Inflation Reduction Act of 2022

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    How a New Corporate Minimum Tax Could Reshape Business Investments

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    With a new corporate minimum tax, Democrats would be adding complexity to an already byzantine tax system.WASHINGTON — At the center of the new climate and tax package that Democrats appear to be on the verge of passing is one of the most significant changes to America’s tax code in decades: a new corporate minimum tax that could reshape how the federal government collects revenue and alter how the nation’s most profitable companies invest in their businesses.The proposal is one of the last remaining tax increases in the package that Democrats are aiming to pass along party lines in coming days. After months of intraparty disagreement over whether to raise taxes on the wealthy or roll back some of the 2017 Republican tax cuts to fund their agenda, they have settled on a longstanding political ambition to ensure that large and profitable companies pay more than $0 in federal taxes.To accomplish this, Democrats have recreated a policy that was last employed in the 1980s: trying to capture tax revenue from companies that report a profit to shareholders on their financial statements while bulking up on deductions to whittle down their tax bills.The re-emergence of the corporate minimum tax, which would apply to what’s known as the “book income” that companies report on their financial statements, has prompted confusion and fierce lobbying resistance since it was announced last month.Some initially conflated the measure with the 15 percent global minimum tax that Treasury Secretary Janet L. Yellen has been pushing as part of an international tax deal. However, that is a separate proposal, which in the United States remains stalled in Congress, that would apply to the foreign earnings of American multinational companies.Republicans have also misleadingly tried to seize on the tax increase as evidence that President Biden was ready to break his campaign promises and raise taxes on middle-class workers. And manufacturers have warned that it would impose new costs at a time of rapid inflation.In a sign of the political power of lobbyists in Washington, by Thursday evening the new tax had already been watered down. At the urging of manufacturers, Senator Kyrsten Sinema of Arizona persuaded her Democratic colleagues to preserve a valuable deduction, known as bonus depreciation, that is associated with purchases of machinery and equipment.The new 15 percent minimum tax would apply to corporations that report annual income of more than $1 billion to shareholders on their financial statements but use deductions, credits and other preferential tax treatments to reduce their effective tax rates well below the statutory 21 percent. It was originally projected to raise $313 billion in tax revenue over a decade, though the final tally is likely to be $258 billion once the revised bill is finalized.The new tax could also inject a greater degree of complexity into the tax code, creating challenges in carrying out the law if it is passed.“In terms of implementation and just bandwidth to deal with the complexity, there’s no doubt that this regime is complex,” said Peter Richman, a senior attorney adviser at the Tax Law Center at New York University’s law school. “This is a big change and the revenue number is large.”What’s in the Democrats’ Climate and Tax BillCard 1 of 6A new proposal. More

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    The Carried Interest Loophole Survives Another Political Battle

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    The latest effort to narrow the preferential tax treatment used by private equity executives failed after Senator Kyrsten Sinema objected.WASHINGTON — Once again, carried interest carried the day.The last-minute removal by Senate Democrats of a provision in the climate and tax legislation that would narrow what is often referred to as the “carried interest loophole” represents the latest win for the private equity and hedge fund industries. For years, those businesses have successfully lobbied to kill bills that aimed to end or limit a quirk in the tax code that allows executives to pay lower tax rates than many of their salaried employees.In recent weeks, it appeared that the benefit could be scaled back, but a last-minute intervention by Senator Kyrsten Sinema, the Arizona Democrat, eliminated what would have been a $14 billion tax increase targeting private equity.Lawmakers’ inability to address a tax break that Democrats and some Republicans have called unfair underscores the influence of lobbyists for the finance industry and how difficult it can be to change the tax code.In addition to doing away with the carried interest provision, the deal Democratic leaders cut with Ms. Sinema included a 1 percent excise tax on stock buybacks and changes to a minimum corporate tax of 15 percent that favored manufacturers.On Friday, the private equity and hedge fund industries applauded the development, describing it as a win for small business.“The private equity industry directly employs over 11 million Americans, fuels thousands of small businesses and delivers the strongest returns for pensions,” said Drew Maloney, the chief executive of the American Investment Council, a lobbying group. “We encourage Congress to continue to support private capital investment in every state across our country.”Bryan Corbett, the chief executive of the Managed Funds Association, said: “We’re happy to see that there is bipartisan recognition of the role that private capital plays in growing businesses and the economy.”Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent. A tax law passed by Republicans in 2017 largely left the treatment of carried interest intact, after an intense lobbying campaign, but it did narrow the exemption by requiring executives to hold their investments for at least three years in order to enjoy preferential tax treatment.An agreement reached last week by Senator Joe Manchin III, Democrat of West Virginia, and Senator Chuck Schumer of New York, the majority leader, would have extended that holding period to five years from three, while changing the way the period is calculated in hopes of reducing taxpayers’ ability to take advantage of the lower 20 percent tax rate.What’s in the Democrats’ Climate and Tax BillCard 1 of 6A new proposal. More

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    Carried Interest Is Back in the Headlines. Why It’s Not Going Away.

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    Changes demanded by Senator Kyrsten Sinema will preserve a tax loophole that Democrats have complained about for years.For years, Democrats and even some Republicans such as former President Donald J. Trump have called for closing the so-called carried interest loophole that allows wealthy hedge fund managers and private equity executives to pay lower tax rates than entry-level employees.Those efforts have always failed to make a big dent in the loophole — and the latest proposal to do so also faltered this week. Senate leaders announced on Thursday that they had agreed to drop a modest change to the tax provision in order to secure the vote of Senator Kyrsten Sinema, Democrat of Arizona, and ensure passage of their Inflation Reduction Act, a wide-ranging climate, health care and tax bill.An agreement reached last week between Senator Chuck Schumer, the majority leader, and Senator Joe Manchin III, Democrat of West Virginia, would have taken a small step in the direction of narrowing carried interest tax treatment. However, it would not have eliminated the loophole entirely and could still have allowed rich business executives to have smaller tax bills than their secretaries, a criticism lobbed by the investor Warren E. Buffett, who has long argued against the preferential tax treatment.The fate of the provision was always in doubt given the Democrats’ slim control of the Senate. And Ms. Sinema had previously opposed a carried interest measure in a much larger bill called Build Back Better, which never secured the 50 Senate votes needed — Republicans have been unified in their opposition to any tax increases.Had the legislation passed in the form that Mr. Schumer and Mr. Manchin presented it last week, the shrinking of the carried interest exception would have brought Democrats a tiny bit closer to realizing their vision of making the tax code more progressive.What is carried interest?Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent.The 2017 tax law passed by Republicans largely left the treatment of carried interest intact, after an intense business lobbying campaign, but did narrow the exemption by requiring private equity officials to hold their investments for at least three years before reaping preferential tax treatment on their carried interest income.What would the Manchin-Schumer agreement have done?The agreement between Mr. Manchin and Mr. Schumer would have further narrowed the exemption, in several ways. It would have extended that holding period to five years from three, while changing the way the period is calculated in hopes of reducing taxpayers’ ability to game the system and pay the lower 20 percent tax rate.Senate Democrats say the changes would have raised an estimated $14 billion over a decade, by forcing more income to be taxed at higher individual income tax rates — and less at the preferential rate.The longer holding period would have applied only to those who made $400,000 per year or more, in keeping with President Biden’s pledge not to raise taxes on those earning less than that amount.The tax provision echoed a measure that was initially included in the climate and tax bill that House Democrats passed last year but that stalled in the Senate. The carried interest language was removed amid concern that Ms. Sinema, who opposed the measure, would block the overall legislation.Why hasn’t the loophole been closed by now?Many Democrats have tried for years to completely eliminate the tax benefits private equity partners enjoy. Democrats have sought to redefine the management fees they get from partnerships as “gross income,” just like any other kind of income, and to treat capital gains from partners’ investments as ordinary income.Such a move was included in legislation proposed by House Democrats in 2015. The legislation would also have increased the penalties on investors who did not properly apply the proposed changes to their own tax filings.The private equity industry has fought back hard, rejecting outright the basic concepts on which the proposed changes were based.“No such loophole exists,” Steven B. Klinsky, the founder and chief executive of the private equity firm New Mountain Capital, wrote in an opinion article published in The New York Times in 2016. Mr. Klinsky said that when other taxes, including those levied by New York City and the state government, were accounted for, his effective tax rate was between 40 and 50 percent.What would the change have meant for private equity?The private equity industry has defended the tax treatment of carried interest, arguing that it creates incentives for entrepreneurship, healthy risk-taking and investment.The American Investment Council, a lobbying group for the private equity industry, described the proposal as a blow to small business.“Over 74 percent of private equity investment went to small businesses last year,” said Drew Maloney, chief executive of the council. “As small-business owners face rising costs and our economy faces serious headwinds, Washington should not move forward with a new tax on the private capital that is helping local employers survive and grow.”The Managed Funds Association said the changes to the tax code would hurt those who invested on behalf of pension funds and university endowments.“Current law recognizes the importance of long-term investment, but this proposal would punish entrepreneurs in investment partnerships by not affording them the benefit of long-term capital gains treatment,” said Bryan Corbett, the chief executive of the association.“It is crucial Congress avoids proposals that harm the ability of pensions, foundations and endowments to benefit from high-value, long-term investments that create opportunity for millions of Americans.”Jim Tankersley More

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    Analysis Deems Biden’s Climate and Tax Bill Fiscally Responsible

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    Despite Republican claims, the new legislation would be only a modest corporate tax increase, Congress’s Joint Committee on Taxation found.After more than a year of trying — and failing — to pack much of President Biden’s domestic agenda into a single tax-and-spend bill, Democrats appear to have finally found a winning combination. They’ve scrapped most of the president’s plans, dialed down the cost and focused on climate change, health care and a lower budget deficit.As soon as party leaders announced that new bill last week, Republicans began attacking it in familiar terms. They called it a giant tax increase and a foolish expansion of government spending, which they alleged would hurt an economy reeling from rapid inflation.But outside estimates suggest the bill would not cement a giant tax increase or result in profligate federal spending.An analysis by the Joint Committee on Taxation, a congressional nonpartisan scorekeeper for tax legislation, suggests that the bill would raise about $70 billion over 10 years. But the increase would be front-loaded: By 2027, the bill would actually amount to a net tax cut each year, as new credits and other incentives for low-emission energy sources outweighed a new minimum tax on some large corporations.That analysis, along with a broader estimate of the bill’s provisions from the nonpartisan Committee for a Responsible Federal Budget, suggests that the legislation, if passed, would only modestly add to federal spending over the next 10 years. By the end of the decade, the bill would be reducing federal spending, compared with what is scheduled to happen if it does not become law.And because the bill also includes measures to empower the Internal Revenue Service to crack down on corporations and high-earning individuals who evade taxes, it is projected to reduce the federal budget deficit over a decade by about $300 billion.Adding up the headline cost for what Democrats are calling the Inflation Reduction Act is more complicated than it was for many previous tax or spending measures that lawmakers approved. The bill blends tax increases and tax credits, just as Republicans did when they passed President Donald J. Trump’s signature tax package in 2017. But it also includes a spending increase meant to boost tax revenues and a spending cut meant to put more money in consumers’ pockets.Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, said the composition of the deal was vastly different from a larger bill that Democrats failed to push through the Senate in the fall. It included several spending programs that were set to expire after a few years, and budget hawks warned that the overall package would add heavily to federal debt if those programs were eventually made permanent, as Washington has been known to do, without offsetting tax increases.Ms. MacGuineas called the original idea, known as Build Back Better, “a massive gimmicky budget buster.” She had kinder words for the new package, saying it “manages to push against inflation, reduce the deficit, and, once fully phased in, it would actually cut net spending, without raising net taxes.”“That is a pretty monumental improvement,” she added.The bill springs from an agreement between Senator Chuck Schumer of New York, the majority leader, and Senator Joe Manchin III of West Virginia, a key centrist Democrat. President Biden blessed it last week, and it carries what remains of what was once his $4 trillion domestic agenda.Understand What Happened to Biden’s Domestic AgendaCard 1 of 7‘Build Back Better.’ More