Last month, Senator Joe Manchin (R-WV) announced, to the surprise of many, that he had reached an agreement with Senate Majority Leader Chuck Schumer on the embattled budget reconciliation package that has stalled in the Senate.
Misleadingly named the Inflation Reduction Act of 2022, the proposed package includes a number of problematic provisions, such as a plan to establish a new 15% corporate minimum tax on book income and add a 1% excise tax on company stock buybacks. While the plan’s details are still murky, advocates say that the tax will only apply to corporations with profits over $1 billion and is necessary to help fund healthcare and climate spending increases. Examples include $370 billion for climate initiatives like wind and solar development and incentives for families and businesses to purchase electric vehicles, and money for a three-year extension of Affordable Care Act subsidies. The Joint Committee on Taxation estimates the tax will raise $313 billion.
What advocates of the plan fail to mention is that while taxing book income (financial statement income) would generate additional revenue, it could also create a host of new and unforeseen consequences. These implications include challenges to pension accounting and a disproportionate impact on specific industries like real estate and rental leasing. They also include an unnatural distortion of corporate investments, as companies choose to shift investments in ways that will allow them to pay the lowest amount in taxes. Taxing book income could also reduce the quality of financial statements, penalize companies for deducting the cost of their investment from tax returns, and worsen the inflationary spiral that is currently harming consumers.
Manchin’s support for the corporate tax hike, and budget reconciliation package, is particularly perplexing given his previous warnings about government spending accelerating inflation. As recently as July 13th, the Senator released a statement saying that leaders in Washington have “ignored serious concerns” about overspending and that America cannot afford to “add any more fuel to this inflation fire.”
Perhaps the pressure to pass legislation was enough to change his vote on something as monumental as a $670 billionspending package. While at least one study has found the package will only “slightly increase inflation,” it will certainly not result in “inflation reduction” in the short term, as the spending package name implies. Instead, it will create new unnecessary complexities for companies must navigate and erode the distinction between corporate book income and taxable income.
The nonprofit Tax Foundation concludes that while the package will generate $304 billion for the Treasury, it will also decrease long-run GDP by .1%, wages by .1%, and roughly 30,000 full time equivalent jobs. In the long run, taxpayers would see their average after-tax incomes decline. Increased government spending would worsen inflation by reducing economic growth and placing greater costs on industries that employ a large cross section of the American public. In practice, companies may be forced to make difficult decisions such as slowing hiring, reducing employment or passing costs onto consumers who are already struggling to get by.
The Inflation Reduction Act of 2022, far from making corporations “pay their fair share,” would encourage corporations to spend a greater portion of their resources on planning around the minimum tax. In all likelihood, most companies would be able to carry forward losses and pay an effective tax rate below 15%.
Unfortunately, Congress seems to have prioritized increasing government spending rather than working to reduce our current inflationary spiral. President Biden should think twice before signing this misguided piece of legislation and consider how such a tax may create more problems than it resolves. Instead, the president should encourage Congress to demonstrate fiscal restraint and begin reigning in unnecessary spending.