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

Congress this week offered a masterclass in the incoherence of government.

First, congressional Democrats (with the help of Senate Republicans) passed the “Chips and Science Act” that will provide up to $280 billion for semiconductor production as well as broader tax credits and subsidies for scientific initiatives. None of the bills were paid for.

Shortly after Democratic senators secured the GOP votes necessary to pass that bill (based on the Republicans’ naive assumption that Congress would pass no additional major spending expansions), Sens. Chuck Schumer and Joe Manchin surprised Republicans by unveiling a reconciliation agreement 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 incoherence arises from Democrats dubbing the reconciliation bill “The Inflation Reduction Act” in part because it would reduce deficits by $305 billion over the decade (though likely less when the three-year health extensions are inevitably extended) — right after they passed a science bill that adds up to $280 billion in deficits over the decade. The net effect of the two bills may be to slightly expand deficits over the decade. Not exactly “inflation reduction.”

Sen.  Joe Manchin was one of the forces behind the surprise reconciliation bill.
Sen. Joe Manchin was one of the forces behind the surprise reconciliation bill.
AP

The other level of incoherence is the contradictory provisions of the bills. The science bill is specifically designed to encourage business investment in semiconductors and other applied scientific research. Similarly, many of the reconciliation bill’s $385 billion in energy and climate provisions offer tax breaks to businesses that invest in clean energy and new technologies.

Yet the reconciliation bill is paid for in part by a 15% corporate minimum tax that specifically takes aim at business investment. A leading reason why some companies currently pay tax rates below 15% is because 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 across industries. So Congress is going to create or expand corporate tax breaks for science, energy and climate — and then hit these 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 receiving assistance from the “Chips and Science Act” will have to turn around and pay $1.7 billion annually in new minimum taxes. Once again, for every government program there is an equal and opposite program.

Schumer and Manchin's agreement proposed $485 billion in energy, climate, and health-care expansions.
Schumer and Manchin’s agreement proposed $485 billion in energy, climate, and health care expansions.
AP

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

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

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

With the economy contracting for the second consecutive quarter — and teetering on the edge of recession — it is 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 out the economy’s supply curve to match all the inflationary demand.

Raising taxes will contract the economy at the very moment that the Federal Reserve is dramatically slamming the brake pedal on the economy to combat the inflation that the White House and Congress have refused to sufficiently address. The pro-growth way to address inflation is by reining in tariffs, scaling back federal spending, expanding oil and gas development and paring regulations such as ethanol mandates and Buy American rules.

Instead, Congress is passing an “Inflation Reduction Act” that is mostly canceled out by an adjoining bill. And these same contradictory bills both subsidize and tax business investment.

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

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

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