The voices of Tax Policy Center's researchers and staff
In a 50-50 Senate where every vote counts, President Biden’s “Build Back Better” (BBB) fiscal agenda has a new name and—if it wants the vote of Sen. Joe Manchin (D-WV)—a slimmed down mission. A new version still would include significant tax increases. But there are reasons to doubt they would produce a reliable source of revenue.
Paring initiatives to slow climate change and support childcare or education will cause some heartburn. But even half of the $1.5 trillion in new revenue over the next decade included in the House version of BBB would give lawmakers plenty of cash to boost spending, at least on paper, in addition to reserving funds to reduce the deficit and help cool inflation as Sen. Manchin prefers.
However, these latest topline negotiations may run into another problem. Sen. Kyrsten Sinema’s (D-AZ) opposition to tax rate increases leaves Democrats with a list of agreed-upon revenue raisers that are problematic, particularly if their primary goal is generating revenue over the 10-year budget window utilized by congressional scorekeepers.
The individual income tax provisions are straightforward, if imperfect. But Manchin’s latest outline would rely heavily on revenues from corporate income tax changes and tougher IRS tax enforcement that could fail to materialize.
Corporate Challenges, Foreign and Domestic
Increasing the corporate income tax rate from the current 21 percent seemed a foregone conclusion until Sinema’s concerns became public last October. Now the $800 billion in new corporate tax revenue mostly comes from two provisions.
A new 15 percent corporate minimum tax based on financial accounting “book” income would raise $320 billion over a decade, according to the Joint Committee on Taxation. Changes in the US tax treatment of multinational corporations—which would track a new tax framework developed by the Organization of Economic Cooperation and Development (OECD)—would generate another $280 billion.
First let’s look at the domestic minimum tax. Compared to raising the regular corporate rate to 25 percent, the minimum tax could deter business investment. And if history is any indication, Congress could repeal the tax in short order, much as it did in the early 1980s after experimenting with a similar book income tax.
Already, lawmakers are seeking to create carveouts from the minimum tax, including for expenditures on research, clean energy, and defined benefit pension plans. It goes without saying that if your proposed minimum tax needs its own set of exemptions, you might want to fix your tax base elsewhere.
The international tax proposals, which interact with the OECD/G-20 base erosion and profit shifting (BEPS) blueprints for global corporate tax reforms, are just as uncertain.
The BEPS “Pillar 1” framework would allocate a slice of the largest multinationals’ profits to countries based on their consumption in each jurisdiction, which requires the US and other countries to ratify a multilateral convention. This would be extremely difficult in the deeply-divided Senate chamber, though some argue the administration could itself ratify the deal.
Pillar 1 is also designed to displace digital services taxes targeting major US-based tech companies that have been enacted by several countries. So several major economies involved in the negotiations already have a backup option if Pillar 1 ratification doesn’t go as planned.
BBB also proposed a sweeping reform of the global intangible low-tax income (GILTI) regime, which would align with the OECD “Pillar 2” global minimum income tax and would raise more than $230 billion over 10 years.
Unlike Pillar 1, Pillar 2 reforms can be adopted unilaterally by individual countries. But the revenue generated in the US could vary depending on what other countries choose to do to implement the proposed regime.
How Long Does the IRS Need to Ramp Up?
Then there’s the matter of the IRS budget. Few disagree that the agency needs more money to improve tax enforcement and customer service. Taxes owed should be collected, otherwise confidence in the system starts to falter. But there is broad uncertainty about how much revenue that extra funding can generate.
The Congressional Budget Office recently projected that $80 billion in new IRS spending would generate $200 billion in new revenue, for a net gain for $120 billion. That’s pretty good, but well below the more than $400 billion estimated by the administration.
It’s difficult to say with certainty how much revenue the IRS can bring in with each new dollar spent and how long it would take to produce those returns. The agency’s years-long funding problem won’t resolve itself overnight. It will take years to recruit, hire, and train the staff necessary to handle complex tax issues.
The tax increases currently on the policy table can raise substantial money. But the complexity and uncertainty surrounding these proposals make them a less-than-perfect way to immediately raise revenue to pay for new spending or deficit reduction.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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