Sep 6, 2022 6 min read

Although most of the attention on the Inflation Reduction Act (IRA) has rightfully focused on the money spent to help transition to a green economy (as exemplified by the Aug. 29 Honda and LG Energy solution announcement of a $4.4 billion joint investment in a new battery plant), there are other, less publicized aspects of the bill that are also very positive.

Increased funding to the IRS will allow it to purchase updated computers and hire more people to provide better service. Republicans have cut funding for the IRS for years (the IRS had only 9,510 auditors in 2018; that last time the IRS had fewer than 10,000 auditors was 1953, when the economy was one-seventh the size it is today). Republicans seem to think cutting IRS funding is a benefit to taxpayers. A lack of funding means it can’t do its job, which includes answering taxpayer questions and getting them refunds in a timely manner. If you already pay the taxes you owe, a better-funded IRS will make your life easier. The IRS not doing its job only benefits people trying to illegally avoid taxes.

One benefit to taxpayers is that the IRA has funding for the IRS to develop software to make it easier for people to pay their taxes electronically. A 2003 deal with private companies the make tax prep software (Intuit, H&R Block) prohibited the IRS from developing its own software. Under that deal, the private companies were supposed to provide (for free) tax-prep software for people who made less than $73,000 annually (in 2021). But the companies made it so difficult to access the software, only 4% of people eligible used it. The IRS developing this software will save taxpayers hundreds of dollars (each) in tax prep.

Republican talking points have focused on the IRS hiring 87,000 new agents to come take your money. This is grossly misleading. More than 50,000 of those hires will simply be replacing employees who are expected to retire in the next five years. Additionally, hiring more agents allows the IRS to more closely monitor the more complicated tax returns of the wealthy, rather than focusing on the easier to audit returns of the less wealthy (especially those that use the Earned Income Tax Credit). The additional agents will allow the IRS to make sure the wealthy are paying their fair share, not terrorize the middle class.

Another important provision of the bill is the minimum corporate income tax of 15% on corporations with revenues over a billion dollars. Corporations tout the profits they make in their annual reports while at the same time making those profits disappear in their reports to the IRS. This provision will help erase that distinction; these large companies will have to pay taxes on the profits they are declaring to their investors. It should also reduce the attraction of hiding profits overseas.

Krysten Sinema (D-Ariz.), who actually began her career as a progressive politician, is now a reliable guardian of the interests of the wealthiest people in America. In order to get her vote for the IRA, she demanded that the “carried interest” loophole remain in the tax code (Manchin had agreed to eliminate it). This loophole is the most blatant evidence that our political system caters to the needs of the wealthy. Hedge fund managers, who manage the investments of the very rich, focus on riskier investments that potentially can generate astronomical returns. These managers earn money on a 2/20 split; they get a fee of 2% of the assets managed (a common way for financial advisers to be paid), while getting an additional 20% of the profits earned over a certain percentage (an 8% threshold is common).

The bottom line is that the carried interest loophole allows this income to be treated as investment income rather than wages, so it is taxed at the capital gains rate of less than 20% rather than regular (wage) income tax of almost 40%. But the hedge fund managers have no risk of loss; they are not investors; they are just managing their money. They are like real estate agents earning a commission based on how much money they make their clients. There is no good reason to allow these wealthy managers to pay a lower tax rate than most people other than they have the power to get some politicians to do their bidding.

Sinema did allow the bill to include a 1% tax on corporate stock buy-backs. Before 1982, the SEC did not allow corporations to buy their own stock because they considered it a form of market manipulation, artificially boosting the price of the stock. This became a bigger issue after the 1990s, when the Clinton Administration’s efforts to rein in the pay of CEOs by not allowing companies to deduct salaries of more than $1 million from their taxes moved companies to pay their CEOs in stocks and stock options. As the stock market boomed, CEO pay exploded. With CEO pay tied to the price of company stock, stock buybacks became much more common, because, as the SEC had feared, such buybacks allowed executives to boost stock prices, enhancing their pay.

Stock buybacks also allow a company to create value for its shareholders tax free, because when stocks rise, the owners pay no tax until they sell the stock. If the company distributed the profits as dividends, the stock owners would have to pay income tax each year on those dividends.

So in addition to helping the transition to a green economy, the lesser known aspects of the IRA have significant benefits. Getting corporations and the wealthy to pay more in taxes is anti-inflationary (taking money out of the economy) and also reduces the deficit. The tax on stock buybacks should discourage executives from using that route to manipulate the share price and avoid taxes. In short, the IRA has closed some of the loopholes that have allowed the wealthy to move the tax burden to everyone else. It is only right that the people who have benefited most from our economic system play a larger role in maintaining it.

Kent James has a doctorate in History and Policy from Carnegie Mellon University and is an adjunct in the History Department at Washington & Jefferson College.