The Inflation Reduction Act Advances Key Tax Issues
By Robert Stewart
In this period of frequent political stalemate, Congress accomplished a great feat on the passage of the Inflation Reduction Act (IRA) on Friday August 12, 2022—a reconciliation package aimed at addressing the inflation that has caused economic uncertainty for many Americans still recovering from the pandemic’s stressors. By investing in climate change remedies, much-needed drug pricing reforms, and ensuring profitable corporations are paying their fair share means that this package is a huge step forward for the country.
This policy win was due to the Senate’s ability to use the reconciliation budget process that allows tax and spend policies used in this special vehicle to be passed by a simple majority. That’s just what happened when all 50 Senate Democrats voted in favor of the measure, with Vice President Harris casting the tie-breaking vote. The House approved the Senate’s version of the reconciliation package today and now it moves to President Biden’s desk.
Public Citizen is particularly pleased on the progressive tax elements of the bill that move the needle toward tax fairness. Our organization has long advocated that corporations should pay their fair share of taxes and the 15% corporate minimum tax on the largest corporations is a step in the right direction. There are vast differences between what lucrative corporations report to their shareholders as income and what they report to the IRS. In fact, in many instances, income reported to the IRS by these corporations is significantly less due to methods to reduce their taxable income through deductions and tax credits. This concept of book income (income reported to shareholders) vs taxable income (income reported to taxing authorities) explains the disparities between the types of income. A well circulated report highlighted how 55 profitable corporations paid nothing in federal taxes in 2020. This 15% corporate minimum tax in the IRA would address tax avoidance of corporations that earn more than $1 billion per year and ensure that these profitable entities pay at minimum 15% on their book profits and is expected to raise over $313 billion in revenue over 10 years.
Public Citizen and our allies in the tax fairness community are also thrilled that in the IRA package there will nearly $80 billion appropriated to the IRS for enforcement, taxpayer services and enhanced technology. What’s more, these audits will be targeted to addressing the tax gap and focusing on higher net worth individuals and large corporations. In fact, IRS Commissioner Retting went on record stating that the additional funding to the IRS, taxpayers making less than $400,000 would not see increased audit rates, contrary to assertions made by conservatives. The wealthy are responsible for 70% of the underreporting in taxable income and because of previous cuts to enforcement agents available for complex audits, IRS has been auditing lower income Americans at the same level as the top 1%, a glaring unfairness that will end after passage of the IRA. These investments in the IRS will not only ensure everyone is paying what they owe, but it will also generate about $124 billion in revenues for the U.S. over the next decade.
Unfortunately to appease moderate Sens. Manchin and Sinema, not all of the proposals that had been included in the stalled House-passed version of a reconciliation bill titled “Build Back Better” made it into the final senate-passed version of tax and spending legislation, such as surtax on millionaires. And, during the senate negotiations, a push to further limit the carried interest loophole, which allows investment fund managers to pay only about half the rate of tax on their income as regular workers are required to pay, was quashed by Sen. Sinema. However, during the back-and-forth negotiations before the Senate passage of the Inflation Reduction Act on Sunday, a 1% excise tax on stock buybacks was included in the package. This is an important reform that will help ensure corporations are not artificially inflating the value of their stock so as to pay out richer bonuses to their well-heeled executives.
Public Citizen’s members and supporters help make the Inflation Reduction Act reality. Not only will the historic climate investments and important health benefits make our country stronger, the tax elements of the bill will make the nation fairer as well. We look forward to building on the successes of this legislation and working to increase congressional attention on tax policies that did not make it into the final compromise bill.