A great many numbers are being tossed around about the Inflation Reduction Act (IRA) passed by the U.S. Senate; a House of Representatives vote is expected by Friday. Elements such as the Act’s 15% corporate minimum tax on large companies are often given without context that enables people to see how much impact, or how little, the bill will have on companies and consumers.
On Aug. 2, the New York Times analysis of the IRA said that it would increase spending by $260 billion, adding that “…but it would also raise taxes by $326 billion in the same period. That’s according to an analysis by the Joint Committee on Taxation, a nonpartisan congressional commission. A separate analysis, released on Friday by the Wharton School (of the University of Pennsylvania), found that the bill would have almost no effect on G.D.P., and would slightly increase inflation for the next two years but then lead to lower prices.”
One of the biggest numbers in the bill is the 15% minimum tax rate on corporations having $1 billion or more of annual adjusted financial statement income. This affects between 150 and 200 of America’s largest companies.
But what does this increase mean, exactly?
On the surface, corporations won’t be able to use deductions and losses to completely skirt the statutorily-set 21% corporate tax rate, or avoid paying federal income taxes altogether. But that doesn’t mean these corporations are going to pay a lot more in federal taxes.
The counter-argument that has raged around this proposal from the outset is that corporations don’t pay the taxes: they’re ultimately paid by the people who buy the corporations’ products. When a company, or even a family, is told that they now have a new 15% obligation, they’re going to have to make up that cost somewhere, either in trying to grow their income or by cutting costs. For businesses, their options are to raise prices (exacerbating inflation), cut back on expansion or development, reduce hiring, slow down on increases to employee pay and benefits, or hope that business growth and sales will keep them from doing any of the above.
Factoring into the complexity of the 15% minimum corporate tax increase is it’s based on the numbers reported to investors on companies’ financial statements. That’s not been the standard for tax computations. This sets up a potentially confusing situation between financial statement vs. tax return preparation. That’s particularly true in that government employees will set to work writing what are very likely to be lengthy and complicated regulations to implement the 755-page IRA. At this moment extremely good financial accounting and legal minds are already working to find – as inevitably will be found – ways for corporations to reduce their tax liability under the IRA.
A continuing – and ever-growing – drag on the U.S. economy is the size of the federal government’s deficits and the country’s national debt. The IRA is said by proponents to cut the deficit. To understand the impact, a look at the numbers is necessary.
News reports and congressional news releases typically say the IRA will reduce the deficit by $300 billion – actually, the figure is closer to $258 billion. The deficit reduction, to the degree it occurs, is over a 10-year period. The best case being put forward is that the IRA will reduce the deficit by between $21-to-$25 billion annually for the next decade.
Upwards of $20 billion is a lot of money. But by way of comparison, in 2021, the federal government had a $2.8 trillion – with a ‘t’ – spending deficit. In 2020, the year Covid-19 shutdowns and business slowdowns overwhelmed the economy, the deficit was $3.1 trillion. Projections for post-Covid 2022 are deficits will come down – to about $ 1 trillion.
That means in three years about $7 trillion will have been added to the debt owed by U.S. taxpayers. The deficits of the past three years are $1.2 trillion more than the U.S. government amassed in the first 225 years of the country’s existence. So, when these numbers are considered, in the end, a promised reduction of less than $30 billion a year over 10 years doesn’t really put a dent in the debt, though, if it happens, it's better than the opposite.
Numbers are important, as is the context of how those numbers are used. In the end, the success or failure of the IRA will likely be as much a political than a financial judgment.