President Biden took office in 2021 with an aggressive agenda of new programs he hoped to enact, as well as a flurry of tax increases to pay them and make taxation “fairer”.” Biden got only some of the programs he wanted, but most of the tax hikes proved too difficult for Congress to push through.
The tax hikes Democrats are likely to pass are bad hikes that will complicate the tax code and leave plenty of room for evasion. The only two significant tax hikes Democrats could pass during Biden’s four-year presidential term are contained in the Inflation Reduction Act, which the Senate passed on August 8 and the House of Representatives is expected to pass soon. Biden has indicated he will sign the bill quickly.
The ERI, as it’s called, includes $390 billion for green power funding over a decade, $318 billion for deficit reduction and smaller amounts for targeted health care subsidies. and rebuilding the depleted Internal Revenue Service. The bill provides just two tax hikes: a minimum 15% income tax or “pound” on large corporations that use tax breaks to pay below the 21% corporate tax rate, and a 1% excise tax on corporate stock redemptions.
If you were designing an effective tax code from scratch, none of these taxes would make a difference. The 15% minimum corporate tax is more of a political statement than anything else. Some big corporations are using the tax breaks passed by Congress years ago, for good reason, to reduce their income tax bills to almost nothing. This has become controversial as income and wealth inequality have worsened in the United States and some business founders have become incredibly wealthy.
Amazon (AMZN), for example, used tax breaks to cut $5 billion in tax bills in recent years, in some cases owing no federal income tax, even over the years he has made a handsome profit. Meanwhile, its founder and former CEO, Jeff Bezos, has amassed a fortune of $166 billion, mostly in Amazon stock.
Corporations get tax breaks for a reason
It may seem unfair, but it’s also true that Amazon has grown from a money-losing startup into a global retail and tech giant that employs more than a million people in the United States. using legal tax breaks Congress wants companies to use, to accomplish exactly what Amazon has accomplished. Businesses can claim many tax credits intended to encourage domestic investment, innovative research, equipment purchases, and many other things deemed beneficial to the U.S. economy. These tax credits exist because Congress has decided over the past few decades that it is good policy to use the tax code to encourage behaviors that can make the US economy more competitive and productive.
The 15% book tax, sometimes described as an alternative minimum corporate tax, will essentially undo tax credits meant to encourage productive business activity.
“The accounting minimum tax would likely increase corporate tax distortions, not reduce them,” tax expert Kyle Pomerleau of the American Enterprise Institute says. “The book tax is not good tax policy and there are far better ways to raise revenue.”
There are several technical reasons why a minimum tax could lead to even more aggressive tax manipulation among large corporations than is currently the case. At a more basic level, the minimum book tax would be in direct conflict with other parts of the tax code, because it would essentially veto tax breaks that the law encourages businesses to take. Complexity makes enforcing taxes more difficult, and companies subject to this new minimum tax – those with more than $1 billion in annual profits – are the companies most likely to hire armies of experts taxes to minimize their tax bills.
The tax on stock buybacks is another politically attractive loophole. In theory, this will discourage public companies from using excess cash to buy back their shares and reduce the number of shares outstanding, which sometimes drives up the stock price, to the benefit of shareholders. Instead, companies will use the money to invest in new projects that will create jobs and spur growth.
But that’s a misunderstanding of how buyouts work and how companies likely to respond to the redemption tax. Most companies only use cash to buy back shares when they don’t see a better use for that money, such as investments with a reasonable rate of return. Raising the cost of redemptions via a tax will not make other investments more attractive. Many companies will likely increase the dividends they pay instead, and some will simply sit on cash, perhaps helped by the recent rise in interest rates. What a buy-out tax clearly won’t do is put more money in the pockets of ordinary workers or help workers learn new skills that will make them more useful in the eyes of employers.
Better ways to increase corporate tax revenue: First, simplify the tax code instead of making it more complex. If Congress thinks the corporate tax breaks are too generous, it should either reduce or eliminate those tax breaks, instead of imposing a new tax that competes with those tax breaks. It might also be more effective to simply raise the corporate tax rate rather than limiting existing tax breaks by raising taxes.
A great advantage of the new taxes
There is, however, at least one upside to the convoluted new taxes Democrats are pushing through: they are able to pass. It may reflect a wink and a wink among some Democrats — as well as the business lobby — that businesses will find workarounds and that the new taxes won’t be very onerous. Obscure and hard-to-understand tax hikes are also less likely to generate vocal opposition than simpler measures, such as a 21% corporate tax rate hike.
Additionally, corporate America is getting a break from the taxes Biden has started to seek. Raising the corporate rate from 21% to 28%, as Biden preferred, for example, would have cost around $75 billion a year. And that was just one of many new taxes on businesses and wealthy Biden lobbied. The 15% minimum and buyout taxes are only expected to generate $45 billion in new revenue per year, combined, and it could end up being well below that as companies adapt. Stocks have risen rather than fallen since Democrats surprised markets by unveiling these new tax hikes in late July, indicating that investors see no significant impact on corporate profitability from the new taxes.
If Republicans take control of the House of Representatives midway through November, as most forecasters expect, they will be able to block whatever remaining items on Biden’s agenda they want. That means there won’t be any more tax hikes until at least 2025. Biden will have made the tax code a little messier, but not terribly more painful.