The Inflation Reduction Act: Building A Fairer Tax System By Making The Biggest Corporations And Rich Tax Cheats Pay Their Fair Share

The Inflation Reduction Act is a major law that President Biden signed in August 2022. Not only did it lower health care costs for Arizonans, provide tax credits for families to help pay for energy efficient home appliances and reduce energy costs, the Inflation Reduction Act also makes huge strides to make our tax code more fair – ensuring that corporations and the wealthy begin to pay their fair share in taxes. 

Corporations Haven’t Been Paying Their Fair Share

In the years following the passage of the 2017 tax law that gave major tax cuts to the wealthy while leaving everyone else behind – it was widely reported that some of America’s most profitable companies paid zero dollars in federal corporate income tax. In fact, the government paid those companies money by giving them tax rebates! Instead of paying the $8.5 billion they should have owed in taxes, some of the world’s biggest corporations (including Nike, FedEx, and Salesforce) got refunds from the government totaling $3.5 billion. 

Between 2018 and 2022, 342 of the largest profitable companies in this country paid an effective income tax rate of 14.1 percent, significantly lower than the 21 percent rate set by the law. Of those, 87 companies paid an effective tax rate in the single digits (or lower) – including 55 corporations who paid less than 5 percent. A report in 2021 found that there were 55 Fortune 500 companies that paid nothing in federal corporate income tax in 2020 – while most Americans were struggling through the economic and health impacts of the pandemic, wondering if they’d be able to keep their job or pay their rent. Of those, 26 companies avoided paying any federal income tax over the prior three years, even though together, they earned more than a total of $77 billion in income.

And it’s not just a trend in corporate America. Wealthy individuals have also been evading taxes and avoiding paying their fair share. A report published by the Treasury Department before the Inflation Reduction Act was passed found that the top 1 percent of earners in this country avoided paying $163 billion in taxes per year.

The Inflation Reduction Act recognized this problem. It is not right that wealthy individuals and corporations should be paying nothing in taxes, while families struggling to get by dutifully pay their tax bill. So, the Inflation Reduction Act, passed in 2022, sought to solve this problem. 

Corporate Minimum Tax

The Inflation Reduction Act instituted a new 15 percent corporate alternative minimum tax starting in 2023. For corporations that have earned over $1 billion in income for three consecutive years, they are required to pay at least a 15 percent tax on the earnings that they report to their shareholders. 

Often, the earnings figure companies report to their shareholders is bigger than what they report to the IRS because while they want to show their shareholders that they’re thriving financially by reporting a large amount in profits, it is in their interest to shrink the size of their profits in the eyes of the IRS so that they’re taxed on less, thereby reducing their tax bill. By requiring companies’ shareholder profit reporting to match their IRS tax reporting, we can begin to ensure that corporations are paying their fair share. 

How does an alternative minimum tax work? At its core, an alternative minimum tax means that corporations pay the greater amount of what their tax bill is, or the minimum tax – 15 percent, in this case. If their tax bill is more than 15 percent of their profits, they simply pay their tax bill. However, if their tax bill is less than 15 percent of their profits – which, as we saw above, it often is for the 342 most profitable companies – they are required to pay at least 15 percent. That means that this alternative minimum tax ensures that the biggest corporations are paying at least 15 percent in taxes, meaning that whatever complicated calculations they have undertaken in the past that yielded them a federal income tax bill of $0 – or less – should be impossible under the Inflation Reduction Act. It means that they’re no longer able to shirk their responsibility and instead they’re required to pay their fair share. It’s estimated that the alternative minimum tax will raise more than $300 billion in revenue.

Stock Buyback Tax

The Inflation Reduction Act also introduced a 1 percent tax that companies are forced to pay if they engage in stock buybacks. A stock buyback is when a company uses its profits to buy its own stock, instead of investing it in growing the company or paying its workers more. Buying company stock reduces the number of shares of stock that are available on the open market, thereby driving up the cost of each share. Stock buybacks are often used to artificially inflate the value of a company. They also serve to increase individual shareholders’ profits, without those shareholders having to pay taxes on their own bigger stock portfolios. Stock buybacks also serve the interests of CEOs and other top executives, whose compensation packages are often tied to the company’s stock price. The higher the stock price, the more they get paid. 

Stock buybacks don’t help people who don’t own shares in the company. Taxing this behavior not only incentivizes companies to stop this practice, but also will serve to raise additional revenue – estimated to be roughly $74 billion – that the government can use to help people who actually need help, rather than CEOs and wealthy stock owners.

Increased Funding for the IRS To Limit Tax Cheating By Corporations And The Rich

The Inflation Reduction Act also allows the Internal Revenue Service to be more effective, by granting them an additional $80 billion in funding to help them do their job of tax enforcement. It also allows the IRS to better serve its customers. It is estimated that the additional funding for the IRS will translate to an additional $204 billion in taxes collected over the next decade because the agency will be able to invest in cracking down on wealthy tax cheats and finally be able to collect what those tax evaders owe the U.S. government. The IRS has actually bumped up that estimate, saying that if the funding continues for the next ten years, it could raise as much as $851 billion.

Over the past few decades, the IRS’s budget has been continuously slashed, and it’s made it nearly impossible for the agency to do its job well. As a result, wealthy people have gotten away with not paying their fair share in taxes for decades, while poor people historically have been subjected to audits because they can’t afford to pay someone to prepare their taxes for them, nor can they pay someone to help defend against an audit. As a result, the tax burden has fallen even more on the poorest taxpayers – an embarrassing inversion of how the system is actually supposed to work. The Inflation Reduction Act helps rebalance that equation.

The increased funding is having its intended effect: The IRS has been able to audit wealthy taxpayers who have been evading taxes for years. In just the first year after the Inflation Reduction Act was passed, the IRS was able to recover $38 million from just 175 wealthy taxpayers. As of February 2024, it was able to collect more than $500 million from 1,600 millionaires who owed at least $250,000 apiece in back taxes. The agency is also cracking down on the personal use of corporate private jets by executives who write them off as tax expenses. There are more than 10,000 corporate private jets and, under the 2017 law, purchasing these planes could be fully written off by corporations, thus lowering their tax bill. 

The agency has also hired thousands of customer service representatives, cutting down on callers’ wait times significantly and answering filers’ questions during tax season. The IRS even reopened a Taxpayer Assistance Center in Glendale, which had been closed due to budget shortfalls to offer people in-person help as they file their taxes.

The Inflation Reduction Act is Working to Make the Tax System Fairer

The Inflation Reduction Act was passed in part to help rebalance our tax system and ensure that hardworking families aren’t paying more in taxes than highly profitable corporations. It also invested more in the IRS to enable the agency to make sure that wealthy and corporate tax cheats are held accountable for not paying what they owe. The Inflation Reduction Act is working, helping us have a more fair tax system that has wealthy individuals and corporations paying their fair share.