Opinion | There’s a miracle in Washington, and it’s all about the taxes

Even in Washington, miracles sometimes happen.

Less than a week ago, any tax and expense deal in Congress, let alone a meritorious deal, seemed completely far-fetched. But the new package announced on Wednesday is a step in the right direction for many of our pressing economic challenges.

While substantially less ambitious than its previous incarnation, Build Back Better, it would reduce the deficit (by the most in more than a decade) rather than increase it, and it would do so without the gimmicks built into BBB.Much through the stubborn efforts of Chuck Schumer, the Senate Majority Leader, and West Virginia Democrat Senator Joe Manchin III, Congress is about to pass historic legislation.

This bill would use tax increases to push the economy towards lower inflation, while addressing pressing climate change priorities and rapidly rising prescription drug prices. In the process, the tax system would be made fairer by forcing profitable companies to pay at least some taxes, while eliminating the notorious loophole of carried interest (which I benefited significantly from).

How does this package attack inflation? Excessive inflation is primarily a function of excessive demand relative to available supply. To reduce inflation, we need to curb demand (however unpleasant it may be). The Federal Reserve plays the leading role in this process by raising interest rates (as it did last week). This causes companies and individuals to take out fewer loans and exerts a particularly strong downward pressure on sectors such as housing, which is very sensitive to rising rates.

But fiscal policy also affects prices. Until last week, Mr. Manchin argued that higher taxes could exacerbate inflation. This is simply a basic economics misconception.

The highest taxes used to lower the budget deficit are deflationary. They take money out of the economy, thereby reducing demand, as the Schumer-Manchin package aims to do. The Committee for a Responsible Federal Budget called it “a welcome improvement,” a proposal that, with interest, could reduce the deficit by $ 100 billion a year by 2032.

While it is enough to produce only a modest deflationary impact, it is an important move in the right direction when too many recent policies have pushed in the wrong direction.

As with any complex package, we need to understand the details, especially the many different elements of the climate package, to make sure they are thoughtful and effective. (The different Covid relief bills were full of wasteful provisions.) I am particularly skeptical of the efficiency of government grant programs (of which there is a small flotilla in the legislation), instead of using tax incentives and penalties to bend behavior to the market forces.

But fortunately, the climate pieces of the new package are heavily geared towards tax incentives. And early analysis by Rhodium Group found that climate provisions would significantly bring the United States closer to meeting our 2030 commitments under the Paris Agreement.

To be sure, the package isn’t perfect. Almost two decades after Congress agreed to stop Medicare from negotiating drug prices to get a prescription benefit plan approved, that mistake will finally be fixed, albeit for only a limited number of drugs and a lot. slowly for most of a decade.

And most importantly, the 15 percent minimum corporate tax is not the best way to ensure that companies pay their fair share. Many of the largest companies do not pay taxes due to the cuts incorporated into President Donald Trump’s 2017 tax legislation. Instead of the more desirable approach of dissolving them, the new bill takes the simpler approach of a fixed 15% tax on each large corporation’s accounting of its profits (known as accounting earnings) rather than on its profits. calculated using the tax code. This would create both distortions and greater potential for manipulation by tinkering with accounting methodologies.

And sadly, on the fiscal front, the Schumer-Manchin compromise does not include the comprehensive tax deal that Treasury Secretary Janet Yellen has admirably negotiated with dozens of other countries to reduce the incentive for companies to lower taxes by shifting profits. worldwide.

Nor does it include some meritorious parts of BBB, such as the extension of the tax credit for the children, although further tax increases would have been required to pay them.

In Washington, as in life, we shouldn’t let perfection be the enemy of good, and there is an abundance of good in this legislation. This includes approximately $ 80 billion in new Internal Revenue Service funding for enforcement; for years, Republicans tried to starve the IRS so that rampant tax avoidance could continue largely unrestricted.

Coincidentally, on the same day the Schumer-Manchin compromise was announced, the Congressional Budget Office released its latest fiscal estimates, showing that, in the absence of extensive legislative changes, the nation’s deficit will remain around $ 1 trillion. per year and will soon begin to grow.

Making even a small dent in this while addressing the major challenges qualifies this legislation as one of the best packages I can recall that Congress has given birth.

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