The Senate passed the Inflation Reduction Act of 2022 as part of the budget reconciliation process. The law project allocate more than $300 billion to encourage clean energy generation and fight climate change, expands Affordable Care Act grants created at the height of the pandemic, and gives Medicare limited powers to negotiate drug prices. prescription drugs. But the bill’s changes to the tax code are the most significant because they go to the heart of how the Cut Inflation Act would reduce the federal deficit and therefore could help curb inflation.
The tax changes brought about by the Inflation Reduction Act consist of a minimum corporate tax of 15% and an excise tax of 1% on share redemptions. The bill originally contained a provision that narrowed the carried interest loophole, which only benefits private equity and hedge fund managers, but Sen. Kyrsten Sinema (D-AZ) made reference to the interest shown. deleted of the bill as a condition of his support.
The minimum tax of 15% on books
The 15% corporate minimum is a “book tax” on the published financial statements of corporations with annual profits over $1 billion. Companies are currently required to pay a 21 percent federal income tax, subject to tax credits and deductions that have enabled fifty-five of the largest, highly profitable U.S. corporations to pay $0 in federal income tax these last years. Tax credits and deductions create discrepancies in how corporations report income to the IRS versus how they report that same income to shareholders. If the corporate tax burden ends up being less than 15 percent after calculating such credits or deductions, and only in this circumstancethey would face the 15 percent “accounting minimum” instead of 21 percentage rate.
The Joint Committee on Taxation estimated, before Democrats compromised on the provision, that the 15 minimum percentage would increase $313 billion over ten years. That estimate may have gotten too optimistic after the Senate passed an amendment exempt companies financed by private equity from the book tax.
At least $40 billion in savings will be lost through another Sinema amendment, which exempt “accelerated depreciation” from the company’s minimum. Businesses will retain the ability to claim larger write-offs for impairment on an earlier schedule than if those deductions were spread over the normal life of an asset. Accelerated depreciation accounted for just over 50 percent of the “total tax relief” granted to twenty major companies, from Google and Amazon to JPMorgan Chase and United Airlines. However, on the 15 The book tax percentage always positively influences how corporations calculate their liabilities, especially if they claim depreciation benefits early and pay closer to 15 % the following years.
Despite the compromises, the 15 The accounting minimum tax percentage ensures that corporate income tax has a firmer floor that makes it nearly impossible for large corporations to have a $0 tax bill, or possibly a negative bill. Reviews argue that the accounting minimum tax would encourage companies to underreport their income to shareholders. In fact, taxing the books is more likely to improve financial reporting by giving investors an accurate account of a company’s true after-tax income. Under-reporting of income in financial statements is less likely than over-reporting, the most common problem in which companies defraud investors by exaggerating their growth. A tax on the books would discourage this latter type of manipulation because corporations would not overestimate their profits to shareholders if they wanted to avoid paying a higher proportion of taxes (15 percent of a greater whole).
Excise tax on redemptions
The Inflation Reduction Act levies a 1 percentage of excise tax on share buybacks, which is expected to increase $74 billion turnover over ten years. When corporations buy back their own shares, they increase the price of the shares and indirectly enrich the shareholders instead of paying dividends. Redemptions allow some shareholders to reduce their tax liability by ensuring they are taxed at the capital gains rate and allow all shareholders to defer taxes by not realizing any capital income.
Redemptions increased significantly after Trump’s tax cuts, corporate taxes fell from 35% to 21%. Larger companies have mostly decided to buy back their shares with the tax savings they could have invested in new products, or spent on hiring and raising salaries. The new excise tax will impose a modest fee on redemptions, which certainly would not end this practice; a financial analyst refers to to tax as “a 1 percentage of salami slice removed from the top” of redemptions. But if the tax even slightly discourages takeovers, it would ultimately be a victory for workers and the real economy.
Opponents of a buy-in tax Argue that it would penalize “mom-and-pop investors as much as institutional investors”. Yet stock buybacks themselves hurt long-term investors by prioritizing artificial short-term stock price gains over reinvesting profits in workers and innovation. That’s why Sen. Elizabeth Warren (D-MA) called buyouts a “high in sugar.”
Companies listed on the S&P 500 put 51 % of their earnings toward buyouts between 2004 and 2013, according to UMass economist William Lazonick. Lazonick claims the buybacks amount to handling of the stock market because the practice places “value extraction” above “value creation”, and concludes that only the latter can benefit the whole economy. 1 percentage of the excise tax will not systematically shift corporate incentives to value creation rather than buyouts, but it is progressive to recognize that companies should compensate the public for externalities arising from buyouts.
The Cut Inflation Act was a compromise from the start, replacing the more ambitious Build Back Better Act. Recent negotiations have meant the Inflation Reduction Act has been further reduced in a way that has blocked meaningful proposals, such as tightening (and one day ending) the interest-bearing loophole. . But on the 15th percent of minimum tax on books and 1 percent of the excise tax on redemptions will generate billions in revenue by creating a fairer tax burden for businesses.