August 2, 2022
Federal Policy Director
August 2, 2022
The Inflation Reduction Act working its way through the Senate would raise about $740 billion in over ten years and put it towards energy security and efficiency, expanded health care, and deficit-reduction. Its biggest revenue-raising provision is a badly needed reform requiring the roughly 150 corporations with more than $1 billion in profits to pay at least 15 percent of their total profits in taxes.
Opponents of requiring corporations to pay even a minimum amount of taxes hold an unpopular position. But over the weekend, Sen. Mike Crapo, the top Republican on the Senate Finance Committee and a leader of that opposition, used a one-sided and incomplete analysis to claim that the corporate minimum tax would raise taxes on low- and middle-income people.
That analysis comes from Congress’s official revenue-estimators at the Joint Committee on Taxation (JCT). It examines some (but not all) of the revenue provisions and none of the spending provisions.
The JCT analysis finds that in 2023 the provisions it examines would increase taxes overall by about $54 billion. Because it shows these amounts distributed among people in different income groups, readers can easily get the impression that people will literally pay higher federal income taxes on April 15, but that is not the case. For example, the analysis finds that in 2023, those with incomes of more than $500,000 will pay 43 percent of the $54 billion tax increase and those with incomes of more than $200,000 will pay 69 percent of the tax increase. Crapo’s press release focuses on the remaining 31 percent of the tax increase and calls this a tax hike for the middle-class.
When thinking about the argument Sen. Crapo is making, the most important points for lawmakers to remember are:
1. Crapo’s argument relies on an analysis that ignores several of the bill’s tax cuts and cost savings for individuals.
2. Despite excluding those very concrete tax cuts and cost savings for individuals, the analysis does include “indirect” tax increases resulting from the corporate minimum tax, which are more speculative and which are not tax increases as normal people would define them.
3. For good reason, the American public intuitively does not believe in the type of argument that Crapo relies on to characterize corporate tax hikes as tax increases on low- and middle-income people.
Sen. Crapo Relies on an Analysis that Ignores Several of the Bill’s Tax Cuts and Cost Savings for Low- and Middle-Income Individuals
Chye-Ching Huang of the Tax Law Center at NYU explained over the weekend that the JCT analysis leaves out several key provisions, including those which would lower taxes for low- and middle-income people. One is the bill’s extension of the expanded health care premium tax credits that were enacted as part of the American Rescue Plan Act. Also left out are tax credits to reduce the costs of energy-efficient cars and houses.
Also excluded is the bill’s provision to control prescription drug prices, which is actually structured as a new excise tax on pharma companies that do not comply with the new pricing program.
These provisions would reduce taxes and lower costs for individuals and households, but the JCT analysis Crapo is relying on does not take them into account.
The Analysis Sen. Crapo Relies on Does Include Speculative “Indirect” Tax Increases That Most People Would Not View as Tax Increases
To make their argument, Sen. Crapo and other opponents of corporate tax increases point to the “indirect” tax increases that would fall on people in different income levels according to JCT. Indirect tax increases are not tax increases as most people understand them. Indirect tax increases are a loss of something – anything – resulting from a change in tax policy.
JCT assumes that someone must indirectly pay corporate income taxes. Corporations pay these taxes directly, but common sense tells us that the burden of all taxes must fall, at least indirectly, on real people. No one can say for sure who exactly pays how much of the corporate tax indirectly, so, JCT uses some conventions and assumptions to answer this question. ITEP follows these conventions in order to produce comparable estimates, but we acknowledge that they are just one of several plausible approaches.
Under JCT’s conventions, the corporate income tax hikes results in indirect tax increases on individuals in at least two ways.
First, people who own corporate stocks or invest in mutual funds with corporate stock holdings face an indirect tax increase when corporate taxes go up. This would happen because higher corporate taxes would leave companies with somewhat smaller profits to pay out as dividends and less valuable shares, reducing the capital gains that investors receive when they sell shares. This loss of dividends or capital gains is certainly a loss of something valuable to investors, but it is not literally a “tax increase” as most people think of the term. Because the value of corporate shares also affects the value of other business assets, economists describe this as an indirect tax increase on capital generally. Most of this falls on the richest taxpayers, who own most corporate stocks and other business assets, but of course some people in lower income groups could, in theory, feel some indirect effects of the corporate tax hike.
Second, and more controversially, JCT assumes that a portion of the corporate tax increase is eventually paid by labor rather than capital – meaning a portion of the indirect tax increase takes the form of lower wages for workers. During the first year that a corporate tax hike is in effect, JCT assumes that the indirect tax increase falls entirely on capital (on the owners of corporate stocks and other business assets). But after that, JCT assumes a portion of the indirect tax increase falls on labor each year until, a decade after the tax hike has gone into effect, 25 percent of the indirect tax increase falls on labor, meaning 25 percent of the effects takes the form of lower wages for workers.
But this is an economic theory, and it may not happen in real life. Wages may have little or no relationship to corporate taxes. Indeed, the 2017 tax law cut corporate taxes, and companies responded largely with stock buybacks that enriched shareholders. And higher productivity may boost profits for shareholders but not wages for workers, particularly with the decline of unions that could negotiate to capture a portion of those profits for labor.
Like the indirect tax increase on capital, the indirect tax increase on labor is not a literal “tax increase” as most people understand the term but rather a theory about how tax changes might affect people, and a very speculative one at that.
Americans Do Not Believe that Corporate Tax Hikes Are Tax Increases on Low- and Middle-Income People
Polling done last year showed that the corporate tax increases in Biden’s initial economic proposal (which were even more extensive than those of the IRA) were popular. One poll found that the single most effective message in favor of the bill described the need to shut down special breaks and loopholes that allowed 55 corporations to avoid corporate income taxes in 2020, at the height of the pandemic.
Most Americans clearly do not believe that they will be adversely affected by corporate tax increases.
The intuition of most Americans that corporate taxes are too low is a correct intuition. Opponents of the IRA like Sen. Crapo are using some convoluted arguments to obscure that, but it’s unlikely to work.