat again in 2011. In 2018, Tesla founder Elon Musk, the second-richest person in the world, also paid no federal income taxes.
Michael Bloomberg managed to do the same in recent years. Billionaire investor Carl Icahn did it twice. George Soros paid no federal income tax three years in a row.
ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.
Many Americans live paycheck to paycheck, amassing little wealth and paying the federal government a percentage of their income that rises if they earn more. In recent years, the median American household earned about $70,000 annually and paid 14% in federal taxes. The highest income tax rate, 37%, kicked in this year, for couples, on earnings above $628,300.
The confidential tax records obtained by ProPublica show that the ultrarich effectively sidestep this system.
America’s billionaires avail themselves of tax-avoidance strategies beyond the reach of ordinary people. Their wealth derives from the skyrocketing value of their assets, like stock and property. Those gains are not defined by U.S. laws as taxable income unless and until the billionaires sell.
To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.
We’re going to call this their true tax rate.
The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.
It’s a completely different picture for middle-class Americans, for example, wage earners in their early 40s who have amassed a typical amount of wealth for people their age. From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period.
No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire. That’s perhaps surprising, given his public stance as an advocate of higher taxes for the rich. According to Forbes, his riches rose $24.3 billion between 2014 and 2018. Over those years, the data shows, Buffett reported paying $23.7 million in taxes.
That works out to a true tax rate of 0.1%, or less than 10 cents for every $100 he added to his wealth.
In the coming months, ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes, exploit loopholes and escape scrutiny from federal auditors.
Experts have long understood the broad outlines of how little the wealthy are taxed in the United States, and many lay people have long suspected the same thing.
But few specifics about individuals ever emerge in public. Tax information is among the most zealously guarded secrets in the federal government. ProPublica has decided to reveal individual tax information of some of the wealthiest Americans because it is only by seeing specifics that the public can understand the realities of the country’s tax system.
Consider Bezos’ 2007, one of the years he paid zero in federal income taxes. Amazon’s stock more than doubled. Bezos’ fortune leapt $3.8 billion, according to Forbes, whose wealth estimates are widely cited. How did a person enjoying that sort of wealth explosion end up paying no income tax?
In that year, Bezos, who filed his taxes jointly with his then-wife, MacKenzie Scott, reported a paltry (for him) $46 million in income, largely from interest and dividend payments on outside investments. He was able to offset every penny he earned with losses from side investments and various deductions, like interest expenses on debts and the vague catchall category of “other expenses.”
In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What’s more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.
His tax avoidance is even more striking if you examine 2006 to 2018, a period for which ProPublica has complete data. Bezos’ wealth increased by $127 billion, according to Forbes, but he reported a total of $6.5 billion in income. The $1.4 billion he paid in personal federal taxes is a massive number — yet it amounts to a 1.1% true tax rate on the rise in his fortune.
The revelations provided by the IRS data come at a crucial moment. Wealth inequality has become one of the defining issues of our age. The president and Congress are considering the most ambitious tax increases in decades on those with high incomes. But the American tax conversation has been dominated by debate over incremental changes, such as whether the top tax rate should be 39.6% rather than 37%.
ProPublica’s data shows that while some wealthy Americans, such as hedge fund managers, would pay more taxes under the current Biden administration proposals, the vast majority of the top 25 would see little change.
ProPublica is not disclosing how it obtained the data, which was given to us in raw form, with no conditions or conclusions. ProPublica reporters spent months processing and analyzing the material to transform it into a usable database.
We then verified the information by comparing elements of it with dozens of already public tax details (in court documents, politicians’ financial disclosures and news stories) as well as by vetting it with individuals whose tax information is contained in the trove. Every person whose tax information is described in this story was asked to comment. Those who responded, including Buffett, Bloomberg and Icahn, all said they had paid the taxes they owed.
A spokesman for Soros said in a statement: “Between 2016 and 2018 George Soros lost money on his investments, therefore he did not owe federal income taxes in those years. Mr. Soros has long supported higher taxes for wealthy Americans.” Personal and corporate representatives of Bezos declined to receive detailed questions about the matter. ProPublica attempted to reach Scott through her divorce attorney, a personal representative and family members; she did not respond. Musk responded to an initial query with a lone punctuation mark: “?” After we sent detailed questions to him, he did not reply.
One of the billionaires mentioned in this article objected, arguing that publishing personal tax information is a violation of privacy. We have concluded that the public interest in knowing this information at this pivotal moment outweighs that legitimate concern.
The consequences of allowing the most prosperous to game the tax system have been profound. Federal budgets, apart from military spending, have been constrained for decades. Roads and bridges have crumbled, social services have withered and the solvency of Social Security and Medicare is perpetually in question.
There is an even more fundamental issue than which programs get funded or not: Taxes are a kind of collective sacrifice. No one loves giving their hard-earned money to the government. But the system works only as long as it’s perceived to be fair.
Our analysis of tax data for the 25 richest Americans quantifies just how unfair the system has become.
By the end of 2018, the 25 were worth $1.1 trillion.
For comparison, it would take 14.3 million ordinary American wage earners put together to equal that same amount of wealth.
The personal federal tax bill for the top 25 in 2018: $1.9 billion.
The bill for the wage earners: $143 billion.
The idea of a regular tax on income, much less on wealth, does not appear in the country’s founding documents. In fact, Article 1 of the U.S. Constitution explicitly prohibits “direct” taxes on citizens under most circumstances. This meant that for decades, the U.S. government mainly funded itself through “indirect” taxes: tariffs and levies on consumer goods like tobacco and alcohol.
With the costs of the Civil War looming, Congress imposed a national income tax in 1861. The wealthy helped force its repeal soon after the war ended. (Their pique could only have been exacerbated by the fact that the law required public disclosure. The annual income of the moguls of the day — $1.3 million for William Astor; $576,000 for Cornelius Vanderbilt — was listed in the pages of The New York Times in 1865.)
By the late 19th and early 20th century, wealth inequality was acute and the political climate was changing. The federal government began expanding, creating agencies to protect food, workers and more. It needed funding, but tariffs were pinching regular Americans more than the rich. The Supreme Court had rejected an 1894 law that would have created an income tax. So Congress moved to amend the Constitution. The 16th Amendment was ratified in 1913 and gave the government power “to lay and collect taxes on incomes, from whatever source derived.”
In the early years, the personal income tax worked as Congress intended, falling squarely on the richest. In 1918, only 15% of American families owed any tax. The top 1% paid 80% of the revenue raised, according to historian W. Elliot Brownlee.
But a question remained: What would count as income and what wouldn’t? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.”
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.
Since then, the concept that income comes only from proceeds — when gains are “realized” — has been the bedrock of the U.S. tax system. Wages are taxed. Cash dividends are taxed. Gains from selling assets are taxed. But if a taxpayer hasn’t sold anything, there is no income and therefore no tax.
Contemporary critics of Macomber were plentiful and prescient. Cordell Hull, the congressman known as the “father” of the income tax, assailed the decision, according to scholar Marjorie Kornhauser. Hull predicted that tax avoidance would become common. The ruling opened a gaping loophole, Hull warned, allowing industrialists to build a company and borrow against the stock to pay living expenses. Anyone could “live upon the value” of their company stock “without selling it, and of course, without ever paying” tax, he said.
Hull’s prediction would reach full flower only decades later, spurred by a series of epochal economic, legal and cultural changes that began to gather momentum in the 1970s. Antitrust enforcers increasingly accepted mergers and stopped trying to break up huge corporations. For their part, companies came to obsess over the value of their stock to the exclusion of nearly everything else. That helped give rise in the last 40 years to a series of corporate monoliths — beginning with Microsoft and Oracle in the 1980s and 1990s and continuing to Amazon, Google, Facebook and Apple today — that often have concentrated ownership, high profit margins and rich share prices. The winner-take-all economy has created modern fortunes that by some measures eclipse those of John D. Rockefeller, J.P. Morgan and Andrew Carnegie.
In the here and now, the ultrawealthy use an array of techniques that aren’t available to those of lesser means to get around the tax system.
Certainly, there are illegal tax evaders among them, but it turns out billionaires don’t have to evade taxes exotically and illicitly — they can avoid them routinely and legally.
Most Americans have to work to live. When they do, they get paid — and they get taxed. The federal government considers almost every dollar workers earn to be “income,” and employers take taxes directly out of their paychecks.
The Bezoses of the world have no need to be paid a salary. Bezos’ Amazon wages have long been set at the middle-class level of around $80,000 a year.
For years, there’s been something of a competition among elite founder-CEOs to go even lower. Steve Jobs took $1 in salary when he returned to Apple in the 1990s. Facebook’s Zuckerberg, Oracle’s Larry Ellison and Google’s Larry Page have all done the same.
Yet this is not the self-effacing gesture it appears to be: Wages are taxed at a high rate. The top 25 wealthiest Americans reported $158 million in wages in 2018, according to the IRS data. That’s a mere 1.1% of what they listed on their tax forms as their total reported income. The rest mostly came from dividends and the sale of stock, bonds or other investments, which are taxed at lower rates than wages.
As Congressman Hull envisioned long ago, the ultrawealthy typically hold fast to shares in the companies they’ve founded. Many titans of the 21st century sit on mountains of what are known as unrealized gains, the total size of which fluctuates each day as stock prices rise and fall. Of the $4.25 trillion in wealth held by U.S. billionaires, some $2.7 trillion is unrealized, according to Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley.
Buffett has famously held onto his stock in the company he founded, Berkshire Hathaway, the conglomerate that owns Geico, Duracell and significant stakes in American Express and Coca-Cola. That has allowed Buffett to largely avoid transforming his wealth into income. From 2015 through 2018, he reported annual income ranging from $11.6 million to $25 million. That may seem like a lot, but Buffett ranks as roughly the world’s sixth-richest person — he’s worth $110 billion as of Forbes’ estimate in May 2021. At least 14,000 U.S. taxpayers in 2015 reported higher income than him, according to IRS data.
There’s also a second strategy Buffett relies on that minimizes income, and therefore, taxes. Berkshire does not pay a dividend, the sum (a piece of the profits, in theory) that many companies pay each quarter to those who own their stock. Buffett has always argued that it is better to use that money to find investments for Berkshire that will further boost the value of shares held by him and other investors. If Berkshire had offered anywhere close to the average dividend in recent years, Buffett would have received over $1 billion in dividend income and owed hundreds of millions in taxes each year.
Many Silicon Valley and infotech companies have emulated Buffett’s model, eschewing stock dividends, at least for a time. In the 1980s and 1990s, companies like Microsoft and Oracle offered shareholders rocketing growth and profits but did not pay dividends. Google, Facebook, Amazon and Tesla do not pay dividends.
In a detailed written response, Buffett defended his practices but did not directly address ProPublica’s true tax rate calculation. “I continue to believe that the tax code should be changed substantially,” he wrote, adding that he thought “huge dynastic wealth is not desirable for our society.”
The decision not to have Berkshire pay dividends has been supported by the vast majority of his shareholders. “I can’t think of any large public company with shareholders so united in their reinvestment beliefs,” he wrote. And he pointed out that Berkshire Hathaway pays significant corporate taxes, accounting for 1.5% of total U.S. corporate taxes in 2019 and 2020.
Buffett reiterated that he has begun giving his enormous fortune away and ultimately plans to donate 99.5% of it to charity. “I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing U.S. debt,” he wrote.
So how do megabillionaires pay their megabills while opting for $1 salaries and hanging onto their stock? According to public documents and experts, the answer for some is borrowing money — lots of it.
For regular people, borrowing money is often something done out of necessity, say for a car or a home. But for the ultrawealthy, it can be a way to access billions without producing income, and thus, income tax.
The tax math provides a clear incentive for this. If you own a company and take a huge salary, you’ll pay 37% in income tax on the bulk of it. Sell stock and you’ll pay 20% in capital gains tax — and lose some control over your company. But take out a loan, and these days you’ll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesn’t consider them income. Banks typically require collateral, but the wealthy have plenty of that.
The vast majority of the ultrawealthy’s loans do not appear in the tax records obtained by ProPublica since they are generally not disclosed to the IRS. But occasionally, the loans are disclosed in securities filings. In 2014, for example, Oracle revealed that its CEO, Ellison, had a credit line secured by about $10 billion of his shares.
Last year Tesla reported that Musk had pledged some 92 million shares, which were worth about $57.7 billion as of May 29, 2021, as collateral for personal loans.
With the exception of one year when he exercised more than a billion dollars in stock options, Musk’s tax bills in no way reflect the fortune he has at his disposal. In 2015, he paid $68,000 in federal income tax. In 2017, it was $65,000, and in 2018 he paid no federal income tax. Between 2014 and 2018, he had a true tax rate of 3.27%.
The IRS records provide glimpses of other massive loans. In both 2016 and 2017, investor Carl Icahn, who ranks as the 40th-wealthiest American on the Forbes list, paid no federal income taxes despite reporting a total of $544 million in adjusted gross income (which the IRS defines as earnings minus items like student loan interest payments or alimony). Icahn had an outstanding loan of $1.2 billion with Bank of America among other loans, according to the IRS data. It was technically a mortgage because it was secured, at least in part, by Manhattan penthouse apartments and other properties.
Borrowing offers multiple benefits to Icahn: He gets huge tranches of cash to turbocharge his investment returns. Then he gets to deduct the interest from his taxes. In an interview, Icahn explained that he reports the profits and losses of his business empire on his personal taxes.
Icahn acknowledged that he is a “big borrower. I do borrow a lot of money.” Asked if he takes out loans also to lower his tax bill, Icahn said: “No, not at all. My borrowing is to win. I enjoy the competition. I enjoy winning.”
He said adjusted gross income was a misleading figure for him. After taking hundreds of millions in deductions for the interest on his loans, he registered tax losses for both years, he said. “I didn’t make money because, unfortunately for me, my interest was higher than my whole adjusted income.”
Asked whether it was appropriate that he had paid no income tax in certain years, Icahn said he was perplexed by the question. “There’s a reason it’s called income tax,” he said. “The reason is if, if you’re a poor person, a rich person, if you are Apple — if you have no income, you don’t pay taxes.” He added: “Do you think a rich person should pay taxes no matter what? I don’t think it’s germane. How can you ask me that question?”
Skeptics might question our analysis of how little the superrich pay in taxes. For one, they might argue that owners of companies get hit by corporate taxes. They also might counter that some billionaires cannot avoid income — and therefore taxes. And after death, the common understanding goes, there’s a final no-escape clause: the estate tax, which imposes a steep tax rate on sums over $11.7 million.
ProPublica found that none of these factors alter the fundamental picture.
Take corporate taxes. When companies pay them, economists say, these costs are passed on to the companies’ owners, workers or even consumers. Models differ, but they generally assume big stockholders shoulder the lion’s share.
For some of the nation’s wealthiest people, particularly Bezos and Musk, adding corporate taxes to the equation would hardly change anything at all. Other companies like Berkshire Hathaway and Walmart do pay more, which means that for people like Buffett and the Waltons, corporate tax could add significantly to their burden.
It is also true that some billionaires don’t avoid taxes by avoiding incomes. In 2018, nine of the 25 wealthiest Americans reported more than $500 million in income and three more than $1 billion.
In such cases, though, the data obtained by ProPublica shows billionaires have a palette of tax-avoidance options to offset their gains using credits, deductions (which can include charitable donations) or losses to lower or even zero out their tax bills. Some own sports teams that offer such lucrative write-offs that owners often end up paying far lower tax rates than their millionaire players. Others own commercial buildings that steadily rise in value but nevertheless can be used to throw off paper losses that offset income.
Michael Bloomberg, the 13th-richest American on the Forbes list, often reports high income because the profits of the private company he controls flow mainly to him.
In 2018, he reported income of $1.9 billion. When it came to his taxes, Bloomberg managed to slash his bill by using deductions made possible by tax cuts passed during the Trump administration, charitable donations of $968.3 million and credits for having paid foreign taxes. The end result was that he paid $70.7 million in income tax on that almost $2 billion in income. That amounts to just a 3.7% conventional income tax rate. Between 2014 and 2018, Bloomberg had a true tax rate of 1.30%.
In a statement, a spokesman for Bloomberg noted that as a candidate, Bloomberg had advocated for a variety of tax hikes on the wealthy. “Mike Bloomberg pays the maximum tax rate on all federal, state, local and international taxable income as prescribed by law,” the spokesman wrote. And he cited Bloomberg’s philanthropic giving, offering the calculation that “taken together, what Mike gives to charity and pays in taxes amounts to approximately 75% of his annual income.”
The statement also noted: “The release of a private citizen’s tax returns should raise real privacy concerns regardless of political affiliation or views on tax policy. In the United States no private citizen should fear the illegal release of their taxes. We intend to use all legal means at our disposal to determine which individual or government entity leaked these and ensure that they are held responsible.”
Ultimately, after decades of wealth accumulation, the estate tax is supposed to serve as a backstop, allowing authorities an opportunity to finally take a piece of giant fortunes before they pass to a new generation. But in reality, preparing for death is more like the last stage of tax avoidance for the ultrawealthy.
University of Southern California tax law professor Edward McCaffery has summarized the entire arc with the catchphrase “buy, borrow, die.”
The notion of dying as a tax benefit seems paradoxical. Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code.
Then comes the estate tax, which, at 40%, is among the highest in the federal code. This tax is supposed to give the government one last chance to get a piece of all those unrealized gains and other assets the wealthiest Americans accumulate over their lifetimes.
It’s clear, though, from aggregate IRS data, tax research and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates. Many of the richest create foundations for philanthropic giving, which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they die.
Wealth managers offer clients a range of opaque and complicated trusts that allow the wealthiest Americans to give large sums to their heirs without paying estate taxes. The IRS data obtained by ProPublica gives some insight into the ultrawealthy’s estate planning, showing hundreds of these trusts.
The result is that large fortunes can pass largely intact from one generation to the next. Of the 25 richest people in America today, about a quarter are heirs: three are Waltons, two are scions of the Mars candy fortune and one is the son of Estée Lauder.
In the past year and a half, hundreds of thousands of Americans have died from COVID-19, while millions were thrown out of work. But one of the bleakest periods in American history turned out to be one of the most lucrative for billionaires. They added $1.2 trillion to their fortunes from January 2020 to the end of April of this year, according to Forbes.
That windfall is among the many factors that have led the country to an inflection point, one that traces back to a half-century of growing wealth inequality and the financial crisis of 2008, which left many with lasting economic damage. American history is rich with such turns. There have been famous acts of tax resistance, like the Boston Tea Party, countered by less well-known efforts to have the rich pay more.
One such incident, over half a century ago, appeared as if it might spark great change. President Lyndon Johnson’s outgoing treasury secretary, Joseph Barr, shocked the nation when he revealed that 155 Americans making over $200,000 (about $1.6 million today) had paid no taxes. That group, he told the Senate, included 21 millionaires.
“We face now the possibility of a taxpayer revolt if we do not soon make major reforms in our income taxes,” Barr said. Members of Congress received more furious letters about the tax scofflaws that year than they did about the Vietnam War.
Congress did pass some reforms, but the long-term trend was a revolt in the opposite direction, which then accelerated with the election of Ronald Reagan in 1980. Since then, through a combination of political donations, lobbying, charitable giving and even direct bids for political office, the ultrawealthy have helped shape the debate about taxation in their favor.
One apparent exception: Buffett, who broke ranks with his billionaire cohort to call for higher taxes on the rich. In a famous New York Times op-ed in 2011, Buffett wrote, “My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.”
Buffett did something in that article that few Americans do: He publicly revealed how much he had paid in personal federal taxes the previous year ($6.9 million). Separately, Forbes estimated his fortune had risen $3 billion that year. Using that information, an observer could have calculated his true tax rate; it was 0.2%. But then, as now, the discussion that ensued on taxes was centered on the traditional income tax rate.
In 2011, President Barack Obama proposed legislation, known as the Buffett Rule. It would have raised income tax rates on people reporting over a million dollars a year. It didn’t pass. Even if it had, however, the Buffett Rule wouldn’t have raised Buffett’s taxes significantly. If you can avoid income, you can avoid taxes.
Today, just a few years after Republicans passed a massive tax cut that disproportionately benefited the wealthy, the country may be facing another swing of the pendulum, back toward a popular demand to raise taxes on the wealthy. In the face of growing inequality and with spending ambitions that rival those of Franklin D. Roosevelt or Johnson, the Biden administration has proposed a slate of changes. These include raising the tax rates on people making over $400,000 and bumping the top income tax rate from 37% to 39.6%, with a top rate for long-term capital gains to match that. The administration also wants to up the corporate tax rate and to increase the IRS’ budget.
Some Democrats have gone further, floating ideas that challenge the tax structure as it’s existed for the last century. Oregon Sen. Ron Wyden, the chairman of the Senate Finance Committee, has proposed taxing unrealized capital gains, a shot through the heart of Macomber. Sens. Elizabeth Warren and Bernie Sanders have proposed wealth taxes.
Aggressive new laws would likely inspire new, sophisticated avoidance techniques. A few countries, including Switzerland and Spain, have wealth taxes on a small scale. Several, most recently France, have abandoned them as unworkable. Opponents contend that they are complicated to administer, as it is hard to value assets, particularly of private companies and property.
What it would take for a fundamental overhaul of the U.S. tax system is not clear. But the IRS data obtained by ProPublica illuminates that all of these conversations have been taking place in a vacuum. Neither political leaders nor the public have ever had an accurate picture of how comprehensively the wealthiest Americans avoid paying taxes.
Buffett and his fellow billionaires have known this secret for a long time. As Buffett put it in 2011: “There’s been class warfare going on for the last 20 years, and my class has won.”
The online giant bans products related to drugs, spying and weapons, but we found plenty for sale; one of the items bought on the site left a grim trail of overdoses
By: Annie Gilbertson and Jon Keegan
Eric Falkowski said he made an easy living working a few hours a week making counterfeit prescription opioids before some two-dozen people overdosed and the authorities caught up with him.
He mixed fentanyl with active ingredients from Xanax and Tylenol and pressed the compound into pills that looked like Percocet, he said, down to the exact color and markings.
Where did he get the equipment? According to federal court records and Falkowski himself: Amazon.com.
“I purchased two pill presses on there. I also purchased the pill press dies, which are the molds to shape the pills and imprint them with whatever number they need be,” Falkowski said in a phone interview from prison, where he is serving a 22-year sentence for crimes connected to his counterfeit drug business.
“You search under the code on the pill … and it’ll just come up,” he added. “It really wasn’t that complex.”
Two people died after taking Falkowski’s pills, and another woman was found dead from an overdose on the property where he kept his makeshift lab, according to officials, law enforcement documents, and autopsy reports. More than 20 others were sickened by the pills but survived.
“Someone could wipe out a whole town” with these “poisonous pills,” said Derrick Helton, a former sheriff’s deputy for Rutherford County, Tenn., where the mass overdose took place. One of the fatalities was his sister Tiffanie Scott, a 33-year-old mother of a young daughter.
Amazon bans pill presses used to make prescription drugs. They’re included among 38 pages of third-party seller rules and prohibitions for its U.S. marketplace.
Yet an investigation by The Markup found that Amazon fails to properly enforce that list, allowing third-party sellers to put up and sell banned items.
Alongside its third-party marketplace, Amazon sells products to consumers directly, and The Markup found it was also selling banned items itself, revealing cracks in the largely automated purchasing system that feeds its massive product catalog.
We found nearly 100 listings for products that the company bans under its categories of drugs, theft, spying, weapons and other dangerous items, a virtual back alley where mostly third-party sellers peddle prohibited goods, some of which are used for illicit and potentially criminal activities.
Amazon’s Choice?
The Markup filled a shopping cart with a bounty of banned items: marijuana bongs, “dab kits” used to inhale cannabis concentrates, “crackers” that can be used to get high on nitrous oxide, and compounds that reviews showed were used as injectable drugs.
We found two pill presses and a die used to shape tablets into a Transformers logo, which is among the characters that have been found imprinted on club drugs such as ecstasy. We found listings for prohibited tools for picking locks and jimmying open car doors. And we found AR-15 gun parts and accessories that Amazon specifically bans.
Almost three dozen listings for banned items were sold by third parties but available to ship from Amazon’s own warehouses. At least four were listed as “Amazon’s Choice.”
The phrase “ships from and sold by Amazon.com” appeared beneath the buy button of five of the banned items we found, which two former employees confirmed means those products are, in fact, sold by Amazon. In addition, one of the sellers we were able to reach also confirmed it sold the items to Amazon.
Many of the items we found had been up for sale for months, some with positive reviews showing they had been sold, including some of the items sold directly by Amazon.
And Amazon led us right to the prohibited listings. When we typed “bong” into the website’s search bar, autocomplete suggestions included “bongs for smoking weed.” When we typed “pill press,” autocomplete suggested “pill press for making pills xanax.”
In a written statement to The Markup, Amazon spokesperson Patrick Graham said the company has “proactive measures in place to prevent suspicious or prohibited products from being listed,” and that the company stopped more than six billion “suspected bad listings” from posting last year, repeating the company’s remarks to Congress earlier this year.
“If products that are against our policies are found on our site, we immediately remove the listing, take action on the bad actor, and further improve our systems,” he said.
Graham did not respond directly to many of our specific questions, including how many of the banned items that The Markup found had been sold, why the company had not noticed some of them for months, why some were listed as Amazon’s Choice, and why many were stored in Amazon’s warehouses for shipment.
He did not respond at all to questions about why Amazon itself had offered banned items for sale.
Most of the banned listings we reported to Amazon have been removed, although at least three have popped back up.
The company removed the six specific terms that we mentioned from autocomplete, according to Graham, who said that feature is informed by “similar searches by other customers.” He wouldn’t say whether the company also removed all other banned items from autocomplete.
Graham also declined to explain why the company chose to allow 13 listings for banned items that we reported to the company to remain for sale. These products were specifically named as banned in Amazon’s rules, met the U.S. Department of Justice’s definition of drug paraphernalia, or were confirmed by two weapons experts to be a gun part or tool. Two of them were items that Amazon sells itself.
In addition to the nearly 100 listings for banned items we found for sale in the U.S. marketplace, we found several pill presses for sale on Amazon’s Canadian marketplace that were available for shipment to the United States. Amazon took them down after we reported them to the company, including a $4,100 TDP 5 Desktop Tablet Press, one of the models Falkowski used.
“Almost dead”
Michael “Shane” Shipley, 39, a native of Rutherford County, Tenn., was one of the people who died after taking Falkowski’s fake pills. He’d worked his entire adult life operating machinery at a local factory.
“I couldn’t even tell you what my dad’s death has done to my family,” his daughter Brittany Conway said in an interview.
Within a day of her father’s death, Conway said, she woke up in a hospital bed herself. She didn’t realize her father had slipped the counterfeit pills into his prescription bottle of Percocet at home and, distraught with grief, she had taken what she thought was a safe medication to help her relax.
“I went from up, talking—to almost dead,” Conway said.
Graham said Amazon’s policies allowed pill press sales when Falkowski was making counterfeit drugs in 2016. He declined comment on the overdoses and said, speaking in general, that the company is not responsible for harm from third-party product sales.
“We are not liable for those products because we do not make, distribute, or sell those products,” he said. He said that also applies to third-party products that are fulfilled by Amazon, which charges sellers to store and ship their items.
The company has successfully shielded itself from legal liability for harm caused by third-party products sold on its website by invoking Section 230 of the federal Communications Decency Act, which states websites are not responsible for third-party content that appears on their sites.
Last year, one federal appeals court ruled that Amazon may shoulder liability for a customer’s injuries from a defective product sold on its site, in part because the company “enables third-party vendors to conceal themselves from the customer, leaving customers injured by defective products with no direct recourse to the third-party vendor.”
Three million third parties from across the globe are now selling on Amazon’s platforms, according to e-commerce intelligence firm Marketplace Pulse. And third-party sellers have fueled the company’s explosive growth for years, according to a 2019 report to shareholders. Last year, Amazon third-party sales reportedly topped $200 billion—a sum that rivals the annual GDP of New Zealand.
Will It “Kill Someone?”
Multiple current and former employees, most of whom asked not to be named for fear of retaliation, said the company struggles to oversee that army of independent sellers.
“Because sellers have the ability to upload items themselves to the website, it makes it very difficult to police all of that without hindering the ability to do business,” said a former member of the product safety team who left the company in 2018. “Amazon knows there’s tons and tons and tons of stuff that shouldn’t be on the website.
“We basically would categorize risks based on their severity,” the former employee added. “Will this product injure or kill someone? Is it high legal risk?”
An Amazon executive acknowledged in the statement to Congress earlier this year that “bad listings” get through but said the company is working to shore up the slippage of “counterfeits, unsafe products, and other types of abuse” by requiring sellers of certain items to be preapproved, partnering with brands to pull counterfeits, and enhancing “proactive” tools to spot problems.
Yet Amazon’s sellers’ tools sometimes help, rather than hinder, the listing of banned items, The Markup found.
When we opened a new seller account and started listing a bong for sale, Amazon suggested we list it as a vase in home decor. We never posted it.
Last month, we successfully listed two banned items for sale: an AR-15 10-round magazine and an AR-15 armorer’s wrench. We removed them within minutes of confirming they had posted. We were able to evade detection by Amazon’s automated filters by purchasing a universal product code for the magazine and by both avoiding specific keywords and miscategorizing the items.
The listings went up even though we had no seller history and had already twice been prohibited from listing the same items using more precise descriptions.
Graham declined to comment on why we were able to post these items but said Amazon’s sellers’ tools “suggest listing categories to help sellers easily categorize their products, but sellers are responsible for choosing the correct category, as they know their products best.” He also declined to comment on why the tools suggested an incorrect product category for listing bongs.
Other media have exposed Amazon’s lax product controls, including three reports just last year: a CNN investigation that documented dangerous child car seats, a CNBC report that revealed Amazon was shipping expired food and baby formula, and a Wall Street Journal investigation that found thousands of unsafe, banned, and deceptively labeled products on the site.
Graham said Amazon investigated these “with urgency” and sought to improve systems when needed but gave no specifics.
Consumer advocates say the company isn’t doing enough to protect the public, and regulators need to step in.
“It’s clear there’s not a major prioritization or investment in resources in policing the terms of service or ensuring that prohibited products are not sold,” said Lori Wallach, a director at the nonprofit organization Public Citizen. “It may be more profitable to have the ‘wild, wild west’ of sales, but it’s also much more dangerous for consumers.”
“We categorically disagree with this claim,” Graham replied.
Automating Enforcement
When Rachel Johnson Greer joined Amazon in 2010 as a product safety program manager, she said she found many problematic products for sale, from unapproved treatments of erectile dysfunction to illegal police radar jammers.
“They were up for sale and selling happily away on Amazon,” Greer said.
She said some troubling products were sold directly by Amazon itself, which she and others said relies on a mostly automated purchasing process.
“Ships and sold by Amazon is Amazon. This is how it all started,” said Greer, who worked for the company until 2017. “They built algorithms to figure out which books they needed to buy and then how much.”
It was Greer’s job to put an end to sketchy sales, she said. Her team wrote programs to flag undesirable products and amassed a universe of terms to feed an automated policing system. She said the tool eventually could scan billions of line items in the catalog in about five minutes.
But it proved flawed, she said. The system by its nature was confined to known threats—things it had seen before. Greer said new problems emerged all the time and slipped right through initial safeguards, only to be flagged by customers after something went wrong.
“The biggest problem with Amazon’s system to begin with is that nearly everything is reactive,” she said. “The reality is when you have a system that relies on finding defects per million, that means that there will always be defects.”
She said some third-party sellers devised “clever, tricky ways to list products. And these rules couldn’t catch it because they hadn’t been written by a human who was thinking in clever, tricky ways.”
One current employee of the restricted products team wearily put it like this: “No matter how much we remove, there’s always more.”
Graham did not directly respond to these descriptions of the company’s difficulties in keeping restricted items off the site. Instead, he said more generally that Amazon strives “to make sure that all products in our store are safe” and “we continuously monitor the products sold in our stores.”
Yet we found an unproven treatment to fight cancer with electromagnetic frequencies that is banned by Amazon’s policies—a rife machine—had been on the site for five years. The listing was removed after we contacted Amazon.
While most of the specific banned listings we brought to Amazon’s attention were removed, similar items that we did not report to the company remained live, including some listings by the same third-party sellers.
Many of the sellers of the banned items that we found continued to sell banned products, including Lead and Steel, which sold gun accessories, and another company, which sold a compound that reviewers said they used as injectable drugs. When we asked Amazon about this in follow-up questions, those storefronts disappeared from Amazon.com.
Graham denied that injectable drugs were sold on its platform, saying they were not sold for that purpose but rather marketed for “research” in the listing. Of the two compounds we found, the World Anti-Doping Agency designates one, TB-500, as a “prohibited substance,” and the U.S. Anti-Doping Agency warned athletes about the risks of the second one, BPC-157, as not approved for human use. Customer reviews on the listing showed people were injecting the product.
Graham said the company removed the listings and would add them to its banned product list “out of an abundance of caution.” But as of publication, both compounds could be found for sale by other sellers on Amazon.com.
Amazon isn’t the only online retailer that has had to grapple with policing the unruly world of third-party e-commerce, where just about anybody can sell just about anything. Falkowski said he bought some of his drug-making supplies on another site.
Some marketplaces are known for thoroughly reviewing products before they go up.
Apple, which offers mobile apps from third-parties, checks the code before any app or update appears in the App Store, for instance. According to its site, Apple uses a combination of automated systems and hundreds of human experts speaking a total of 81 languages to review them before posting.
“We take responsibility for ensuring that apps are held to a high standard for privacy, security, and content,” Apple’s website states, “because nothing is more important than maintaining the trust of our users.”
Amazon’s users appear to know exactly what they’re buying, even when banned products are lightly disguised.
Lead and Steel listed a gunsmithing tool for an AR-15 as a “paperweight desk organizer,” posting a photo of the vise block holding paper clips and erasers.
Customers joined in on the ruse in reviews. “Helps when you need to do a hands free clean up of your desktop,” wrote one. “Locks items solidly into place, will Load plenty of paper clips or tacks.”
Another customer retorted, “Sorry. I’m not playing along. I can buy AR-15 parts all day on Amazon.”
To go along with the vise block, Amazon’s “frequently bought together” tool suggested other gunsmithing tools, showing at least one of Amazon’s automated systems received signals that it was not an office product.
Graham, the Amazon spokesperson, declined to explain why the items were still for sale, even though the “frequently bought together” tool seemed to recognize they were related to firearms.
Lead and Steel, which declined to be interviewed for this story, had sold at least four dozen vise blocks from that posting since it went up in December, according to reviews, until we reported it to Amazon, which pulled the listing.
On the Hunt for Honey Oil Equipment
Vic Massenkoff, a retired fire investigator from Contra Costa County, Calif. said he tried years ago to get Amazon to take down dangerous equipment—but said he was frustrated by what he sees as the company’s inaction.
He said he’d seen too many fires caused by the process of extracting highly potent hash oil, or “honey oil,” from marijuana using butane and in 2013 decided to investigate where the equipment could be found for sale. He said he found it on Amazon.com.
“There it was lined up, everything from the extraction tubes, to the grams digital scales, to the silicone pads, the silicone containers, to the digital thermometers,” Massenkoff said. “Everything you would need to set up shop.”
When he clicked on a listing for the glass tubes, Amazon’s recommendation engine suggested he buy the other items needed to make and use hash oil. He kept screenshots of the suggestions.
“There is no safe way to make butane honey oil,” he said in an interview.
He said he emailed Amazon from his work email to alert the company to the danger. He still remembers the reply: “Thanks for bringing this to our attention. We have assigned it to someone on our staff to research this.”
He said he got one other email from Amazon and then heard nothing.
Graham, the Amazon spokesperson, declined to say how the company handled Massenkoff’s complaint, for which he said The Markup had provided no “evidence.”
Amazon’s current rules ban the sale of equipment to make hash oil; we were able to find it on the site.
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“This story was originally published by ProPublica.”
The shoreline communities of Ocean County, New Jersey, are a summertime getaway for throngs of urbanites, lined with vacation homes and ice cream parlors. Not exactly pastoral — which is odd, considering dozens of Paycheck Protection Program loans to supposed farms that flowed into the beach towns last year.
As the first round of the federal government’s relief program for small businesses wound down last summer, “Ritter Wheat Club” and “Deely Nuts,” ostensibly a wheat farm and a tree nut farm, each got $20,833, the maximum amount available for sole proprietorships. “Tomato Cramber,” up the coast in Brielle, got $12,739, while “Seaweed Bleiman” in Manahawkin got $19,957.
None of these entities exist in New Jersey’s business records, and the owners of the homes at which they are purportedly located expressed surprise when contacted by ProPublica. One entity categorized as a cattle ranch, “Beefy King,” was registered in PPP records to the home address of Joe Mancini, the mayor of Long Beach Township.
“There’s no farming here: We’re a sandbar, for Christ’s sake,” said Mancini, reached by telephone. Mancini said that he had no cows at his home, just three dogs.
All of these loans to nonexistent businesses came through Kabbage, an online lending platform that processed nearly 300,000 PPP loans before the first round of funds ran out in August 2020, second only to Bank of America. In total, ProPublica found 378 small loans totaling $7 million to fake business entities, all of which were structured as single-person operations and received close to the largest loan for which such micro-businesses were eligible. The overwhelming majority of them are categorized as farms, even in the unlikeliest of locales, from potato fields in Palm Beach to orange groves in Minnesota.
The Kabbage pattern is only one slice of a sprawling fraud problem that has suffused the Paycheck Protection Program from its creation in March 2020 as an attempt to keep small businesses on life support while they were forced to shut down. With speed as its strongest imperative, the effort run by the federal Small Business Administration initially lacked even the most basic safeguards to prevent opportunists from submitting fabricated documentation, government watchdogs have said.
While that may have allowed millions of businesses to keep their doors open, it has also required a massive cleanup operation on the backend. The SBA’s inspector general estimated in January that the agency approved loans for 55,000 potentially ineligible businesses, and that 43,000 obtained more money than their reported payrolls would justify. The Department of Justice, relying on special agents from across the government to investigate, has brought charges against hundreds of individuals accused of gaming pandemic response programs.
Drawn by generous fees for each loan processed, Kabbage was among a band of online lenders that joined enthusiastically in originating loans through their automated platforms. That helped millions of borrowers who’d been turned down by traditional banks, but it also created more opportunities for cheating. ProPublica examined SBA loans processed by several of the most prolific online lenders and found that Kabbage appears to have originated the most loans to businesses that don’t appear to exist and the only concentration of loans to phantom farms.
In some cases, these problems would’ve been easy to spot with just a little more upfront diligence — which the program’s structure did not encourage.
“Pushing this through financial institutions created some pretty bad incentives,” said Naftali Harris, the CEO of Sentilink, which helps lenders detect potential identity theft. “This is definitely a case where companies that decided they wanted to be more careful in terms of giving out loans were penalized for doing so.”
Presented with ProPublica’s findings, SBA inspector general spokeswoman Farrah Saint-Surin said that her office had hundreds of investigations underway, but that she did “not have any information to share or available for public reporting at this time.” Reuters reported that federal investigators were probing whether Kabbage and other fintech lenders miscalculated PPP loan amounts, and the DOJ declined to confirm or deny the existence of any investigation to ProPublica.
Kabbage, which was acquired by American Express last fall, did not have an explanation for ProPublica’s specific findings, but it said it adhered to required fraud protocols. “At any point in the loan process, if fraudulent activity was suspected or confirmed, it was reported to FinCEN, the SBA’s Office of the Inspector General and other federal investigators, with Kabbage providing its full cooperation,” spokesman Paul Bernardini said in an emailed statement.
As soon as the pandemic swept across America, Kabbage was in trouble.
The online lending platform had launched in 2009 as part of a generation of financial technology companies known as “non-banks,” “alternative lenders” or simply “fintechs” that act as an intermediary between investors and small businesses that might not have relationships with traditional banks. Based in Atlanta, it had become a buzzy standout in the city’s tech scene, offering employees Silicon Valley perks like free catered lunches and beer on tap. It advertised its mission as helping small businesses “acquire funds they need for their big breaks,” as a recruiting video parody of Michael Jackson’s “Thriller” put it in 2016.
The basic innovation behind the burgeoning fintech industry is automating underwriting and incorporating more data sources into risk evaluation, using statistical models to determine whether an applicant will repay a loan. That lower barrier to credit comes with a price: Kabbage would lend to borrowers with thin or checkered credit histories, in exchange for steep fees. The original partner for most of its loans, Celtic Bank, is based in Utah, which has no cap on interest rate, allowing Kabbage to charge more in states with stricter regulations.
With backing from the powerhouse venture capital firm SoftBank, Kabbage had been planning an IPO. Its model foundered, however, when Kabbage’s largest customer base — small businesses like coffee shops, hair salons and yoga studios — was forced to shut down last March. Kabbage stopped writing loans, even for businesses that weren’t harmed by the pandemic. Days later, it furloughed more than half of its nearly 600-person staff and faced an uncertain future.
The Paycheck Protection Program, which was signed into law as part of the CARES Act on March 27, 2020, with an initial $349 billion in funding, was a lifeline not just to small businesses, but fintechs as well. Lenders would get a fee of 5% on loans worth less than $350,000, which would account for the vast majority of transactions. The loans were government guaranteed, and processors bore almost no liability, as long as they made sure that applications were complete.
At first, encouraged by the Treasury Department, traditional banks prioritized their own customers — an efficient way to process applications with little fraud risk, since the borrowers’ information was already on file. But that left millions of the smallest businesses, including independent contractors, out to dry. They turned instead to a collection of online lenders that have sprung up offering short-term loans to businesses: Kabbage, Lendio, Bluevine, FundBox, Square Capital and others would process applications automatically, with little human review required.
For the platforms, this was also easy money. In the first funding round that ran out last August, Kabbage completed 297,587 loans totaling $7 billion. It received 5% of each loan it made directly and an undisclosed cut of the proceeds for those it processed for banks; its total revenue was likely in the hundreds of millions of dollars. A lawsuit filed by a South Carolina accounting firm alleges that Kabbage was among several lenders that refused to pay fees to agents who helped put together applications, even though the CARES Act had said they could charge up to 1% of the smaller loans (a provision that was later reversed). For Kabbage, that revenue kept the company alive while it sought a buyer.
“For all of these guys, it was like shooting fish in a barrel. If you could do the minimum amount of due diligence required, you could fill up the pipeline with these applications,” said a former Kabbage executive, one of four former employees interviewed by ProPublica. They spoke on the condition of anonymity to avoid retaliation at their current jobs or from industry giant American Express.
To handle the volume, Kabbage brought back laid-off workers starting at $15 an hour. When that failed to attract enough people, they increased the hourly rate to $35, and then $40, and awarded gift cards for reaching certain benchmarks, according to a former employee with visibility into the loan processing. “At a certain point, they were like, ‘Yes, get more applications out and you’ll get this reward if you do,’” the former employee said. (Bernardini said the company did not offer incentive compensation.)
In a report on its PPP participation through last August, Kabbage boasted that 75% of all approved applications were processed without human review. For every 790 employees at major U.S. banks, the report said, Kabbage had one. That’s in part because traditional banks, which also take deposits, are much more heavily regulated than fintech institutions that just process loans. To participate in the PPP, fintechs had to quickly set up systems that could comply with anti-money laundering laws. The human review that did happen, according to two people involved in it, was perfunctory.
“They weren’t saying, ‘Is this legitimate?’ They were just saying, ‘Are all the fields filled out?’” said another former employee. As acquisition talks proceeded, the employee noted, Kabbage managers who held the most company stock had a built-in incentive to process as many loans as possible. “If there’s anything suspicious, you can pass it along to account review, but account review was full of people who stood to make a lot of money from the acquisition.”
One situation in which Kabbage approved a suspicious loan became public in a Florida lawsuit filed by a woman, Latoya Clark, who received more than $1 million in PPP loans to three businesses. When the funds were deposited into accounts at JPMorgan Chase, the bank discovered that Clark’s businesses hadn’t been incorporated before the PPP program’s cutoff and froze the accounts. Clark sued Chase, and Chase then filed a counterclaim against the borrower and Kabbage, which had originated the loan despite its questionable documentation. In its response, Kabbage said it had not yet completed its investigation of the incident.
Although the Justice Department rarely names lenders that processed fraudulent PPP applications, Kabbage has been named at least twice. One case involved two loans worth $1.8 million to businesses that submitted forged information, and the other involved a business that had inflated its payroll numbers and submitted a similar application to U.S. Bank, which flagged authorities. Kabbage had simply approved the $940,000 loan. American Express’ Bernardini declined to comment further on pending litigation.
Shortly after the application period for PPP’s first round closed on Aug. 8, American Express announced the Kabbage purchase. But the transaction included none of Kabbage’s loan portfolios, either from the PPP or its pre-pandemic conventional loans. The PPP loans had either been sold to SBA-approved banks or bought by the Federal Reserve. Bernardini wouldn’t say which banks now own the loans, however, and said that no potentially fraudulent loans had been pledged to the Fed.
In April, an Ocean County, New Jersey, resident contacted ProPublica after seeing his name attached to a Kabbage loan for a nonexistent “melon farm.” To see whether it was an isolated incident, ProPublica took basic information the government released after a Freedom of Information Act lawsuit by ProPublica and others and compared it with state business entity registries. Although registries don’t pick up all sole proprietorships and independent contractors, the absence of a name is an indication that the business might not exist.
As it turned out, Kabbage had made more than 60 loans in New Jersey to unlisted businesses. Fake farms also showed up repeatedly in the SBA’s Economic Injury Disaster Loan Program, according to reports from localnewsoutlets.
A common tie became apparent when the resident of the home to which one nonexistent business was registered said that he was a client of the certified public accountants at Ciccone, Koseff & Company. In March 2020, the firm notified its clients of what it called an “ultimately unsuccessful ransomware attack” that occurred the previous month. According to information filed with Maine’s attorney general, the attackers acquired Social Security numbers and financial information.
Several other clients of the accounting firm, including Mancini, the Long Beach mayor, also had loans registered to their addresses. Reached by phone, firm founder Ray Ciccone declined to comment.
But that CPA’s data breach didn’t account for all of the suspicious loans ProPublica found across the country. Searches for PPP applicants that didn’t show up in state registration records yielded hundreds in 28 more states, with dense clusters in Florida, Nebraska and Virginia. Other lenders had nonexistent businesses as well, but fake farms only showed up in Kabbage loans. Most followed a distinctive naming convention, with part of the name of a resident or former resident of the home to which the business is registered, plus a random agricultural term.
Some of the fake loans listed addresses of people who’d also legitimately applied for their businesses. Hartington, Nebraska, anesthesiologist Bruce Reifenrath received a PPP loan for his practice in nearby Yankton, South Dakota. That’s why the idea of one being approved for a “potato farm” was so strange. “We did a PPP loan last spring and it’s pretty extensive, the documentation,” Reifenrath said.
Reifenrath was part of a cluster of dubious Kabbage loans in Hartington that also included the home of J. Scott Schrempp, the president of the Bank of Hartington, who confirmed that he did not own a strawberry farm. Schrempp said he had noticed the fake loan, and reported it to the SBA.
The SBA data only reflects approved applications received from lenders, some of which are then caught and not funded. The SBA also periodically updates its dataset to remove loans canceled by lenders. But none of the suspicious loans pulled by ProPublica show undisbursed funds, and they all have remained in the dataset for more than eight months.
One possible mechanism for the invented businesses is a technique known as synthetic identity theft, in which a criminal obtains pieces of personally identifiable information — such as a home address, a Social Security number and a birthdate — and combines it with fake information to build a credit profile. The associated bank account then routes to the fraudster, not the owner of the original information.
None of the residents of the phony farms ProPublica contacted were getting notices that they needed to repay the loans they didn’t apply for, because they didn’t get any money. But that doesn’t mean they’re not at risk, according to James Lee, chief operating officer at the Identity Theft Resource Center.
“Just having an address linked to your name on a fraudulent loan can impact your credit,” Lee said. It can also pose problems for pre-employment background checks, insurance applications or new identification documents like passports and driver’s licenses.
Meanwhile, if not corrected, the fabricated identities will stay in circulation and become better at fooling other financial institutions. “Those records get built into the credit and authentication systems used by government and commercial entities,” Lee said. “Each next time they are used and authenticated, the more ‘real’ they become. That’s what makes synthetic identity fraud so insidious.”
This, however, is largely not Kabbage’s problem anymore.
After its huge blitz of PPP loans last summer, Kabbage had hundreds of thousands of borrowers whose loans would need to be serviced until they were closed out. The loans could either be forgiven, if the borrower demonstrated that they spent most of the money on payroll, or paid back with interest. But American Express didn’t acquire the part of Kabbage’s business that owned those loans. Instead, a separate entity called K Servicing would handle loan forgiveness and take applications for a second PPP draw that Congress funded in December. The servicer is led by former Kabbage employees and its website looks very similar to Kabbage’s, but American Express says it has no affiliation.
If Kabbage was understaffed for the volume of PPP loans it took on before the acquisition, the situation has apparently worsened since then. Reddit, Yelp, Consumer Affairs, Trustpilot, Facebook and Better Business Bureau threads are replete with complaints from customers whose applications were denied or who received no communication from the company. When the SBA changed the rules in February to make the program more generous to independent contractors, K Servicing couldn’t incorporate the new forms into its processing system. So it told all new applicants to apply through another company, SmartBiz, which had operated as a mostly online processor of SBA loans even before the pandemic.
K Servicing is run by Kabbage’s former head of program management, Laquisha Milner, who also runs her own consulting firm. “Due to extenuating circumstances beyond our control, currently, our processing function is delayed,” Milner emailed in response to detailed questions from ProPublica. “We are relentlessly exploring all available options to ensure our existing customers are able to maximize their loan forgiveness.”
Jennifer Dienst is a freelance travel and events writer who received her first-draw loan from Kabbage and wants to apply for forgiveness before her window for doing so closes in the fall, but she has been stymied by K Servicing’s failure to make the forms available. “Please be patient with us as we prepare for the new forms,” a message on the loan portal reads.
Meanwhile, Dienst’s account has started accruing interest, which Milner said will not be charged if the loan is forgiven. But it’s making Dienst nervous.
“It’s always the same response from K Servicing — we’re updating our forgiveness forms and they’ll be made available soon,” Dienst said. “They’ve been saying that for months.”
Journalists have used scrapers to collect data that rooted out extremist cops, tracked lobbyists, and uncovered an underground market for adopted children
By: The Markup Staff
The fruits of web scraping—using code to harvest data and information from websites—are all around us.
Scrapers are also the tools of watchdogs and journalists, which is why The Markup filed an amicus brief in a case before the U.S. Supreme Court this week that threatens to make scraping illegal.
The case itself—Van Buren v. United States—is not about scraping but rather a legal question regarding the prosecution of a Georgia police officer, Nathan Van Buren, who was bribed to look up confidential information in a law enforcement database. Van Buren was prosecuted under the Computer Fraud and Abuse Act (CFAA), which prohibits unauthorized access to a computer network such as computer hacking, where someone breaks into a system to steal information (or, as dramatized in the 1980s classic movie “WarGames,” potentially start World War III).
In Van Buren’s case, since he was allowed to access the database for work, the question is whether the court will broadly define his troubling activities as “exceeding authorized access” to extract data, which is what would make it a crime under the CFAA. And it’s that definition that could affect journalists.
Or, as Justice Neil Gorsuch put it during Monday’s oral arguments, lead in the direction of “perhaps making a federal criminal of us all.”
Investigative journalists and other watchdogs often use scrapers to illuminate issues big and small, from tracking the influence of lobbyists in Peru by harvesting the digital visitor logs for government buildings to monitoring and collecting political ads on Facebook. In both of those instances, the pages and data scraped are publicly available on the internet—no hacking necessary—but sites involved could easily change the fine print on their terms of service to label the aggregation of that information “unauthorized.” And the U.S. Supreme Court, depending on how it rules, could decide that violating those terms of service is a crime under the CFAA.
“A statute that allows powerful forces like the government or wealthy corporate actors to unilaterally criminalize newsgathering activities by blocking these efforts through the terms of service for their websites would violate the First Amendment,” The Markup wrote in our brief.
What sort of work is at risk? Here’s a roundup of some recent journalism made possible by web scraping:
The COVID tracking project, from The Atlantic, collects and aggregates data from around the country on a daily basis, serving as a means of monitoring where testing is happening, where the pandemic is growing, and the racial disparities in who’s contracting and dying from the virus.
This project, from Reveal, scraped extremist Facebook groups and compared their membership rolls to those of law enforcement groups on Facebook—and found a lot of overlap.
The Markup’s recent investigation into Google’s search results found that it consistently favors its own products, leaving some websites from which the web giant itself scrapes information struggling for visitors and, therefore, ad revenue. The U.S. Department of Justice cited the issue in an antitrust lawsuit against the company.
In Copy, Paste, Legislate, USA Today found a pattern of cookie-cutter laws, pushed by special interest groups, circulating in legislatures around the country.
A secretive algorithm that’s constantly being tweaked can turn influencers’ accounts, and their prospects, upside down
By: Dara Kerr
It was the middle of the pandemic, and Mason McClellan had just started his first semester of college in Georgia. He was stuck at home, learning remotely, and had more time than expected on his hands. So, one night he made a few short videos loosely based on small-town news stories and posted them to TikTok.
“I made five videos in the first day, went to sleep, and then ended up with 50,000 followers out of nowhere,” McClellan said. “Then I was like, ‘I gotta make more videos now.’ ”
He kept going. Over the next three days, he made several more videos and amassed one million followers—a major milestone in the world of TikTok. Views on his videos continued to tick up throughout the fall, and several million more followers streamed in. McClellan began to make money off his account, roughly $500 a week, but then, in January, it took an unexpected turn—he started hemorrhaging followers, losing roughly 200,000 in a matter of weeks.
“Since Jan. 18, I haven’t had a day that I’ve gained followers,” McClellan said. “Before late February, even my followers weren’t seeing my videos.”
McClellan hadn’t taken time off, posted taboo content, or altered the style of his videos. On his side of things, nothing had changed. And he isn’t alone: Jan. 18 was a pivotal day for many TikTok creators who say they saw inexplicable drops in followers.
No other platform can provide the explosive virality that TikTok is known for—Charli D’Amelio became famous for casual dance routines on the app and now has her own TV show, and rapper Lil Nas X credits TikTok for the meteoric rise of his song “Old Town Road.” Who goes viral is largely dictated by a discovery-based system in which TikTok’s algorithm puts together an endless “For You” feed where viewers spend most of their time picking and choosing who to follow.
Unlike YouTube, Instagram, and Snapchat, which depend on creators building a network of followers, TikTok’s algorithm can put videos at the top of the For You scroll and turn people into overnight sensations. But similarly, if videos suddenly disappear from that feed, creators’ prospects can evaporate. Those people who’ve centered their lives around performing on the app can be left trying to figure out how to stay relevant on an impenetrable, constantly changing platform. The growing industry around TikTok resembles the promise and callousness of early Hollywood—burgeoning creativity, swift fame, and little by way of worker protections—except that instead of studios creating stars, it’s a faceless, inscrutable machine.
“What is so incredibly precarious is often the [algorithmic] tweaks that are unannounced. They can wreak havoc on a creator’s livelihood,” said Brooke Erin Duffy, associate professor of communication at Cornell University, who studies social media and digital labor. “There’s always been this unpredictability, and creators have little to no recourse.”
TikTok spokesperson Hilary McQuaide declined to comment on questions about the company’s algorithm, specifically how often it’s changed and if creators are told about such changes.
The private company, which is owned by China’s ByteDance, arrived in the U.S. in 2018 and is estimated to be valued at around $50 billion. TikTok has acknowledged the mystery around its algorithm. Last June, it wrote a blog post about how the For You page generally works, saying it shows people videos based on their stated interests, such as pets or travel, and how they engage with certain videos and accounts.
A few months earlier, TikTok announced the launch of its Transparency and Accountability Center, saying experts would be able to observe its moderation policies in real time and examine the code that drives its algorithm.
McQuaide declined to comment on questions about the center but pointed The Markup to a September blog post that says nearly two dozen experts and lawmakers virtually visited the center and were guided through various demonstrations on TikTok’s safety and security practices.
Meanwhile, creators say they still feel largely left on their own.
“The TikTok algorithm is very opaque,” McClellan said. “You have to post O.K. content, but after that it’s really just random chance that your videos are going to blow up.”
Shadow Bans, Algorithm Tweaks, and Censorship
Jan. 18—the day many TikTok creators reported a sudden drop in followers—has gained some infamy in the networks creators use to trade complaints and insights into the mysteries of the algorithm. One Reddit forum directly discusses the “myths and questions about the Jan 18 suppression” with theories about a possible unannounced tweak to the algorithm.
Speculation also points to what creators call “shadow banning,” which is the belief that TikTok silences accounts without explanation. With shadow banning, nothing changes in what creators see, but they’re invisible to most everyone else.
Rumors around shadow banning are rife on TikTok, with nearly six billion videos hashtagged with #shadowbanned and more than 300 million with #unshadowbanme. YouTube tutorials, Quora forums, and entire websites are filled with tips and tricks for people hoping to get rid of TikTok shadow bans. The “Tiktokhelp” subreddit even has a popular topic tag titled “algorithm question/shadowbanned,” which is filled with thousands of comments about supposed shadow bans and advice on how to avoid them.
Cameron Hickey, project director for algorithmic transparency at the National Conference on Citizenship, studies the spread of disinformation on TikTok and other social media platforms and believes all of these sites do some sort of algorithmic downgrading. Instagram, Twitter, and YouTube have also been accused of shadow bans.
“Are they shadow-banning? I’m sure of it,” Hickey said. “How do we prove it? We don’t know.”
One of the reasons shadow-banning myths have especially taken off on TikTok could be that the company appears to be more proactive in content moderation than other social media platforms.
“They are taking down individual content from creators, and we see creators constantly complaining about that. It says to me that they’re much more aggressive and they seem less beholden to a very strict set of criteria,” Hickey said. “Facebook’s default is to let stuff stay on the platform. TikTok seems to be the opposite.”
TikTok bans violent extremism, hateful behavior, adult nudity, and more. In its community guidelines, it says it enforces its rules “using a mix of technology and human moderation.” Additionally, for videos that “could be considered upsetting or depict things that may be shocking to a general audience—we may reduce discoverability, including by redirecting search results or limiting distribution in the For You feed.”
TikTok’s McQuaide declined to comment on questions about content moderation, Jan. 18, or shadow banning.
Last May, Black TikTok creators organized a protest against the company, saying their content was being shadow-banned and censored. TikTok denied those claims. Then, in late May, just after the killing of George Floyd and the hashtag #BlackLivesMatter surged across all social media, TikTok admitted to a glitch in its system and made a rare apology.
“At the height of a raw and painful time, last week a technical glitch made it temporarily appear as if posts uploaded using #BlackLivesMatter and #GeorgeFloyd would receive 0 views,” TikTok’s U.S. general manager Vanessa Pappas and director of creator community Kudzi Chikumbu wrote in a June 1 blog post. They explained the glitch was a display issue, and the posts still generated billions of views. “Nevertheless, we understand that many assumed this bug to be an intentional act.”
The incident happened just months after The Intercept got hold of internal documents from TikTok that outlined what seems to be a clear example of shadow banning. The documents instructed moderators to exclude creators with “ugly facial looks,” “abnormal body shape,” “too many wrinkles,” and other physical features from the For You feed because they could “decrease the short-term new user retention rate.” TikTok responded to The Intercept saying those guidelines were an attempt to prevent bullying and were no longer in use.
Dopamine Hits and Trying to Make It
Tinuade Oyelowo watched the conversations around Black creators feeling marginalized at the same time she was starting to get into TikTok herself. The Brooklyn-based artist’s goal was to promote her work and to come off as a body-positive Black woman and spread that vibe to others. Her first video shows her skateboarding along a river waterfront, and when she loses her balance, she flashes a thumbs up. But Oyelowo hasn’t experienced the same rapid success as McClellan.
“It felt like crawling up on my bare hands to get 500 [followers],” Oyelowo said. “To get to 500 was really really difficult. I was posting and posting videos.”
At first, she tried all the tricks to get views and followers, like a 30-day video challenge and “follow trains” in which creators promise to follow whoever follows them. She even joined a private Facebook group led by a marketer who promised to reveal the secret to success on TikTok. “And then things just naturally started to pick up without me doing anything,” Oyelowo said.
She said seeing those pings roll in on her videos gave her the dopamine hits that social media is known for. “It is definitely addictive,” Oyelowo said. “I would argue it’s not even the likes that are the addiction, it’s the validation and the feeling of being seen.”
Duffy, the associate professor at Cornell, said this idea of being seen is hardwired into the way TikTok works. “For content creators, their livelihoods depend upon their ability to get visibility,” Duffy said. “With this entire system, it extracts labor. And more specifically, it extracts labor to direct attention to the platform.”
Christian Barnes, of St. Louis, has steadily grown his TikTok audience since last summer and now has 1.5 million followers. Many of his videos involve comical skits in which a quiet school kid surprises his teacher and classmates with unexpected dance moves or musical skills. He posts about four times a week, and each video takes roughly three hours to create and upload. He shoots and edits the videos at night once he comes home from his day job waiting tables. It can be exhausting, he said. So, a couple of months ago he decided to take a three-day break.
“You definitely get tired sometimes and lose motivation,” Barnes said. “That’s why I decided to take a break that one time. I was like, ‘This is too much for me.’ ”
When he started uploading videos again, he noticed they were getting fewer views than normal. Trying everything he could think of, such as interacting with his followers and posting consistently, he got his audience back. But it took weeks. To this day, Barnes has no idea what happened.
“There are a lot of times I go out of town and I’m scared I’ll lose views if I’m not uploading videos all the time,” he said.
Despite that, Barnes said he enjoys making videos and hopes to one day parlay his work on TikTok into a full-time job. On a good week, he’ll make a couple hundred dollars from TikTok’s creator fund, which the company set up last July as a way for popular creators to earn money from video views. He’s also sponsored by a water bottle company and color contact lens maker and uses their products as props in his videos.
Chasing the Pot of Gold
Barnes doesn’t yet have an agent, but over the past year, it’s become common for Hollywood talent agencies to sign TikTok stars. They promote creators and act as middlemen in making deals with brands. D’Amelio, for example, is repped by United Talent Agency, which has managed actors like Johnny Depp and Angelina Jolie. A3 Artists Agency’s roster lists around 200 digital creators, including Avani Gregg, who has 33 million followers and Larray, who has 23 million. With such massive audiences, TikTok creators can be good at bringing in money.
“As an agency, we get paid when they get paid,” said Keith Bielory, an A3 partner in alternative programming, digital media, licensing, and branding. “This could be a lucrative industry for years and years to come.”
A3 helps influencers in every area except growing their TikTok fanbase. In the instances when the algorithm seems to be causing a drop in followers, Bielory said, he’ll reach out to his TikTok contacts for insight into what’s happening. Ultimately, however, it’s up to the influencers to keep up engagement.
“A lot of people can go viral, but can they back that up?” Bielory said. “The folks that we work with create content for a living. It’s a lot of pressure to keep that going.”
Tha Lights Global, a smaller talent agency that focuses on hip-hop artists, has represented influencers for years. One of the first dance memes to go viral on social media was from two Detroit rappers the agency represented, Zay Hilfigerrr and Zayion McCal, who came out with “Juju on That Beat” in 2016. Jordan Tugrul, co-owner of Tha Lights Global, said influencers he works with can spend hours a day creating TikTok videos. One of the agency’s goals is get them to think beyond the social media platform.
“They’re going against thousands of other people their age who want to be in the spotlight as well,” Tugrul said. “TikTok might not be around forever, and you cannot rely on that.”
“The influencer space is still often referred to as the ‘wild wild west’, and it’s a place where creators can be taken advantage of,” Gabrielle Carteris, the union’s president, wrote in an email to The Markup. “This agreement is there to help empower and give self-determination to influencers, who are oftentimes trying to navigate their professional careers without much guidance—they’re true pioneers in this space.”
For now, SAG-AFTRA is focused on helping creators negotiate with brands and doesn’t yet assist in dealings with TikTok or other social media platforms. But, Carteris said, “This agreement is just a first step; we’re always exploring what is needed in this community.”
Despite their ups and downs on TikTok, McClellan and Barnes still regularly make videos and don’t plan to stop anytime soon. For Oyelowo, the novelty has worn off.
She has more than 1,000 followers and still likes making videos for fun but posts just once a week, at best. Spending hours trying to tap into what’s trending and scouring her Facebook group for advice is tiring, she said, especially given the whims of TikTok’s algorithm.
“You invest time in it because it’s this odd mystery puzzle,” Oyelowo said. “With algorithms, in theory, there is a potential solution, there is a way to figure it out—everybody is chasing that pot of gold in some way. But it’s a moving target.”
