US Senate’s new tax legislation has issues

The Inflation Reduction Act, passed by the Senate and now headed to the House, is a notable achievement. It provides much-needed incentives for investment in clean energy and takes long-overdue steps to control drug prices. Its new revenue will more than pay for the extra spending, so that over the course of 10 years the plan will trim public borrowing.
Sadly, however, some fiscal habits seem hard to break. In a flurry of last-minute revisions designed to win the support of Senator Kyrsten Sinema, the plan’s tax provisions were tweaked yet again. As a result, the Senate passed the measure without knowing exactly how much it will raise. And revenue implications aside, the further revisions do nothing to improve the IRA’s basic approach.
The deal first struck by Majority Leader Chuck Schumer and Senator Joe Manchin had three main tax components: a new corporate minimum rate of 15% for the most profitable firms, a provision to end the preferential treatment of “carried interest,” and stepped-up enforcement. The new version retains expanded of funding for the Internal Revenue Service, but waters down the minimum tax and scraps the change to carried interest.
The minimum tax aims to limit the deductions that companies can apply to their profits in calculating what they owe. But here’s the problem: Those “loopholes” (as advocates like to call them) exist because Congress enacted them to make firms do what Congress wants. So the Schumer-Manchin plan already allowed various climate-policy incentives and other deductions to be set against book income before applying the minimum rate. The new version goes further — in particular, by allowing bigger deductions for depreciation to encourage investment.
This is defensible: Encouraging investment is why the existing code allowed accelerated depreciation in the first place. But a minimum tax that ended up restoring all such carve-outs would be pointless. As it stands, the new plan will still collect more revenue than current policy — though less than the extra $313 billion over 10 years first advertised.
There’s no ambiguity about the defeat of the carried-interest reform. Allowing private-equity and other finance managers to call earnings capital gains rather than ordinary income reduces their taxes, serves no good fiscal purpose, and is plainly unfair. The survival of this longstanding anomaly is nothing but a tribute to the power of lobbying. Its substitute in the new plan — a 1% tax on stock repurchases — is another half-baked tax complication, serving to lock capital into firms whose managers think they can’t invest it profitably.
Additional spending on the IRS is wise. The agency is acutely underfunded. More audits and energetic enforcement should cut tax evasion enough to raise more revenue than the $124 billion over 10 years conservatively estimated by officials. One caveat. Much will depend on how well the agency uses its new resources. Things could backfire unless a more aggressive IRS also gives weight to improving the service it offers to ordinary taxpayers, who’ve grown accustomed to inordinate delays in processing and granting refunds, lack of clear information, and botched procedures for resolving tax debts and other issues that unduly burden low-income taxpayers. It would be good, as well, if the IRS could tell its new staff to occasionally pick up the phone. For most of this year, US fiscal policy has been in shambles, and the IRA would be genuine progress. Even so, the work of improving the benighted American tax system while correctly aligning spending and revenue has barely begun.
—Bloomberg