J. Scott Applewhite/AP Photo
Senate Majority Leader Chuck Schumer talks to reporters about the agreement reached with Sen. Joe Manchin, July 28, 2022.
The surprisingly progressive tax provisions of the Manchin-Schumer deal allowed Democrats to unite behind the artfully titled Inflation Reduction Act. The new revenues finance both new climate investments and $300 billion of deficit reduction over a decade as a sop to fiscal conservatives.
These deficit cuts will do little to cut inflation, which is being driven mainly by other forces. The deficit is already projected to come down by $1.7 trillion this year alone. The genuinely anti-inflation parts of the bill are the provisions that will reduce drug costs to consumers, plus the clean-energy tax credits. But I digress.
The best part of the revenue provisions is the corporate minimum tax. Closely modeled on a plan first proposed by Sen. Elizabeth Warren, the measure requires corporations to pay taxes of at least 15 percent on profits that they report to their shareholders, not on “profits” as characterized by creative accounting. This provision will raise $313 billion over a decade.
The reform covers only corporations reporting over $1 billion in annual income—about 150 of America’s largest. When the deal was first reported, skeptics wondered whether it was too good to be true. Would the fine print allow for deductions that would bring the effective tax rate well below the nominal 15 percent?
In fact, the bill allows no room for bogus deductions. It allows legitimate tax credits such as renewable energy and low-income housing, but not manipulation of depreciation and other ploys widely used by big corporations to cut their tax obligations to zero.
The other major revenue-raiser in the package is more funding for the IRS. If anything, the $124 billion revenue projection from better tax enforcement is way low. The government fails to collect many hundreds of billions of dollars, owed but untaxed, because tax-evasion gimmicks become more brazen and more convoluted every year.
Virtually all this lost revenue is from very high-income people and partnerships. The Republican/corporate strategy has been to underfund, and overwhelm, the IRS.
A third provision reforms the long-abused provision that allows private equity compensation to be taxed at lower capital gains rates rather than as ordinary income. Private equity companies, which claim to employ 227,000 people in Arizona, have put a full-court press on Kyrsten Sinema to block this provision.
Closing this so-called carried interest loophole is long overdue. But this part of the reform raises only $14 billion over a decade. Even if the fickle and conflicted Sinema were to make it a deal-breaker (and let’s hope she doesn’t), the rest of the package is well worth enacting.
Of all the improbable outcomes this year, genuine progress on climate financed by genuine tax reform, and co-sponsored by Joe Manchin no less, had to be one of the most fanciful. But here we are. Maybe good things will happen in November, too.
