Despite Its Flaws, the IRA Will Raise Taxes on Corporate Profits and Stock Buybacks
The Inflation Reduction Act was a compromise from the outset, and Senator Kyrsten Sinema made its tax provisions even worse. But the legislation will still raise billions in revenue by creating a fairer tax burden for corporations.
President Joe Biden signs the Inflation Reduction Act into law, August 16, 2022. (Demetrius Freeman / The Washington Post via Getty Images)
The Senate passed the Inflation Reduction Act of 2022 through the budget reconciliation process. The bill allocates over $300 billion to incentivize clean energy production and fight climate change, extends Affordable Care Act subsidies created at the height of the pandemic, and grants Medicare limited powers to negotiate prescription drug prices. But the bill’s changes to the tax code are the most significant, because they are the crux of how the Inflation Reduction Act would reduce the federal deficit and may thus help curb inflation.
The Inflation Reduction Act’s tax changes consist of a 15 percent corporate minimum tax and a 1 percent excise tax on stock buybacks. The bill originally contained a provision that tightened the carried interest loophole, which uniquely benefits private equity and hedge fund managers, but Senator Kyrsten Sinema (D-AZ) had any mention of carried interest removed from the bill as the condition for her support.
The 15 Percent Book Minimum Tax
The 15 percent corporate minimum is a “book tax” on the publicly reported financial statements of corporations whose annual profits exceed $1 billion. Corporations are presently required to pay a 21 percent federal income tax, subject to tax credits and deductions, which have allowed fifty-five of the largest, highly profitable US corporations to pay $0 in federal income taxes the past few years. Tax credits and deductions create discrepancies in how corporations report earnings to the IRS versus how they report those same earnings to shareholders. If corporations’ tax burden ends up lower than 15 percent after those credits or deductions are calculated, and only in that circumstance, they would face the 15 percent “book minimum” in lieu of the 21 percent rate.
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