Can Democrats finally rally behind the Inflation Reduction Act?

After over a year of dead ends, false starts, and frustrating negotiations, it looks like Democrats may finally be close to passing a reconciliation bill. Last week, Senate Majority Leader Chuck Schumer and Senator Joe Manchin reached an agreement on a new reconciliation package, the Inflation Reduction Act of 2022, a shocking development considering that Manchin publicly voiced his opposition to such a package just two weeks ago.

We’re going to run through the main tax provisions of the bill, but here are the three main things you should know as the Senate gears up to hopefully pass it.

  1. It’s not over yet – While Manchin is by all accounts totally on board with this plan, his partner in obstructing Democrats over the last year, Senator Kyrsten Sinema, won’t say what she thinks of it. In the past, Sinema has publicly voiced her aversion to one of the main tax provisions of the bill – changing the carried interest loophole – just like what she’s done with other tax proposals that would adversely impact her ultra-rich, corporate donors. Without her on board, this bill won’t pass.
  2. This is nowhere near enough – Democrats came into 2021 with ambitious plans to tax the rich, and out of control growth in billionaire wealth only made those plans more necessary. But as time has gone by, their Tax the Rich agenda has shrunk dramatically, leaving only a few pieces left in the Inflation Reduction Act. Congress has a lot more to do if it wants to actually make our tax code fair.
  3. It’s still a big win – This might not be our ideal bill, but it’s far, far better than what we expected Congress to be able to pass just a week ago. There are a lot more changes our tax code needs, but making giant corporations, private equity fund managers, and illegal tax cheats pay more is a clear-cut win.

With all that said, let’s dive into the bill’s three new major tax initiatives: a 15% corporate minimum tax, an extension of the carried interest loophole investment holding period, and a boost in funding to the IRS.

15% corporate minimum tax

Thanks to the 2017 Tax Cuts and Jobs Act signed into law by Donald Trump, the current corporate tax rate sits at a paltry 21%. That rate is much, much too low, but the sad reality of our tax code is that many major corporations in America get away with paying taxes far below this rate. In 2020, no fewer than 55 corporations – including big-box names like Nike, FedEx, and Salesforce – actually managed to get away with paying nothing in corporate taxes, despite raking in billions in profits.

The Inflation Reduction Act would take a step in righting this wrong by instituting a 15% alternative minimum tax for corporations with average annual income exceeding $1 billion. It’s not a perfect solution – it differs in some critical ways from the 15% global minimum tax that over 130 OECD countries agreed upon last year – but it nonetheless would be a first step in stopping the worst of corporate tax dodging. If it successfully passes, we should see an end to stories of multinational corporations paying nothing in taxes, and that’s a real win.

Changes to the carried interest loophole

The carried interest loophole gives private equity fund managers, a few thousand of the wealthiest people in the entire world, a massive tax break by allowing them to classify some of their income from client fees as capital gains rather than ordinary income. This allows them to cut their tax bill nearly in half, lowering their top tax rate to just 20%, lower than the top tax rate paid by almost any working American.

In order for managers to take advantage of the loophole, their clients have to have held their assets for at least three years. The Inflation Reduction Act changes the loophole by extending that holding period from three to five years.

This is a significant change and a step in the right direction, but it’s hardly groundbreaking for an industry that already holds a significant amount of its investment for five to seven years. Private equity managers may not be able to take advantage of the carried interest loophole in quite as many cases, but it’s far from eliminated.

IRS funding

Over the past decade, the IRS’ enforcement budget has gotten tighter and tighter. This has left the agency ill-equipped to perform its critical work in collecting the tax revenue that the richest Americans owe. According to the Center on Budget and Policy Priorities, since 2010, the IRS has lost almost a fifth of its staff. Between 2010 and 2019, the overall audit rate dropped by 58% and the audit rate on millionaires dropped by a whopping 71%. In 2019, the agency answered just 29% of the phone calls it received. In short, the IRS is in bad shape and in desperate need of funds.

The Inflation Reduction Act would give the IRS a much-needed $80 billion in additional funding over the next decade. This would go a long way in helping the agency to rebuild and to close the estimated $600 billion tax gap, i.e. the difference between taxes owed and taxes actually paid. There are an enormous number of millionaires and billionaires who aren’t just manipulating loopholes to avoid paying taxes: they’re straight up illegally committing tax fraud and betting the IRS won’t catch them. This new funding would be primarily designated to help the agency go after these tax cheats and hold them responsible for breaking the law.

In short, we welcome all three of the tax initiatives included as part of the Inflation Reduction Act. We believe that Democrats can (and must) do much more to ensure that wealthy Americans like us pay our fair share in taxes, but for now these proposals are great steps in the right direction.

The clock is ticking for Democrats to win this fight before the legislative calendar makes it impossible to pass before the midterms. We urge them to do all they can to win over Sinema and get her on board with the Inflation Reduction Act and its tax initiatives before it’s too late.

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