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    IRS Releases Inflation-Adjusted Tax Rates for 2023

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    Filers whose salaries have not kept pace with inflation could see savings on their federal income tax bills.WASHINGTON — The rapidly rising cost of food, energy and other daily staples could allow many Americans to reduce their tax bills next year, the I.R.S. confirmed on Tuesday.Tax rates are adjusted for inflation, which in typical times means incremental movements in the thresholds for what income is taxed at what rate. But after a year that brought America’s fastest price growth in four decades, the shift in rates is far more notable: an increase of about 7 percent.Other parts of the tax code will also be affected by the inflation adjustment. Those include the standard deduction Americans can claim on their tax returns.The shift would be slightly larger if not for a change Republicans made as part of President Donald J. Trump’s tax overhaul that was passed in 2017. It tied rates to a measure of inflation, called the chained Consumer Price Index, that typically rises more slowly than the standard Consumer Price Index. In September, chained C.P.I. was up about a quarter of a percentage point less, compared with the previous year, than standard C.P.I.In dollar figures, the shift will be largest at the highest end of the income spectrum, although all seven income brackets will adjust for inflation. The top income tax rate of 37 percent will apply next year to individuals earning $578,125 — or $693,750 for married couples who file joint returns. That is up from $539,900 for individuals this year. The difference: Nearly $40,000 worth of individual income is eligible to be taxed next year at a lower rate of 35 percent.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Economists Nervously Eye the Bank of England’s Market Rescue

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    The Bank of England stepped in to save a critical market this week. Economists say it was necessary but also worry about the precedent.When the Bank of England announced last week that it would buy bonds in unlimited quantities in an effort to stabilize the market for U.K. government debt, economists agreed it was probably a necessary move to prevent a cataclysmic financial crisis.They also worried it could set a dangerous precedent.Central banks defend the financial stability of the nations in which they operate. In an era of highly leveraged and deeply interconnected markets, that means that they sometimes have to buy bonds or backstop lending to prevent a problem in one area from spiraling into a crisis that threatens the entire financial system.But that backstop role also means that if a government does something to generate a major shock, politicians can be fairly confident that the local central bank will step in to stem the fallout.Some economists say that is essentially what happened in the United Kingdom. Liz Truss, the new prime minister, proposed a huge package of tax cuts and spending during a period of already high inflation, when standard economic theory suggests governments should do the opposite. Markets reacted forcefully: Yields on long-term government debt shot up, and the value of the British pound fell sharply relative to the dollar and other major currencies.The Bank of England announced that it would buy long-term government debt “on whatever scale is necessary” to prevent a full-blown financial crisis. The move was particularly striking because the bank had been poised to begin selling its bond holdings — a plan that is now postponed — and has been raising interest rates in a bid to bring down inflation.Economists broadly agreed that the bank’s decision was the right one. The rapid rise in interest rates sent shock waves through financial markets and upended a typically sleepy corner of the pension fund industry, which, left unaddressed, could have carried severe consequences for millions of workers and retirees, destabilizing the country’s entire financial system.“You saw very substantial market dislocation,” said Lawrence H. Summers, a former U.S. Treasury Secretary who is now at Harvard. “It’s a recognized role of central banks to respond to that.”To some economists, that was exactly the problem: By shielding the U.K. government from the full consequences of its actions — both preventing citizens from feeling the painful aftereffects and keeping government borrowing costs from shooting higher — the policy demonstrated that central bankers stand ready to clean up messy fallout. That could make it easier for elected leaders around the world to take similar risks in the future.Those concerns eased somewhat on Monday when Ms. Truss partly backed down, reversing plans to abolish the top income tax rate of 45 percent on high earners.But she appears poised to go forward with the rest of her proposed tax cuts and spending programs, putting the Bank of England in a delicate spot.Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Mortgage Market: The uptick in interest rates roiled Britain’s mortgage market, leaving many homeowners calculating their potential future mortgage payments with alarm.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.The “partial U-turn” from Ms. Truss “still leaves the Bank of England with a set of near-impossible choices,” analysts at Evercore ISI wrote in a note to clients. “The only way to alleviate this is for the government to take much bigger steps to restore credibility — but there is little sign this is imminent.”There’s a reason that the interplay between monetary policy and politics in the United Kingdom is garnering so much attention. Central banks have for decades closely guarded their independence from politics. They set their policies to either stoke the economy or to slow it down based on what was necessary to achieve their goals — in most cases, low and stable inflation — free from the control of elected officials.The logic behind that insulation is simple. If central bankers had to listen to politicians, they might let price increases get out of control in exchange for faster short-term growth that would help the party in power.Now, that independence is being tested, and not just in the United Kingdom. Central banks around the world are raising interest rates to try to fight inflation, resulting in slower growth and making it harder for governments to borrow and spend. That is likely to lead to tension — if not outright conflict — between central bankers and elected leaders.It is already beginning. A United Nations agency on Monday warned that the Federal Reserve risked a global recession and significant harm in developing countries, for instance. But the United Kingdom’s example is stark because the elected government is carrying out policy that works against what the nation’s central bank is trying to achieve.“One always worries that actions like these can affect incentives going forward,” said Karen Dynan, a Harvard economist who served as a top official in the Treasury Department under President Obama. “It’s basic economics: People respond to incentives, and fiscal policymakers are people.”Part of the issue is that it is hard for central bankers to single-mindedly focus on controlling inflation in an era when financial markets are fragile and susceptible to disruption — including disruptions caused by elected governments.Before 2008, the Fed had never used mass long-term bond purchases to calm markets in its modern era. It has now used them twice in the span of 12 years. In addition to last week’s moves, the Bank of England also turned to mass bond purchases to calm markets in 2020.Bank of England officials have stressed that the policies they announced last week are a temporary response to an immediate crisis. The bank plans to buy long-dated bonds for less than two weeks and says it will not hold them longer than necessary. The Treasury, not the bank, will be responsible for any financial losses. The bank said it remained committed to fighting inflation, and some economists have speculated that it could raise rates even more aggressively in light of the government’s growth-stoking policies.If the bank is able to hold to that plan, it could mitigate economists’ concerns about the longer-run risks of the program. If interest rates rise again and it gets more expensive for the government to borrow, Ms. Truss will still need to grapple with the costs of her proposed programs, just without facing an imminent financial crisis.But some economists warn that the Bank of England may find the situation harder to extricate itself from than it hopes. It may turn out that the bank needs to keep buying bonds longer than expected, or that it cannot sell them without threatening another crisis. That could have the unintentional side effect of giving the British government a helping hand — and it could demonstrate that it is hard for a big central bank to remove support from its economy when the elected government wants to do the opposite.Liz Truss, Britain’s prime minister, will still need to grapple with the costs of her proposed programs, but she won’t be facing an imminent financial crisis because of the Bank of England’s actions.Alberto Pezzali/Associated PressMs. Truss’s policies — particularly before her partial reversal on Monday — would work directly against the bank’s efforts to cool growth, stoking demand through lower taxes and increased spending. The rapid rise in bond yields last week suggested that investors expected inflation to rise even further.Under ordinary circumstances, these conditions would lead the Bank of England to do even more to bring down the inflation it had already been fighting, raising interest rates more quickly or selling more of its bond holdings. Some analysts early last week expected the bank to announce an emergency rate increase. Instead, the brewing financial crisis forced the bank to do, in effect, the opposite, lowering borrowing costs by buying bonds.While lowering rates and stoking the economy was not the point — just a side effect — some economists warn that those actions risk setting a dangerous precedent in which central banks can only tighten policy to control inflation if their national governments cooperate and do not roil markets in a way that threatens financial stability. That situation puts politicians more in the driver’s seat when it comes to making economic policy.Guillaume Plantin, a French economist who has studied the interplay between central banks and governments, likened the dynamic to a game of chicken: To avoid a financial crisis, either Ms. Truss had to abandon her tax-cut plans, or the Bank of England had to set aside, at least temporarily, its efforts to raise borrowing costs. The result: “The Bank of England had to chicken out,” he said.Policymakers have known for decades that when the government steps in to rescue private companies or individuals, it can encourage them to repeat the same risky behavior in the future, a situation known as “moral hazard.” But in the private sector, there are steps governments can take to offset those risks — regulating banks to reduce the risk of collapse, for example, or wiping out shareholders if the government does need to step in to help.It is less clear what monetary policymakers can do to prevent the government itself from taking advantage of the safety net a central bank provides.“There is a moral hazard here: You are protecting some people from the full consequences of their actions,” said Donald Kohn, a former Fed vice chair and a former member of the Bank of England’s Financial Policy Committee, who agreed that it is necessary to intervene to prevent market dysfunction. “If you think about the entities that benefited from this, one was the chancellor of the Exchequer, the government.”Some forecasters have warned that other central banks might have to pull back on their own efforts to fight inflation to avoid destabilizing financial markets. Some investors are speculating that the Fed will have to end its policy of shrinking government bond holdings early or risk stirring market turmoil, for instance.Not all of those scenarios would necessarily raise the same concerns. In the United States, the Biden administration and the Fed are both focused on fighting inflation, so any reversal by the central bank would probably not look like bowing to pressure from the elected government.Still, the common thread is that financial stability issues could become a hurdle in the fight against inflation — especially where governments do not decide to go along with the push to rein in prices. And how worrying the British precedent proves will depend on whether the Bank of England is capable of backing away from bond buying quickly.“Is this just an exigent moment that they needed to respond to, or does it give the fiscal authority room to be irresponsible?” said Paul McCulley, an economist and the former managing director at the investment firm PIMCO. “The question is who blinks.”Joe Rennison More

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    Britain’s Gamble on Tax Cuts has Economists Warning of Past Mistakes

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    The International Monetary Fund is just one of the many voices that have criticized a plan to cut rates for high earners.WASHINGTON — A stunning rebuke from the International Monetary Fund this week underscored one of the biggest risks of the new British government’s plan to slash taxes on high earners: It could exacerbate rapid inflation and destabilize markets at a precarious economic moment.The alarm from economists, central bankers, investors and top U.S. officials centered on the likelihood that the tax cuts could stoke consumer demand by giving people more money to spend, pushing crushingly high prices even higher. That would put the British government in direct conflict with aggressive efforts of the central banks around the globe — and in the United Kingdom — that are raising interest rates in a bid to bring inflation under control.Many economists say British officials are also ignoring the lessons of the most recent bout of tax cuts — those engineered in the United States by former President Donald J. Trump. Empirical research on the early results of those cuts suggests that they mostly helped the economy by temporarily increasing consumer demand, an outcome that could prove particularly damaging in the high-inflation environment that Britain and much of the world are experiencing.Liz Truss, Britain’s new prime minister, has staked her fledgling government on a oversize, once-in-a-generation package of tax cuts and deregulation meant to energize the economy. It includes a cut in rates for the country’s lowest income tax bracket — and, in what was a surprise move, a five-percentage-point cut in the country’s top income tax rate, which applies to those earning more than 150,000 pounds, or about $164,000, a year.The International Monetary Fund responded to those proposals with the sort of pointed criticism it typically reserves for an emerging-market economy, not for the economy of one of the wealthiest nations in the world.“Given elevated inflation pressures in many countries, including the U.K., we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the I.M.F. said in a news release on Tuesday.The statement noted that the tax cuts would most likely increase economic inequality, and it urged the British government to “provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high income earners.”More on Politics in BritainPrime Minister Liz Truss was chosen by a divided British Conservative Party to lead a country facing the gravest economic crisis in a generation.A Domestic Push: After a period of mourning for the death of Queen Elizabeth II, the new government led by Ms. Truss began to work in earnest, announcing several initiatives to address Britain’s economic and social problems.A Turn Toward Thatcherism: Ms. Truss bet on a heavy dose of tax cuts, deregulation and free-market economics to reignite growth. The negative reaction from financial markets underscored the extent of the gamble.Seizing the Moment: Accusing Ms. Truss of losing control of Britain’s economy, the leader of the opposition Labour Party, Keir Starmer, staked his claim as the guardian of sound fiscal policy.Energy Policies: The British government said it would freeze electric and gas bills for households and cut energy costs for companies in an effort to mitigate the effects of Russia’s restriction of gas supplies to Europe.Investors have also recoiled from the plan, sending British bond yields soaring — forcing the Bank of England to intervene to stabilize them — and causing the value of the pound to plummet.Ms. Truss is not the first conservative politician in recent years to come into office promising to slash taxes. Mr. Trump also campaigned on — and ultimately delivered — “massive tax cuts” in 2017, a package that only Republican lawmakers backed. Decades ago, President Ronald Reagan and Prime Minister Margaret Thatcher of Britain both pursued tax-cutting agendas that cemented their legacies in office.Ms. Truss has been cheered on by conservative champions of supply-side economics in the United States, including many of the chief backers of Mr. Trump’s tax cuts. Stephen Moore, who served as an outside economic adviser to the former president, praised Ms. Truss for her willingness “to challenge the reigning orthodoxy by sharply cutting taxes to boost growth,” calling the package “a gutsy and sound policy decision.”“By far the most important change is the reduction in the top income tax rate from 45 percent to 40 percent,” Mr. Moore wrote. “This will bring jobs, capital and businesses back to the U.K.”A host of critics, though, have lined up to denounce the tax package, warning it will provoke economic war with the Bank of England and risk a damaging combination of economic contraction and soaring prices, which could in turn hurt the global recovery.The impact of previous tax cuts, including those signed into law by Mr. Trump in 2017, provides fodder for those critiques.Much as Ms. Truss has proposed to do, Mr. Trump reduced tax rates for income earners across the spectrum, including those in the highest bracket. He also cut a variety of business tax rates — a contrast with the British plan, which cancels a planned increase in corporate taxes. Mr. Trump said his full package of cuts would jump-start economic activity by encouraging businesses to invest, hire and raise wages.Yet initial evidence, which includes studies from I.M.F. economists, suggests Mr. Trump’s cuts did not deliver the steep gains in investment and productivity that conservatives had promised. If such gains came to pass in Britain, they could help counter inflation there.Instead, the cuts increased consumer spending, an outcome that helped temporarily expand growth in the United States, the I.M.F. found, but which could be dangerous in a high-inflation environment.“The record through 2019 from the Trump tax cuts is not encouraging for the U.K.,” said William G. Gale, a co-director of the Urban-Brookings Tax Policy Center in Washington.Last year, Mr. Gale and a colleague, Claire Haldeman, published a study on the effects of Mr. Trump’s tax cuts up until the start of the pandemic recession. They looked for supply-side effects — whether the cuts increased investment incentives and other means of stimulating sustained economic growth — and found little evidence of such results.Instead, they found that the cuts did little to promote job growth or investment outside the oil and gas sector, which is highly correlated with the global price of fossil fuels. And they found that the cuts significantly reduced federal tax revenues, contrary to Republicans’ promises that the cuts would pay for themselves by inciting additional economic growth.Broader research suggests that Ms. Truss’s cuts for top earners are unlikely to drive significant gains in economic growth. In a recent study of decades of tax changes, Owen Zidar, an economist at Princeton, found that cuts for the top 10 percent of earners did little to prompt job gains.The hope that cuts in Britain’s top rate will supercharge the economy, Mr. Zidar said in an interview, “is completely at odds with the empirical record of the United States since 1950.”Mr. Gale, Mr. Zidar and other economists joined the I.M.F. in noting a particular challenge for the British tax cuts: the likelihood that they will be offset by interest rate increases from the Bank of England, as it seeks to bring down price growth.Other rounds of tax cuts, like those under Mr. Reagan, helped to increase growth by working in tandem with interest rate cuts taken by the Federal Reserve, according to economists who specialize in tax policy. In Britain’s case, the opposite appears to be true: The Bank of England has already been raising rates, and it appears ready to push them even higher to offset the effects of Ms. Truss’s policies. Those rate increases would negate a major goal of the tax cuts — to make it cheaper for companies to invest — by raising the costs of borrowing across the economy.Economists say faster rate increases also heighten the risk of recession in Britain.Supporters of the British tax cuts are already accusing the central bank of crippling them — much as Mr. Trump accused the Fed of undermining his tax cuts when it raised interest rates repeatedly after they were enacted.“It hasn’t helped that the Bank of England has launched a public campaign to sabotage the Truss agenda,” Mr. Moore wrote this week, echoing comments he made about the Fed in 2019.The actions of the British government could reverberate far beyond that country’s borders given the flows of international trade and the potential for a far-flung financial crisis. In recent days, President Biden has grown more concerned with the situation in Britain. On Wednesday, he met with members of his economic team to discuss developments in global financial markets, instructing them to brief him regularly on the situation.“We’re watching this very closely,” Jared Bernstein, a member of the White House’s Council of Economic Advisers, said on Wednesday at the Peterson Institute for International Economics. “The president’s being kept up on all the developments.”When asked about the cuts this week, the White House press secretary, Karine Jean-Pierre, said the administration would leave British policy to Ms. Truss’s government. But other administration officials have criticized the plan.Speaking at an event at the Brookings Institution on Wednesday, Gina Raimondo, the secretary of commerce, said Britain’s combination of cutting taxes and increasing spending would neither help the country fight inflation in the short term nor send it in the direction of long-term growth.“Investors, businesspeople want to see world leaders taking inflation very seriously, and it’s hard to see that out of this new government,” she said, adding, “We’re pursuing a different strategy.”Ana Swanson More

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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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    States Turn to Tax Cuts as Inflation Stays Hot

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    WASHINGTON — In Kansas, the Democratic governor has been pushing to slash the state’s grocery sales tax. Last month, New Mexico lawmakers provided $1,000 tax rebates to households hobbled by high gas prices. Legislatures in Iowa, Indiana and Idaho have all cut state income taxes this year.A combination of flush state budget coffers and rapid inflation has lawmakers across the country looking for ways to ease the pain of rising prices, with nearly three dozen states enacting or considering some form of tax relief, according to the Tax Foundation, a right-leaning think tank.The efforts are blurring typical party lines when it comes to tax policy. In many cases, Democrats are joining Republicans in supporting permanently lower taxes or temporary cuts, including for high earners.But while the policies are aimed at helping Americans weather the fastest pace of inflation in 40 years, economists warn that, paradoxically, cutting taxes could exacerbate the very problem lawmakers are trying to address. By putting more money in people’s pockets, policymakers risk further stimulating already rampant consumer demand, pushing prices higher nationally.Jason Furman, an economist at Harvard University who was an economic adviser under the Obama administration, said that the United States economy was producing at full capacity right now and that any additional spending power would only drive up demand and prices. But when it comes to cutting taxes, he acknowledged, the incentives for states do not always appear to be aligned with what is best for the national economy.“I think all these tax cuts in states are adding to inflation,” Mr. Furman said. “The problem is, from any governor’s perspective, a lot of the inflation it is adding is nationwide and a lot of the benefits of the tax cuts are to the states.”States are awash in cash after a faster-than-expected economic rebound in 2021 and a $350 billion infusion of stimulus funds that Congress allocated to states and cities last year. While the Biden administration has restricted states from using relief money to directly subsidize tax cuts, many governments have been able to find budgetary workarounds to do just that without violating the rules.Last week, Gov. Ron DeSantis of Florida signed a $1.2 billion tax cut that was made possible by budget surpluses. The state’s coffers were bolstered by $8.8 billion in federal pandemic relief money. Mr. DeSantis, a Republican, hailed the tax cuts as the largest in the state’s history.“Florida’s economy has consistently outpaced the nation, but we are still fighting against inflationary policies imposed on us by the Biden administration,” he said.Adding to the urgency is the political calendar: Many governors and state legislators face elections in November, and voters have made clear they are concerned about rising prices for gas, food and rent.“It’s very difficult for policymakers to see the inflationary pressures that taxpayers are burdened by right now while sitting on significant cash reserves without some desire to return that,” said Jared Walczak, vice president of state projects with the Center for State Tax Policy at the Tax Foundation. “The challenge for policymakers is that simply cutting checks to taxpayers can feed the inflationary environment rather than offsetting it.”The tax cuts are coming in a variety of forms and sizes. According to the Tax Foundation, which has been tracking proposals this year, some would be phased in, some would be permanent and others would be temporary “holidays.”Next month, New York will suspend some of its state gas taxes through the end of the year, a move that Gov. Kathy Hochul, a Democrat, said would save families and businesses an estimated $585 million.In Pennsylvania, Gov. Tom Wolf, a Democrat, has called for gradually lowering the state’s corporate tax rate to 5 percent from 10 percent — taking a decidedly different stance from many of his political peers in Congress, who have called for raising corporate taxes. Mr. Wolf said in April that the proposal was intended to make Pennsylvania more business friendly.States are acting on a fresh appetite for tax cuts as inflation is running at a 40-year high.OK McCausland for The New York TimesMr. Furman pointed to the budget surpluses as evidence that the $1.9 trillion pandemic relief package handed too much money to local governments. “The problem was there was just too much money for states and localities.”A new report from the Tax Policy Center, a left-leaning think tank, said total state revenues rose by about 17.6 percent last year. State rainy day funds — money that is set aside to cover unexpected costs — have reached “new record levels,” according to the National Association of State Budget Officers.Yet those rosy budget balances may not last if the economy slows, as expected. The Federal Reserve has begun raising interest rates in an attempt to cool economic growth, and there are growing concerns about the potential for another recession. Stocks fell for another session on Monday, with the S&P 500 down 3.2 percent, as investors fretted about a slowdown in global growth, high inflation and other economic woes.Cutting taxes too deeply now could put states on weaker financial footing.The Tax Policy Center said its state tax revenue forecasts for the rest of this year and next year were “alarmingly weak” as states enacted tax cuts and spending plans. Fitch, the credit rating agency, said recently that immediate and permanent tax cuts could be risky in light of evolving economic conditions.“Substantial tax policy changes can negatively affect revenues and lead to long-term structural budget challenges, especially when enacted all at once in an uncertain economic environment,” Fitch said.The state tax cuts are taking place as the Biden administration struggles to respond to rising prices. So far, the White House has resisted calls for a gas tax holiday, though Jen Psaki, the White House press secretary, said in April that President Biden was open to the idea. The administration has responded by primarily trying to ease supply chain logjams that have created shortages of goods and cracking down on price gouging, but taming inflation falls largely to the Fed.The White House declined to assess the merits of states’ cutting taxes but pointed to the administration’s measures to expand fuel supplies and proposals for strengthening supply chains and lowering health and child care costs as evidence that Mr. Biden was taking inflation seriously.“President Biden is taking aggressive action to lower costs for American families and address inflation,” Emilie Simons, a White House spokeswoman, said.The degree to which state tax relief fuels inflation depends in large part on how quickly the moves go into effect.Gov. Laura Kelly backed a bill last month that would phase out the 6.5 percent grocery sales tax in Kansas, lowering it next January and bringing it to zero by 2025. Republicans in the state pushed for the gradual reduction despite calls from Democrats to cut the tax to zero by July.Understand the 2022 Midterm ElectionsCard 1 of 6Why are these midterms so important? More

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    Modern Monetary Theory Got a Pandemic Tryout. Inflation Is Now Testing It.

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    The sun was sinking low over Long Island Sound as Stephanie Kelton, wearing the bright red suit jacket she had donned to give a virtual guest lecture to university students in London that morning, perched before a pillow fort she had constructed atop the heavy wooden desk in her home office.The setup was meant to keep out noise as she recorded the podcast she co-hosts, a MarketWatch production called the “Best New Ideas in Money.” The room was hushed except for Ms. Kelton, who bantered energetically with the producers she was hearing through noise-blocking headphones, sang a Terri Gibbs song and made occasional edits to the script. At one point, she muttered, “That sounds like Stephanie.”What Stephanie Kelton sounds like, circa early 2022, is the star architect of a movement that is on something of a victory lap. A victory lap with an asterisk.Ms. Kelton, 52, is the most familiar public face of Modern Monetary Theory, which posits that if a government controls its own currency and needs money — to make sure its citizens have food and places to live when, say, a global pandemic pushes many out of work — it can just print it, as long as its economy has the ability to churn out the needed goods and services.In the M.M.T. view of the world, “How will you pay for it?” is a vapid policy question. Real-world resources and political priorities determine how much lawmakers can and should spend.It is an idea that was forged, and put to something of a test, during a low-inflation era.When Ms. Kelton’s book, “The Deficit Myth,” was published in June 2020 and shot onto best seller lists, inflation had been weak for decades and had dropped below 1 percent as consumers retrenched in the pandemic. The government had begun to spend rapidly to try to prop up flailing households.When Ms. Kelton appeared on a Bloomberg podcast episode, “How M.M.T. Won the Fiscal Policy Debate,” in early 2021, inflation had bounced back to around 2 percent.But by a chilly January afternoon, as ducks flew over the frosty estuary outside Ms. Kelton’s house near Stony Brook University, where she teaches, inflation had rocketed up to 7 percent. The government’s debt pile has exploded to $30 trillion, up from about $10 trillion at the start of the 2008 downturn and $5 trillion in the mid-1990s.The good news: The government has had no trouble selling bonds to fund its spending, contrary to the direst projections of deficit scolds.The bad news: Some economists blame big spending in the pandemic for today’s rapid price increases. The government will release fresh Consumer Price Index data this week, and it is expected to show inflation running at its fastest pace since 1982.And that may be why Ms. Kelton, and the movement she has come to represent, now seem anxious to control the narrative. The pandemic spending wasn’t entirely consistent with M.M.T principles, they say — it wasn’t assessed carefully for its inflationary effects as it was being drawn up, because it was crisis policy. But the situation has underlined how hard it is to know just where the economy’s constraints lay, and how difficult it is to fix things once you run into them.Last summer, Ms. Kelton called inflation a temporary sign of “growing pains.” By the fall, she painted it as a good problem to solve, compared with a continued weak economy. As it lingers, she has argued that diagnosing what is causing it is key.“Can we blame ‘MMT’ for the run-up in inflation?” she tweeted rhetorically last month, just hours before her podcast recording.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.“Of course not.”Emon Hassan for The New York TimesThe economy is the limitTo understand how M.M.T. fits in with other dominant ways of thinking, it’s helpful to take a trip to the beach.In economics, there’s a school of thought sometimes called “freshwater.” It’s the set of ideas that became popular at inland universities in the 1970s, when they began to embrace rational markets and limited government intervention to fight recessions. There’s also “saltwater” thinking, an updated version of Keynesianism that argues that the government occasionally needs to jump-start the economy. It has traditionally been championed in the Ivy League and other top-ranked schools on the coasts.You might call the school of thought Ms. Kelton is popularizing, from a bay that feeds into the East River, brackish economics.M.M.T. theorists argue that society should feel capable of spending to achieve its goals to the extent that there are resources available to fulfill them. Deficit spending need not be constrained to recessions, even theoretically. Want to build a road? No problem, so long as you have asphalt and construction workers. Want to feed children free lunches? Also not a problem, so long as you have the food and the cafeteria workers.What became Modern Monetary Theory began to percolate among a small group of academics when Ms. Kelton, a former military brat and one-time furniture saleswoman, was a graduate student.She had a gap period between graduating with a bachelor’s degree from California State University, Sacramento and attending Cambridge University on a Rotary scholarship, and her college economics professor recommended that she spend the time studying with L. Randall Wray, an early pioneer in the set of ideas.They hit it off. She remained in Mr. Wray’s circle, and he — and Warren Mosler, a hedge fund manager who had written a book on what we get wrong about money — convinced her that the way America understood cash, revenues and budgeting was all backward.Ms. Kelton earned her doctorate at The New School, long a booster of out-of-mainstream economic thinking, and went on to teach at the University of Missouri-Kansas City. She, Mr. Wray, who was there at the time, and their colleagues mentored doctoral students and began to write academic papers on the new way of thinking.But academic missives reached only a small circle of readers. After the 2008 financial crisis punched a hole in the economy that would take more than a decade to fill, Ms. Kelton and her colleagues, invigorated with a new urgency, began a blog called “New Economic Perspectives.” It was a bare bones white, red and black layout, using a standard WordPress template, that served as a place for M.M.T. writers to make their case (and, in its early days, featured a #Occupy[YourCityHere] tab).The theory picked up some fervent followers but limited popular acceptance, charitably, and outright derision, uncharitably. Mainstream economists panned it as overly simplistic. Many were confused about what it was arguing.“I have heard pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not,” Jerome H. Powell, the Fed chair, said in 2019. “The idea that deficits don’t matter for countries that can borrow in their own currency is just wrong.”Ms. Kelton kept the faith. She and her colleagues held conferences, including one in 2018 at The New School where she gave a lecture on “mainstreaming M.M.T.”Rohan Grey organized the conference and a media reception afterward at an Irish pub (“‘Shades of Green,’ monetary pun intended,” he said). It was attended by organizers, academics, “lay people” and lots of journalists. At the happy hour — which lasted until 1 a.m. — Ms. Kelton was mobbed when she walked in the door. “She was already on her way to super celebrity status at that point,” said Mr. Grey, an assistant professor at Willamette Law.When she gave presentations on her ideas, Ms. Kelton would occasionally display a quote often attributed to Mahatma Gandhi: “First they ignore you, then they laugh at you, then they fight you. Then you win.”And her star was rising more broadly. She advised Bernie Sanders’ presidential campaigns in 2016 and 2020, getting to know the Vermont senator. He never fully publicly embraced M.M.T., but he nevertheless advanced policies — like Medicare for All — that reflected its ideals.She amassed a following of tens of thousands, later growing to 140,000, on Twitter. Her first handle, @deficitowl, prompted ardent fans to gift her wise bird figurines, some of which are still on display in her home office. She cultivated a small coterie of prominent journalists who were interested in the idea, most notably Joe Weisenthal at Bloomberg. She signed a book deal. She was regularly talking to Democratic lawmakers, sometimes in groups.Her idea percolated through Washington’s media and liberal policy circles. Mainstream economic predictions that huge debt loads would come back to haunt nations like Japan had not played out, the anemic rebound from 2008 had scarred society and called the size of the crisis response into question. Ms. Kelton and her colleagues were ensuring that their theory on benign deficits was an ever-present feature of the blossoming debate.Then the pandemic hit, and suddenly the theoretical question of just how much the government could spend before it ran into limits faced a real-world experiment.The $1.9 Trillion FloorWithout thinking about paying for it, Donald J. Trump’s government quickly passed a $2.3 trillion relief package in late March 2020. In December, it followed that up with another $900 billion. President Biden took office in early 2021, and promptly added $1.9 trillion more.Inflation F.A.Q.Card 1 of 6What is inflation? More