Not sure why this obvious fact is being down-voted. The comments above don't mention that the killer feature of private orgs is the ease of exit, and therefore, the enormous risk of failure. This remains the dominant feature of private orgs, even if we can argue about certain orgs on the margin. For every example of "users are locked into either the Apple or the Android phone platform", I can think of several crappy Google and Apple products which failed and were withdrawn from the market (e.g. Google Wave).
It is much easier to exit from or steer a private org. For example, it is very possible to run a company which caters to 10 percent of a consumer base by providing niche products which may be slightly more expensive. Those 10 percent will simply consume less of some other good. It is very difficult to do an analogous thing at the state level, because we generally don't get individual "ticket books" which we can "spend" on more of one state service vs. another. The democratic model is that you first get 50+ percent support and then your coalition decides how resources are allocated for almost everyone.
Here, I think some lawmakers probably thought (a) "if someone can use this tool that well, then more power to him", or (b) I don't like it, but it is so unlikely, and I can probably live with it.
I don't think it was a scenario of someone failing to "consider the case."
Sure, if you can reproduce the input and if you agree that it is misuse. This is a scenario where we don't know the formula to create $5B, and and there is no consensus that it ("making an extremely successful investment in a tax shelter") is misuse.
> Is it in the interest of the US to pay Thiel to put his money in a Roth? How much should the US pay? How many of your tax dollars would you want to go to funding tax breaks for Thiel?
I submit that yes, it is in the interest of the US to do this, provided that Thiel is creating value for the US (and to some extent the world) with that money. $5B is approximately one day of US government spending (maybe less now). Letting Thiel invest $5B may not be the best investment decision that the USG has ever made (e.g. Internet funding, Telsa support), but it is way higher than the mean decision.
When you create a tax shelter, someone always asks "what if someone uses this to create an enormous amount of wealth"? This is not just true for the US tax code, but has been true for probably every tax code in history. When that question is raised, the first thing to contemplate is how likely it is to occur. And if it is not considered likely, then this risk is accepted.
Fuzzing may be a good analogy. Fuzzing can be used to test POST request processing when the logic is too complicated to validate via more formal means. We try a large sample of inputs. If they pass, then the test passes, even though we cannot be confident that the code will handle every input string correctly.
I disagree with ProPublica's take. If it was as simple as "pay just fractions of a penny per share... watch as all the gains..." then we would all do it. Not just with Roth IRAs, but with our entire portfolios. The reason we don't all do this is because startups are very very risky. Some people will succeed and walk away with windfalls. Other people will lose their shirts. If there was arbitrage, there would be a an "app for that" and there would be more billionaires walking around.
If they intended something else, then why didn't they write the rules to reflect "else"? The truth is that they didn't think that any Roth IRA investor would be as successful as Thiel. He showed that he can be. Good for him.
I can think of two reasons:
(1) It was not his own company when the IRA made the investment. That is, the IRA invests alongside other investors at the founding. Anyone who wants to buy shares at 0.01 is able to do so. He is not dictating some special price that only he gets.
(2) If some investors create an SPV to invest in PayPal (e.g. to limit liability), then his IRA becomes an investor in that SPV. He loses management control over that portion of the investment, but when the SPV sells its PayPal shares, it distributes the cash to all investors, including to the IRA.
Does anyone know whether this kind of tax planning is available to today's startup investors? Are there any administrators which support this kind of illiquid investment?
If you start from "democratically elected governments exist to make the world a better place," then you're going to end up somewhere wrong. Even in the best of times, democratically elected governments exist to give the majority power over the minority. This is considered an improvement over other forms of government, where often a minority had power over a majority and treated them poorly.
There are actually some "fundamental distinctions" between government and business. For example, most governments (democratic or not) are slow, monolithic, and effectively immortal. Since governments have tax and police authority, they can survive bad periods, including those caused by their own errors, for longer periods of time. Most businesses do not have tax and police authority and must face the market test on a daily basis. The businesses that fail the test typically die and new businesses replace them.