Sinema and taxes
She probably saved the country from a severe recession, but isn't really a supply-sider.
Kyrsten Sinema is getting political heat from the left, and renewed threats of a primary challenge, for having removed the carried interest provision from the fraudulently titled Inflation Reduction Act, the emaciated successor to Build Back Better.
In reality, Sinema’s influence on tax policy during the Biden administration has been significantly more consequential than this ruction. She has probably saved the country from a serious recession.
The Biden administration initially proposed an eye-watering array of tax increases. The top individual income tax rate was to go from 37% to nearly 48%. The top corporate rate was to increase from 21% to 28%. Capital gains for the rich were to be taxed at the ordinary income tax rate. The wealthy would owe annual capital gains taxes even on unsold assets.
These and other provisions would have seriously depleted and discouraged private investment. And that is what the economy now relies on to avoid a serious recession or to recover quickly from one.
We’ve had a period of extraordinary fiscal and monetary stimulus. But combating inflation requires tighter monetary policy and at least restraint in the growth in federal borrowing. The Inflation Reduction Act purports to achieve a modest reduction in federal borrowing over time.
While some of Biden’s proposed tax hikes would have floundered on the legislative shoals anyway, Sinema is the principal reason the private sector investment climate wasn’t seriously impaired.
While Joe Manchin gets most of the credit or blame for the demise of Build Back Better, it was Sinema who was the roadblock on deleterious tax policy. Manchin was willing to go along with a lot of it. His problem was primarily on the spending side.
Sinema has opposed increases in tax rates for individuals and corporations, and other provisions that would adversely affect private sector investment.
The Inflation Reduction Act does include a minimum tax on profits reported by large corporations to shareholders. The gap between the profit on which companies pay taxes and that they report to shareholders is almost wholly the result of decisions by Congress to treat revenue and expenses differently for tax purposes than they are treated for financial reporting purposes. The difference isn’t the result of companies shirking their tax obligations. It’s an intended result of congressional enactments.
While the minimum corporate income tax was retained in the Inflation Reduction Act, Sinema got it amended to exclude accelerated depreciation, one of the areas in which Congress has enacted a law treating large capital expenditures differently for tax purposes than they are treated in financial reports.
The carried interest provision that is generating the heat on Sinema can be argued, from the standpoint of sound tax policy, either way.
Carried interest is a not particularly descriptive term for what amounts to a performance bonus for the general partners in a private equity venture. If the investment exceeds certain benchmarks, the general partners get the bonus.
This is a return on sweat equity. It is not guaranteed as a salary would be. The return is at risk, but doesn’t include an upfront cash investment, as is common for capital gains.
The tax code currently regards carried interest as a capital gain, eligible for lower capital gains tax rates. The Sinema opposed provision of the bill would have instead treated it as ordinary income subject to the higher rates.
This is mostly a symbolic dispute. The tax policy can fairly be argued either way. And there’s not much tax revenue at issue.
Why has Sinema been so anchored on these tax policy issues? Is she the first Democratic supply-sider since Bill Bradley?
I don’t think so, as evidenced by the provision which replaced the carried interest tax hike: a one percent excise tax on stock buybacks.
Contrary to bipartisan skepticism about them, stock buybacks are an efficient and useful way to redeploy capital. This excise tax will do far more to inhibit the productive flow of capital than subjecting general partner performance bonuses to individual income tax rates rather than capital gains ones. A true supply-sider would never have made that exchange.
Sinema is also prone to support industrial policy, in which government intervenes to direct private sector economic activity – an anathema for true supply-siders. She was a staunch supporter of the subsidy bill for computer chip manufacturers. And the Inflation Reduction Act she voted for is, in large part, industrial policy for the energy sector.
Instead, Sinema is a pro-business Democrat. That used to not be as rare as it is today, particularly in Arizona. Dennis DeConcini was a pro-business Democrat.
Corporations generally aren’t opposed to industrial policy that benefits them.
The business community lobbied Sinema to oppose the tax increases the Biden administration was proposing and virtually all other congressional Democrats supported. Yes, she has raked in campaign contributions as a result. But I don’t think that’s her main motivation. Either from sincere belief or desired political imaging, she wants to be regarded as pro-business.
Sinema probably won’t get credit for saving the country from a severe recession. But, in a very real sense, she deserves it.
Reach Robb at robtrobb@gmail.com. Follow him on Twitter at @RJRobb.