And here comes Joe Manchin’s moment for explanations. The White House has finally released its plan to fund the new infrastructure bill, a necessary step now that Democrats have decided to shove it through the Senate using reconciliation. That requires the plan to be deficit neutral, and this new set of corporate-tax hikes does cover the $2 trillion spending plan … but only after 15 years, and through the use of static tax analysis:
The Biden administration unveiled its plan to overhaul the corporate tax code on Wednesday, offering an array of proposals that would require large companies to pay higher taxes to help fund the White House’s economic agenda.
The plan, if enacted, would raise $2.5 trillion in revenue over 15 years. It would do so by ushering in major changes for American companies, which have long embraced quirks in the tax code that allowed them to lower or eliminate their tax liability, often by shifting profits overseas. The plan also includes efforts to help combat climate change, proposing to replace fossil fuel subsidies with tax incentives that promote clean energy production.
Some corporations have expressed a willingness to pay more in taxes, but the overall scope of the proposal is likely to draw backlash from the business community, which has benefited for years from loopholes in the tax code and a relaxed approach to enforcement.
The businesses aren’t the only entities benefiting from the tax code and enforcement policies. There’s a way to fix both — institute a flat-rate tax system without any write-offs or deductions. Large businesses would hate that because it eliminates a competitive advantage against smaller businesses. Congress hates the idea because it gives them no opportunity for social engineering through the tax code. If the Biden administration really wanted to solve that problem, they know how to do so. What they really want, however, is just to pick a different set of winners.
Hence, we have the new proposal, which won’t raise the money needed for their infrastructure spending until well after it’s sent. It also won’t raise anywhere near this amount of money because static tax analysis assumes no behavioral changes when incentives are shifted in statute and regulation, which is utter nonsense. When the rates go up and the loopholes shift in favor of the Biden administration’s preferred incentives, more income will get sheltered in those — which means less money will get collected as a result. (In fact, that’s the entire point of social engineering through the tax code — to change market behaviors.) However, for the purposes of reconciliation, the static tax analysis will be good enough, and in truth neither party cares much about deficit spending any more anyway.
And thus we come to the crux of the matter for Manchin. He claimed this week that he won’t go along on any corporate tax rate higher than 25%. Even with static tax analysis, though, 25% won’t get enough revenue to pay for the $2 trillion infrastructure package Manchin insists he wants, and which should pay off handsomely for him in West Virginia. Unless he plans to rewrite that package with Republicans to get to 60 votes, the only way Manchin gets that infrastructure spending is to provide enough pay-for to get through reconciliation.
In the end, Manchin will cave on this point. He’ll put up a nominal fight, followed by a declaration that the issue is too critical to fight over a nominal increase in the corporate tax rate. Don’t expect too much static from Manchin, in other words.