In recent days, critics of the Inflation Reduction Act (IRA) have used a misleading and incomplete analysis to claim that the breakthrough legislation would be a “tax increase on everyone.” These opponents’ claims are based on an analysis by the Joint Committee on Taxation (JCT)—released by Senate Finance Committee Ranking Member Mike Crapo (R-ID) on July 30, 2022—that assumes that taxes levied on large corporations that currently pay little or no corporate income taxes represent a tax increase on individuals and families.
However, this simply is not true. The IRA closes tax loopholes exploited by large corporations that currently pay little or no tax and by wealthy investment fund managers. It also cracks down on tax dodging, especially by the wealthy, which currently accounts for the largest share of unpaid taxes. Contrary to critics’ claims, the IRA does not raise taxes on individuals earning less than $400,000 or on any but the largest and most profitable corporations.
The IRA does not raise taxes on individuals earning less than $400,000 or on any but the largest and most profitable corporations.
How the IRA raises revenue
To fully understand why the JCT analysis and critics’ claims are misleading, one must first understand how the IRA works. Specifically, it raises revenue in three ways:
- Imposing a 15 percent corporate minimum tax (CMT) on very large corporations that report profits to shareholders averaging more than $1 billion over three years: Notably, only about 150 of the largest corporations would be subject to the new CMT. They would pay 15 percent of the income they report to shareholders after certain adjustments or the amount they owe under the regular corporate tax—whichever is greater.
- Modernizing the IRS to improve enforcement and customer service: This provision does not change the amount of tax owed; it simply gives the IRS the resources it needs to make sure that large corporations and the wealthy pay the amounts they owe and that all taxpayers receive quality customer service. The IRA specifically states, “Nothing in this subsection is intended to increase taxes on any taxpayer with a taxable income below $400,000.”
- Closing the carried interest loophole, which allows private equity fund managers earning at least $400,000 per year to convert a share of their income into low-tax capital gains: Investment managers, who include some of the world’s richest people, typically take a management fee equal to just 2 percent of the assets they manage, plus a 20 percent cut of their investors’ profits. In doing so, the carried interest loophole shields the bulk of their income from ordinary tax rates.
Why IRA critics’ claims are misleading
The argument that the CMT increases taxes on low- and middle-income households assumes that an increase in corporate taxes affects not only the shareholders of the corporation but also workers’ wages. Economic models assume that most of the benefits of any corporate tax cuts and most of the cost of corporate increases fall on the owners of capital—in other words, the shareholders. A small fraction will pass through to workers based on their share of labor income, which is skewed to high earners such as CEOs and high-wage professionals.
Yet recent history suggests that any impact will be minimal. That’s because the revenues raised by the proposed CMT are insignificant compared with the overall size of the U.S. economy—just 0.2 percent of gross domestic product (GDP) in FY 2023—while wages are set in the larger economy. Take, for example, the 2017 Tax Cuts and Jobs Act: Supporters argued that benefits would “trickle up” to workers and consumers, yet research shows that the measure overwhelmingly benefited shareholders, with no measurable impact on wages or investment.
Moreover, the JCT analysis specifically excludes the impact of many parts of the IRA that would benefit middle-income families—specifically, the legislation’s measures to lower prescription drug costs (Subtitle B) and extend provisions that make health coverage more affordable (Subtitle C), as well as some parts of the bill that make clean energy more available and affordable (Subtitle D). In other words, the analysis ignores the impact of most of the the provisions that directly benefit consumers.
The flawed assumption that large, profitable corporations currently paying little or no corporate tax have no choice but to pass on taxes to workers is how we ended up with an outrageously unfair tax system in the first place. Fortunately, policymakers can now pass legislation that would not only fight inflation but also lower drug costs, improve health coverage, and help build a path toward a cleaner energy future. It is important that they ignore critics’ misleading claims and take advantage of this opportunity.