Reforms in Inflation Reduction Act—2 Years Old This Week—Offer a Guide to Tax Fairness

By William Rice

Two years ago this week, the Biden-Harris administration enacted the largest collection of progressive tax reforms in recent American history through the Inflation Reduction Act (IRA). Not only did these reforms make the tax code more fair and narrow wealth and income gaps, but they funded the most comprehensive response to climate change ever and lowered drug prices for seniors. On their second anniversary, the IRA tax reforms remain a model of how we can use the tax code to pay for crucial public investments while avoiding debt and increasing economic equality. 

The biggest revenue raiser in the law was a new minimum tax on the nation’s largest corporations. Huge profitable firms can sometimes go years paying little or no income tax because the system allows them to show their profits two ways. To attract investors, they puff up their earnings as much as possible. To duck out on their taxes, they use special deductions, credits and other loopholes to whittle down the profits they report to the IRS. 

The Biden-Harris administration ended this for the very largest corporations—those averaging a billion dollars or more in profits over three years—by requiring them to pay a tax rate of no less than 15% of the earnings they report to Wall Street every year. This long-overdue reform is expected to raise more than $220 billion over its first 10 years while impacting fewer than 150 of the nation’s biggest companies. 

The next largest reform was a 1% tax on corporate stock buybacks, a wasteful practice that pads the pockets of wealthy CEOs and other rich investors at the cost of useful investments in business activity, worker compensation and community development. By creating more demand for the stock, buybacks artificially inflate the value of shares remaining in investor hands. The massive tax-cut handout to corporations in the 2017 Trump-GOP tax law spurred a frenzy of share repurchases: more than $4 trillion worth over the five years between the effective dates of the Republican law and the IRA. 

Estimates have recently gone up on how much revenue the stock-buyback tax generates. One respected government scorekeeper—the Congressional Budget Office—originally expected the tax to raise $74 billion over its first decade, but more recently another group of experts in the Office of Management and Budget estimated the tax will bring in over $100 billion in just six years.  Whatever the actual total, the tax (especially if raised to 4%, as the Biden-Harris administration has proposed) will continue to serve the dual role of discouraging buybacks while raising money from those that still happen. 

The last substantial reform was providing adequate funding for the Internal Revenue System. Throughout the last decade, Republicans in Congress slashed the IRS budget, making it easier and easier for wealthy and corporate tax cheats to evade taxes while denying honest taxpayers decent customer service. The IRA restored $80 billion in agency funding and the results are already rolling in: over a billion dollars in back taxes collected from millionaires; a bill for nearly $30 billion presented to Microsoft for years of dodging taxes through offshore accounting maneuvers; and the IRS now answers taxpayer phone calls in three minutes instead of 30. 

The IRS recently estimated that the restoration of adequate agency funding (even after Republicans, those tireless champions of tax evasion, rescinded $20 billion of the IRA investment) will raise more than half a trillion dollars over the next 10 years. 

As much as the IRA tax reforms are worth celebrating, they are just the first exciting step. We can raise trillions of more dollars from sensible reforms that simply ask the richest Americans and our most profitable corporations to pay their fair share of taxes. The Biden-Harris administration has laid out many of these reforms—which include taxing wealth more like work, effectively taxing billionaires and cutting down on offshore corporate tax dodging—every year in its annual budget. 

Next year will be a good time to try to enact some of these changes since the tax code is primed for a major overhaul with the expiration of most of the Trump tax law. The tax reforms in the Inflation Reduction Act can be our inspiration, example, and guide.