Delusional Democrats subsidize business in one bill, then tax it in another

Congress this week offered a masterclass on incoherence in government.

First, Democrats in Congress (with the help of Republicans in the Senate) passed the “Chips and Science Act” which will provide up to $280 billion for semiconductor production along with tax credits and broader grants for scientific initiatives. No invoice has been paid.

Shortly after Democratic senators secured the GOP votes needed to pass this bill (based on Republicans’ naïve assumption that Congress would not pass any additional major spending increases), Senators Chuck Schumer and Joe Manchin surprised Republicans by unveiling a reconciliation deal that would add $485. billion in energy, climate and health care expansions and offset that cost with $790 billion in new taxes plus Medicare drug savings.

The first level of inconsistency stems from Democrats dubbing the reconciliation bill “The Inflation Reduction Act” in part because it would cut deficits by $305 billion over the decade (though likely less). when three-year health extensions are inevitably extended) — just after they passed a science bill that adds up to $280 billion in deficits over the decade. The net effect of the two bills could be to slightly increase deficits over the decade. Not exactly “reducing inflation”.

The other level of inconsistency is the conflicting provisions of the bills. The science bill is specifically designed to encourage business investment in semiconductors and other applied scientific research. Likewise, much of the $385 billion in energy and climate provisions in the reconciliation bill provide tax breaks for companies that invest in clean energy and new technologies.

Yet part of the reconciliation bill is paid by a 15% minimum corporate tax that specifically targets business investment. One of the main reasons why some companies currently pay tax rates below 15% is that they can deduct capital investments, as well as benefit from tax credits for R&D and clean energy. These are not “loopholes” – they were specifically created by Congress to encourage business investment in all sectors. So Congress will create or expand corporate tax breaks for science, energy, and climate — and then hit those companies with a minimum tax if they take advantage of those tax breaks.

Economist Donald Schneider estimates that the same S&P 500 semiconductor companies getting help from the Chips and Science Act will have to turn around and pay $1.7 billion a year in new minimum taxes. Again, for every government program, there is an equal and opposite program.

One foot on the accelerator, one foot on the brake.

It is possible that Congress will resolve this conflict by exempting all new science, climate, and energy tax breaks from the minimum corporate tax calculation. But granting these exemptions to a set of industries would create more very narrow tax breaks that Congress is attacking as loopholes. In short, Congressional actions to close loopholes with a minimum tax could end up creating new loopholes instead.

More broadly, the corporate minimum tax may seem like a populist winner — who doesn’t want corporations to pay their “fair share”? — but in practice it will simply negate tax breaks for business expansions and investments, as well as for research and development. And in fact, the $315 billion cost would roughly offset the corporate tax savings enacted in the 2017 tax cuts.

With the economy contracting for the second quarter in a row – and on the brink of recession – it’s a terrible time to raise taxes by hundreds of billions of dollars. America needs more business investment and more R&D in order to build the economy’s supply curve to meet all the inflationary demand.

Raising taxes will contract the economy just as the Federal Reserve is dramatically stepping on the brakes on the economy to fight inflation that the White House and Congress have refused to sufficiently address. The growth-friendly way to fight inflation is to rein in tariffs, cut federal spending, expand oil and gas development, and reduce regulations such as ethanol mandates and Buy Rules. American.

Instead, Congress passes an “Inflation Reduction Act” which is largely undone by a related bill. And these same contradictory bills both subsidize and tax business investment.

It turns out that President Ronald Reagan was right when he observed, “The government’s view of the economy could be summed up in a few short sentences: if it moves, tax it. If it keeps moving, fix it. And if he stops moving, subsidize him.”

Brian Riedl is a senior researcher at the Manhattan Institute. Follow him on Twitter @Brian_Riedl.