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Recent analysis by the nonpartisan Joint Committee on Taxation (JCT) shows the impact of several tax pieces included in the Inflation Reduction Act (IRA). The report suggests taxes would increase at nearly every income level. However, pundits and lawmakers should consider other important factors before drawing conclusions about how the IRA would affect taxpayers.
What’s Missing from JCT’s Score
For 2021 and 2022, the 2021 American Rescue Plan temporarily expanded the eligibility and generosity of the premium tax credit for health plans under the Affordable Care Act. The IRA would keep those provisions in place for three more years, providing additional benefits to low- and middle-income taxpayers that are not included in JCT’s distributional tables.
The JCT tables also leave out the benefits of tax credits households could claim for making their property more energy efficient or purchasing a clean-fuel vehicle. And, while not a tax measure, drug pricing reform legislation that benefits consumers through lower drug prices is also omitted from the JCT analysis.
Some of these policies may have been too difficult to score precisely, or they could fall under the purview of the Congressional Budget Office. But before relitigating the debate over President Biden’s pledge not to raise taxes on households making less than $400,000 a year, it’s worth keeping these missing pieces in mind.
How the Corporate Minimum Tax hits labor versus shareholders
While the IRA proposes reforming the tax treatment of carried interest and Superfund cleanup fees, its primary tax increase is a 15 percent minimum tax on corporations’ “book” profits above $1 billion. Economists have long debated the precise portion of corporate taxes that end up falling on workers, as opposed to shareholders and other capital owners. JCT allocates the corporate tax 25 percent to labor and 75 percent to capital.
The labor portion in JCT’s model is relatively small compared to the burden faced by shareholders. But it’s enough to make the JCT distributional tables reflect tax increases among nearly all income groups in a bill where a corporate tax increase is the primary revenue source.
However, a more careful look at how corporate taxes work today calls into question the estimated changes in federal taxes for middle- and lower-income households. In analyzing corporate taxes, JCT does not distinguish between “normal” and “super-normal” returns. Normal returns can be thought of as the minimum risk-adjusted return necessary for a firm to make an investment. Taxing normal returns can deter business investment and reduce hiring and wages.
On the other hand, super-normal returns—often called rents, excess returns, or excess profits—comprise any returns above the normal returns a business could expect. Firms may earn super-normal returns through patents, special expertise, outsized influence in product or labor markets, or just simple luck. A tax below 100% on excess returns should still leave the firm with some remaining super-normal profit and be less likely to affect investment or hiring than a tax on normal returns. In that case, standard analysis assumes that the tax on excess returns is borne by shareholders. In fact, some studies show that 60 percent or more of the corporate tax base is made up of super-normal profits.
Distinguishing between normal and super-normal returns is especially important here since the corporate minimum tax under discussion would only apply to firms with $1 billion or more in profits. Given their financial status, it’s quite possible the businesses impacted are more likely to be earning excess or super-normal returns.
The debate over corporate tax incidence is also continuing to evolve. Recent work has shown that firms share a substantial portion of their excess returns with high-income managers and executives. This all suggests that the corporate minimum tax under discussion, while not perfect policy, would be highly progressive.
Tax modeling by JCT provides policymakers with useful information to better understand the tradeoffs involved with different policy choices. But members of Congress should understand the full picture on the IRA before passing judgement on how households at different income levels could be impacted.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.