They Might Really Do It: The Senate Is About to Reform Our Tax Code

Watching the Senate Democrats advance their reconciliation bill feels like riding a plane with extreme turbulence. You want to reach for the paper bag in the seat in front of you, but you figure they know how to land this thing. Right?

It looks increasingly like they do. The agreement brokered between Sen. Kyrsten Sinema and Democratic Leader Chuck Schumer makes some changes but does not alter the overall effectiveness of the tax provisions in the Inflation Reduction Act. I said last week that this bill would bring badly needed reforms to our tax code, and that has not changed.

Sens. Sinema and Schumer agreed to add a provision to tax corporate stock buybacks. As my colleague Joe Hughes explains, stock buybacks are functionally the equivalent of stock dividends – both are ways that corporations transfer income to their (mostly) wealthy shareholders. This provision would address the unfairness of the current rules that tax dividends but not buybacks. The provision is reported to raise $74 billion over a decade, which is more than is lost due to the other changes that Sens. Schumer and Sinema agreed to make in the bill.

They agreed to keep the corporate minimum tax. As in the bill that Sens. Schumer and Manchin agreed to last week, the provision would require that corporations with average profits exceeding $1 billion pay at least 15 percent of their profits in taxes. ITEP’s Matt Gardner explains how the minimum tax would affect two corporations – Apple, which probably would pay the tax in some years, and 3M, which probably would not pay, based on the profits and taxes reported by the two companies in recent years.

It appears they made one small change to this provision, to exempt depreciation breaks from the minimum tax. This means that corporations could continue to pay less than 15 percent of their profits by using accelerated depreciation, the ability to deduct the costs of investments in equipment more quickly than it wears out. Many lawmakers believe that accelerated depreciation encourages investment and manufacturing, but ITEP has explained why that is not true. But ultimately this does not matter very much. It is reported that the exception for depreciation breaks lowers the projected $313 billion revenue impact of the corporate minimum tax by just $40 billion.

Sinema and Schumer also agreed to remove the bill’s provision to chip away at the carried interest loophole, which allows wealthy fund managers to pretend that compensation they are paid for managing other people’s money is capital gains income that is eligible for lower tax rates. The removal of the carried interest provision from the bill is a disappointment.

But the reality is that carried interest is just a small part of a much bigger problem – the entire collection of tax breaks that Congress has long provided for capital gains, which mostly benefit the wealthy. President Biden has proposed extensive changes that would address this problem, but those are not part of the bill that the Senate is debating right now. Many tax breaks will be snared by the Inflation Reduction Act, but the capital gains breaks are making their getaway, ensuring that even if this battle for tax fairness ends in victory, the war will continue.

For now, the Senate is poised to reverse cuts to the IRS enforcement against wealthy tax evaders for the first time in a decade, crack down on tax-dodging by huge corporations for the first time since 1986, and finally address the method increasingly used by corporations to transfer income to shareholders to avoid federal taxes. The multi-decade winning streak of corporate lobbyists and special interests who have practically written many of our tax laws in recent years is about to come to an end.

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