President Biden signed the Inflation Reduction Act into law this week. The headlines will focus on the environmental and energy policies designed to address the climate change crisis, as well as important health policy reforms. The bill’s tax provisions are also crucial—they are intended to pay for much of the legislation’s new spending. To understand the bill’s major new tax reforms, we sat down with Adjunct Lecturer in Public Policy Jay Rosengard, who teaches courses on tax policy and public finance and directs the Mossavar-Rahmani Center for Business and Government’s Financial Sector Program.
Q: The bill includes a new 15% minimum tax on corporations. Why did the bill’s proponents argue that a minimum tax was necessary?
Many clearly prosperous corporations are not contributing tax revenue to fund government infrastructure and services essential for their prosperity. For example, in 2019, 20% of large corporations reporting profits to shareholders of more than $100 million paid zero federal income taxes—some even received tax refunds. The purpose of a 15% minimum corporate tax is to ensure corporations are paying their fair share by addressing this legal, loophole-enabled difference between book income reported to shareholders and taxable income reported to the IRS.
Q: Is it an effective way of raising revenue from corporations? Are there other tax loopholes that Congress should have also considered?
It is effective because it is similar to our AMT (alternative minimum tax) for wealthy individuals: both are straightforward to calculate and thus relatively easy to implement. It is also equitable in that even if all tax avoidance measures taken to reduce a corporation’s tax liabilities are legal, they nevertheless violate the fundamental tax principle of paying in accordance with one’s means.
The most egregious tax loophole not closed (at the insistence of Senator Kyrsten Sinema in exchange for her vote) is the carried interest tax. This loophole benefits a small number of America’s richest, namely partners in private equity firms and hedge funds, who make their money my managing other people’s money. Their share of profits would normally be taxed as earned income at 37% but instead is taxed at the much lower 20% capital gains rate (as long as it is held for at least three years). Not only is this blatantly unfair, but closing the loophole would have also generated about $14 billion in tax revenue.