Winners and Losers on Tax Policy
The big winner in the eleventh-hour concessions to Kyrsten Sinema was the private equity industry.
August 10, 2022
In the last-minute negotiations to get 50 votes for the Inflation Reduction Act, the private equity industry made out like the bandits that they are. Sen. Sinema’s first successful demand was to get rid of a reform that would have required private equity earnings to be taxed as ordinary income rather than at the lower capital gains rate under current law. That cost about $14 billion, and it has gotten the most attention in the coverage of the bill.
To offset that revenue loss and other losses in the final bargain, Sens. Chuck Schumer and Joe Manchin agreed to another reform that would have increased other taxes levied on private equity—by subjecting most to a corporate minimum tax. But late Sunday, in the final bargaining, the industry persuaded Sinema to strip that from the bill as a condition of voting for it, leaving the private equity companies more powerful and more politically protected than before.
The big PE outfits own portfolios of hundreds of actual operating companies. Because they are not publicly traded on stock exchanges, both the PE firms and the companies they own are exempted from the usual disclosures and conflict-of-interest rules required by the Securities and Exchange Commission.
As the bill headed for final passage, it included a provision subjecting corporations to a 15 percent minimum tax based on their true “book” income as opposed to the income they report to the IRS via creative accounting. (This was weakened by the late insertion of a provision allowing corporations to keep the special accelerated depreciation deductions created by the Trump tax cuts of 2017.)
Until the eleventh-hour concessions to Sinema, written by the PE industry, private equity companies were to be treated as a single unit for tax purposes, and their income would be subject to the 15 percent minimum if it aggregated to more than $1 billion. But at Sinema’s behest, the final bill added a carve-out scrapping that provision.
Taxing was never a great remedy to address the abuses of private equity. The right remedy is to close the loopholes in the securities laws that allow private equity to exist at all, some of which is proposed in Sen. Elizabeth Warren’s Stop Wall Street Looting Act.
It is encouraging that all Senate Democrats except Sinema, many of whom receive campaign contributions from PE, were willing to vote for a measure that would have slightly cut PE’s after-tax profits. But deeper reform will require either repeal of the filibuster or more Senate Democrats for the next reconciliation bill in 2023, assuming Democrats can hold the House. That’s a steep climb. As it becomes even wealthier, PE grows more politically powerful.
As for the other tax measures in this year’s bill, one of the good provisions that has gotten too little attention is dramatically increased funding of $79.6 billion for the IRS over the next ten years (an increase of more than 50 percent over current levels), which the Congressional Budget Office projects will bring in an additional $203.7 billion in revenue, a figure that many tax experts consider too low. Unfortunately, under the terms of the deal, all new money goes to deficit reduction, not new spending.
Deeper reform will require either repeal of the filibuster or more Senate Democrats for the next reconciliation bill in 2023.
For decades, a key part of the Republican “starve the beast” strategy has been to vilify the IRS as a dangerous police agency and strip its resources. In the past decade alone, the IRS budget has been cut by about 15 percent, adjusted for inflation; its total workforce, at about 79,000 full-time employees, is about what it was in 1974, since which time the annual number of tax filings has nearly doubled.
In testimony before the Senate Finance Committee last April, IRS Commissioner Charles Rettig told the committee: “Over the next six years, we estimate we will need to hire 52,000 employees just to maintain our current levels.” Rettig also called attention to the agency’s woeful underinvestment in computer technology, adding, “Absent consistent, timely, multi-year funding we have largely been a paper-based organization operating in a digital environment. In 2022, IRS employees should not be transcribing paper returns by hand.”
And that understates the problem. As new loopholes keep being added to the tax code, the kinds of tax dodges used by corporations, partnerships, and individuals become ever more complex and are no match for an overwhelmed and underresourced IRS (witness the tax maneuvers of one Donald Trump).
The richer you are, the less likely you are to be audited. Total IRS audits in 2021 were just four per thousand (0.4 percent), a percentage that has been dropping for decades, but were five times that for low-income people. Given its rudimentary computer technology, a favorite IRS device has been to use computer matching to audit recipients of the Earned Income Tax Credit (who include no hedge fund managers) for technical violations.
Doing comprehensive forensic audits of a small number of corporations, banks, real estate ventures, and PE companies could literally consume the entire IRS enforcement division. And because a tax expert can make ten times as much helping rich people avoid taxes as helping the IRS to collect them, the revenue service has had great difficulty attracting and retaining career people with the technical skills to match those of the tax evaders.
Since all of these tax dodges are used almost exclusively by very rich people, there is no more progressive tax strategy than improving enforcement. The enhanced IRS budget is long overdue. And while we are at it, it’s high time to replace Rettig, a holdover Trump appointee who tells Democrats what they want to hear, with a progressive fully committed to the IRS mission.
Robert Kuttner
Robert Kuttner is co-founder and co-editor of The American Prospect, and professor at Brandeis University’s Heller School.