No Cause to Water Down the Tax Reforms within the Construct Again Higher Act – ITEP

There is no justification for recently reported efforts to scale back the tax reforms in the Build Back Better Act, a bill passed by the House of Representatives in November that would raise significant revenue and make our tax code more progressive by enacting widely popular proposals. (See ITEP’s report on the BBBA.)

Of course, President Biden cannot enact such legislation without at least 50 votes in the Senate. But acknowledging the need to negotiate with recalcitrant senators does not require us to pretend that their demands make any sense when they do not.

It does not make any sense to respond to the grim polling for the president’s party by scaling back the most popular parts of his agenda. Americans have been telling pollsters for years that corporations and the rich should pay more in taxes. All throughout last year, a stream of polls indicated that the tax increases on corporations and the rich are extremely popular parts of the president’s economic agenda. One poll even found that the single most effective message focused on the unfairness of the 55 profitable corporations ITEP identified as paying no federal corporate income taxes at the height of the pandemic and the need to shut down the special breaks and loopholes that allow this to happen.

It does not make any sense to respond to rising inflation and higher interest rates on debt by raising less revenue. The interest rate hikes implemented by the Federal Reserve to help tame inflation will mean more federal resources will go to interest payments on the national debt. Whether one thinks the national debt is a large problem, a small problem, or no problem at all, there is no logical argument for scaling back the amount of federal tax revenue collected. Whether revenue raised is used to pay for new spending or goes toward deficit-reduction, higher interest rates on the national debt would seem to be a reason to raise more, not less, revenue.

It does not make any sense to respond to huge excess corporate profits by allowing companies to avoid taxes. As ITEP recently explained, economists have concluded in recent years that most corporate profits are “supernormal returns” or “excess profits.” These are profits exceeding the normal profit needed to attract shareholders or pay lenders and justify the investments, work and innovation that go into the business. In theory, even if excess profits are taxed away completely, corporations would still have an incentive to invest and innovate to generate what economists consider normal profits. Today, this is more obvious than ever, as corporations and their shareholders benefit from events entirely beyond their control, like the war in Ukraine, rather than from their own innovation, clever investments, or hard work.

While some lawmakers have proposed measures that would attempt to disentangle excess profits from normal profits and tax the former, a more straightforward path would be to enact the type of reforms in the BBBA that would ensure that all corporate profits are subject to reasonable taxes that companies cannot avoid.

Specifics of Tax Proposals That May Be Watered Down

After the BBBA passed the House in November, it languished in the Senate, seemingly due the opposition of one or two senators. One of those was Sen. Joe Manchin of West Virginia. Bloomberg now reports that Democratic leaders negotiating with Manchin are considering watering down the revenue-raising provisions in the developing package in at least three ways.

First, they are considering weakening the package’s 15 percent global minimum tax, which would apply to offshore profits of large, multinational corporations. Instead of applying the 15 percent global tax on a “per-country” basis as spelled out in the BBBA, corporations would be allowed to show that their combined offshore profits are, taken as a whole, subject to an effective tax rate of at least 15 percent (including both U.S. taxes and foreign taxes). This would make it possible for corporations to continue to claim some profits earned in tax havens like Bermuda where they are not taxed at all while earning other profits in countries with reasonable corporate tax rates. In other words, this weaker version of the proposal would largely sustain the status quo when it comes to offshore tax-dodging by corporations.

Second, they are considering weakening the 15 percent domestic minimum tax, a proposal designed to ensure that American corporations pay an effective tax rate of at least 15 percent on their total domestic and offshore income. The change under consideration would, as Bloomberg puts it, “exclude a business’s deductions for the investments they make.” This is likely a reference to the accelerated depreciation breaks that are the very reason many corporations avoid taxes today. In ITEP’s report on corporate tax avoidance during the first three years of the Trump tax law, we explained that “Amazon saved $4.8 billion through accelerated depreciation while Walt Disney saved $3.9 billion and Verizon saved $2.1 billion. General Motors saved $1.3 billion in this way and FedEx saved $1.1 billion.” Another ITEP report explains that these tax breaks likely reward companies for investments they would have made in the absence of any tax break.

Third, they are considering carving exceptions into the otherwise simple surtax that the BBBA would place on those with income of more than $10 million. The BBBA would impose a straightforward tax on any taxpayer’s adjusted gross income (AGI) beyond $10 million, with a rate of 5 percent, rising to 8 percent for AGI beyond $25 million. Incredibly, business groups claim this would be overly burdensome to those with incomes exceeding $10 million. They call for carving out “pass-through” income, which is business profits that are not subject to the corporate income tax but instead included on the business owners’ personal income tax returns. There is already a massive deduction for pass-through income in the Trump tax law that mainly benefits the richest one percent. Providing a special break for multi-millionaires with income that is already treated too generously would suggest that lawmakers have forgotten the point of this legislation.

Of course, political limits are real limits. The president cannot enact legislation without the votes of 50 senators. But it is impossible to believe that any such limits come from the American people. Voters are not raising their voices against a “per-country” global minimum corporate tax, not in West Virginia or any other state. No senator’s switchboard is being clogged with calls demanding that those with more than $10 million in income escape any tax increase on their pass-through business profits. The president and his party face many crises today, but watering down proposals requiring corporations and the rich to pay their fair share is no solution to any of them.