Republicans and business lobbyists are waging war against the tax provisions in Democrats’ big budget bill. Don’t listen to them.
The bill could also modestly reduce prices over the long run — even if, yes, the “inflation-reducing” power of this “Inflation Reduction Act” has been overstated.
The bill’s weak spot, at least politically, lies in how it will raise revenue to pay for everything. Republicans are trying to peel off the inscrutable Sen. Kyrsten Sinema (D-Ariz.), who wields a critical vote in the 50-50 Senate, by falsely claiming that middle-class taxpayers will foot the bill. Or that the economy will collapse.
Or something similarly horrific.
In reality, the tax-side changes are so narrow that relatively few people should even notice. Even the biggest chunk of the revenue raisers — on megacorporations — is effectively only a partial clawback of the huge GOP corporate tax cuts passed in 2017.
“If you’re not a tax cheat, hedge fund manager or a corporation making over $1 billion, you’re not affected,” summarizes Steven M. Rosenthal, a senior fellow at the Tax Policy Center.
Let’s go through the measures one by one.
First, the bill would give money to the IRS, mostly for enforcement but also for customer service and IT modernization. This may sound like an expense, but it’s really a long-overdue investment: Beefing up the IRS enables the agency to identify and collect tax bills already owed, and it encourages more voluntary compliance.
The bill’s second key tax measure would narrow the carried interest loophole. Under current law, managers of private equity and other investment funds can pay taxes on some of their earnings at capital gains rates, rather than at the higher rates at which ordinary labor income is taxed.
This means wealthy investment managers can pay much lower tax rates than their receptionists. The loophole’s continued existence serves no discernible public interest.
Sinema, who has received a lot of donations from the finance industry, reportedly objected to similar measures last year and is expected to do so again. This is unfortunate. Relatively little money ($14 billion) is at stake, though. So if Democrats do cut the provision to appease Sinema, the rest of the bill won’t obviously fall apart.
Finally, there’s the biggest and most controversial provision, which raises $313 billion: a so-called book corporate minimum tax.
Right now, some megacompanies pay zero in corporate income taxes, despite telling shareholders they brought in big bucks, because there are different rules for how profits are calculated for financial markets vs. for tax purposes. Under this bill, companies that report at least $1 billion in profits to shareholders must pay at least 15 percent of that amount in taxes (with some carveouts and other adjustments).
This has obvious political appeal: It doesn’t seem fair that companies get to report one set of profits to investors (typically, the largest possible number) and another to Uncle Sam for tax purposes (the smallest possible number).
But there are drawbacks to this approach. For example, it effectively creates two parallel corporate tax systems, and the one we already have is complicated enough. It would also disproportionately affect the manufacturing industry, which benefits from a key tax break that would become less valuable.
There are more efficient, less convoluted ways to wring money out of these companies. For example, Congress could raise the standard corporate income tax rate. Or it could pare some of those generous tax breaks it has doled out over the years, which have enabled corporations to grind down their tax liabilities in the first place.
Unfortunately, Sinema has already ruled out rate hikes. And Congress is notoriously bad at rescinding specific tax deductions and credits. “Congress gives out tax breaks like candy,” says Kimberly Clausing, a former Biden Treasury Department official. “It becomes hard to say ‘no lollipop for you, no Skittles for you,’ even as everyone’s teeth are rotting.”
Given the constraints, this is the best corporate tax revenue tool left standing. Even the 10th-best solution is still a solution — and one worth seizing when the future of the planet is at stake.