IRS Interest Rate Increases, Inflation Reduction Act, and Carbon Tax
Tax Policy:
August 15: IRS interest rates increase for Q4
The interest rates the Internal Revenue Service uses will go up for the quarter beginning Oct. 1, the agency said.
The rates will be:
6% for overpayments (5% in the case of a corporation);
3.5% for the portion of a corporate overpayment exceeding $10,000;
6% for underpayments; and,
8% for large corporate underpayments.
The rates are determined quarterly.
For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus three percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus three percentage points and the overpayment rate is the federal short-term rate plus two percentage points.
August 15: Corporations facing new book tax and stock buyback levy
The Inflation Reduction Act that Congress passed Friday includes a new minimum tax of 15% on the book income of corporations that earn over $1 billion in revenue, along with a 1% tax on stock buybacks, and those provisions are likely to change the tax planning used by the largest companies and their accounting firms.
The new "Book tax" applies to the earnings recorded on the business's financial statements, as opposed to the income that's usually recorded for tax purposes and reported to the Internal Revenue Service. The new tax isn't the same as the global minimum tax of 15% that Treasury Secretary Janet Yellen negotiated with other countries involved with the Organization of Economic Cooperation and Development.
"I think it will be more pronounced for specific industries and business models, business models where it's capital intensive and where there's an incentive in the Tax Code to accelerate depreciation expense," said Wes Bricker, vice chair and U.S. Trust Solutions co-leader at Big Four firm PricewaterhouseCoopers.
"That's the tax policy justification for accelerating depreciation. You get more renewal and more investment in the economy and it spurs growth, so it can have a dampening effect over time." Sen. Kyrsten Sinema, D-Arizona, insisted on creating an exemption for accelerating depreciation deductions as one condition for agreeing to support the legislation, so companies such as manufacturers will still be able to take advantage of the accelerated bonus depreciation to buy equipment, for example, and it will be exempted from the corporate minimum tax.
To help make up for the potential revenue lost from preserving this and the accelerated depreciation tax break, another new tax will be a 1% excise tax on share buybacks. "The corporation is going to have to make a decision," said Kevin Matthews, a CPA and accounting professor at George Mason University's School of Business who also has his tax practice.
August 13: GOP under fire for rhetoric over IRS
Republicans are coming under fire for their rhetoric over $80 billion in funding for the IRS that was included in a massive climate, tax, and health care bill that Democrats in Congress are sending to the White House. The funding, over 10 years, is intended to help the IRS enforce various provisions in the Inflation Reduction Act, which would raise more than $700 billion in new revenue by instituting a 15-percent corporate minimum tax, taxing stock buybacks, and extending a cap on deductions for business losses, in addition to helping the IRS enforce existing tax law.
Republicans, who have nursed grievances over the IRS going back to the Obama administration that was inflamed further by fights over former President Trump's tax returns, have aimed at the funding, arguing it amounts to creating a new army of IRS agents to go after taxpayers.
A Grassley aide said in a statement to The Hill that "Democrats' partisan bill includes an additional $80 billion to beef up IRS enforcement, including hiring an additional 87,000 IRS employees, which will undoubtedly result in more audits targeting American small businesses - at their expense. Unfortunately, Democrats' focus is on IRS enforcement rather than providing badly needed tax services. It's shockingly disingenuous to argue all of these new agents will only be answering phone calls."
Democrats have long argued the IRS needed a major funding boost as audit rates and hiring levels dipped over the last decade.
Republican lawmakers have repeatedly argued against providing more money for the IRS. "This additional money for the IRS to target all Americans is absolutely wrong. It will target our families, it's going to target our small businesses, and it's going to go after them to get them to pay more money," Sen. Rick Scott said back in December 2021 about the Democrats' unsuccessful Build Back Better legislation, which also proposed an IRS enforcement funding boost.
"I guarantee you, citizens, in every one of our states, if you ask them, what do they want, they don't want 87,000 new IRS agents," Sen. Ted Cruz said after proposing an amendment to strike the additional funding for the IRS from the Democrats' bill.
August 11: Yellen tells IRS not to use the new funding to increase middle-class audits
Treasury Secretary Janet Yellen directed IRS officials not to use new funding secured for the agency in the Democrats' Inflation Reduction Act to increase audits on households making under $400,000 annually. In a Wednesday letter to IRS Commissioner Charles Rettig, Yellen reaffirmed a commitment "That audit rates will not rise relative to recent years for households making under $400,000 annually," which she described as a "Guiding precept of the planning" for the agency.
Yellen's comments are an apparent response to Republican attacks targeting Democrats' proposed funding for the agency, which has seen its funding and staffing decline for roughly a decade.
Ted Cruz and Lindsey Graham, have warned of tens of thousands more IRS agents and an increase in audits that would impact those below the $400,000 threshold.
"Crucially, these resources will support a much-needed upgrade of technology that is decades out-of-date, and an investment in taxpayer service so that the IRS is finally able to communicate with taxpayers in an efficient, timely manner," Yellen said.
The IRS funding proposal is one of several tax-related provisions included in the Inflation Reduction Act to raise revenue to help cut the nation's deficit over the next decade, while also offsetting investments in health care and climate. In her letter to Rettig, Yellen said the IRS's "Enforcement resources will focus on high-end noncompliance."
Inflation Reduction Act of 2022:
August 16: Biden Signs Climate, Health Bill Into Law as Other Economic Goals Remain
President Biden signed into law a landmark tax, health, and energy bill on Tuesday that takes significant steps toward fulfilling his goal to modernize the American economy and reduce its dependence on fossil fuels. The $370 billion climate, tax, and health care package that President Biden signed on Aug. 16 could have far-reaching effects on the environment and the economy.
Mr. Biden has so far been unable to deliver on many of the programs he proposed to help Americans balance work responsibilities with care for children or aging parents and to pursue high-quality education from a young age.
Opposition from another critical Senate Democrat, Kyrsten Sinema of Arizona, forced Mr. Biden to drop much of what he promised would be an overhaul of the tax code to "Reward work, not wealth." He did not, as he repeatedly proposed, end up raising top marginal income tax rates for high earners, or taxing investment returns for millionaires at the same set of rates as income earned from wages, which he had promised would help reduce economic inequality.
Ben Harris, a campaign economic aide to Mr. Biden who is now the assistant secretary for economic policy in the Treasury Department, said the increased I.R.S. enforcement against tax evasion by high earners and corporations would by itself help balance the tax system in favor of workers.
The bill Mr. Biden signed Tuesday invests $370 billion in spending and tax credits in low-emission forms of energy to fight climate change. Mr. Biden called on Congress to create a civilian climate corps - what he described in his American Jobs Plan outline as a $10 billion effort to create "The next generation of conservation and resilience workers.
August 12: Inflation Reduction Act: House Passes Climate, Health-Care, And Tax Bill
House Democrats on Friday approved a sprawling bill to lower prescription drug costs, address global warming, raise taxes on some billion-dollar corporations, and reduce the federal deficit, sending to President Biden the long-delayed, last component of his economic agenda in time for this year's elections. To pay for the spending, Democrats rely on revisions to tax laws, including a new minimum tax on some billion-dollar corporations that now pay nothing to the U.S. government.
Biden's popularity is low in some polls, even after Democrats notched a wide array of legislative victories in recent weeks, including laws to restrict gun purchases, expand veterans' health care and manufacture much-needed computer chips. To win Manchin's vote Democrats also agreed to mandate new oil and gas leasing in the Gulf of Mexico and off the coast of Alaska, while backing a future bill to streamline permitting for pipelines and other infrastructure.
In the months to follow, every major House committee produced reams of pages of legislative text toward the massive spending bill, which Democrats likened to the "Great Society" reforms enacted under Lyndon B. Johnson - an analogy Biden himself favored.
Even as Democrats shaved billions of dollars, and shelved some of their most prized plans to aid low-income Americans, Manchin remained troubled by its cost - and at one point, last month, walked away from climate and tax policies he had once supported. Reflecting on the compromises Democrats made on the eve of the House vote, Pelosi said in an interview that she had urged her members to "Respect the bill for what it does" rather than "Make judgments about it for what it does not."
August 11: Tax Strategy: Inside the Inflation Reduction Act legislation
On Sunday, Aug. 7, 2022, the Senate passed the Inflation Reduction Act by a party-line vote of 51 to 50, with Vice President Harris casting the deciding vote, and Speaker Nancy Pelosi promising that the House would pass it on Friday, Aug. 12, 2022. Following long-term negotiations between Senators Chuck Schumer and Joe Manchin, the two finally reached an agreement on a bill much reduced from the original Build Back Better legislation, and even then, last-minute changes were needed to win the vote of Senator Kyrsten Sinema and the support of the Senate parliamentarian to make sure it complied with the budget requirements to be passed with only a simple majority under budget reconciliation.
Research credit and payroll taxes: The legislation would increase the limitation on the ability of small businesses to claim the research credit against payroll taxes from $250,000 to $500,000.
The legislation was expected to be enacted with only Democratic support, with Sen. Schumer indicating that it included all of their priorities, including promoting clean energy and health care, corporate tax increases, IRS funding, and deficit reduction. Republicans criticized the plan as raising taxes when the country was facing a recession. It remains to be seen what impact, if any, the legislation may have on the November elections.
August 11: Does the Inflation Reduction Act contain a carbon tax?
Lesser known provisions may lead to a kind of tax on carbon and methane emissions for the first time in the U.S., or at least prompt accountants to get involved in tracking such carbon dioxide and methane emissions, as well as nitrous oxide. The bill provides funding to the U.S. Department of Agriculture's Natural Resources Conservation Service for conservation technical assistance as well as a program to quantify carbon sequestration and carbon dioxide, methane, and nitrous oxide emissions. While there are no explicit taxes on carbon or methane emissions in the bill, some of the languages may suggest a path there.
Democrats had tried during the Obama administration to include a cap-and-trade scheme that would have put a price on carbon emissions as part of a larger climate package, the American Clean Energy and Security Act, but the effort stalled in the Senate after passing in the House in 2009.
The new Inflation Reduction Act may be a harbinger of such a carbon tax, at least when it comes to methane emissions, which are often overlooked when companies make commitments to a "Net zero" goal on carbon dioxide emissions.
"It's part of transitioning the economy over time to alternative sources of energy. In emerging markets, for example, there are 14 states in Mexico that have enacted or proposed carbon-based taxes. Emerging economies see it also as a way of raising revenue, largely raising revenue from outside their borders, so it's politically popular with their citizens." Accountants will need to develop skills to account for carbon emissions, as groups like the recently formed International Sustainability Standards Board work to develop the proposed standards for climate and sustainability disclosures under the auspices of the International Financial Reporting Standards Foundation. The package does include some provisions pertaining to methane emissions, especially in the petroleum and natural gas industries.
Economic News/Policy:
August 14: Economy Week Ahead: Housing and Retail Sales in Focus
Monday: The National Association of Home Builders/Wells Fargo housing-market index kicks off a week of U.S. housing figures. Economists surveyed by The Wall Street Journal expect that the index—a measure of building confidence—declined slightly.
The Federal Reserve Bank of New York is slated to release its monthly Empire State Manufacturing Survey, and economists expect to show a decline in general business conditions.
Tuesday: Economists estimate that new residential construction fell 3.8% in July, as buyers face record housing prices. Building permits are expected to rise by 0.9%, economists say. The Federal Reserve is expected to report industrial output increased in July. Economists also expect an increase in capacity utilization, a measure that shows how much industries are producing compared with what they are capable of producing.
Wednesday: The Commerce Department will report U.S. retail sales for July, a measure of spending on goods, in addition to eating and drinking out. Economists estimate that retail spending slowed last month compared with earlier in the summer when consumers continued to spend despite high inflation.
A separate Commerce Department report is expected to show that business inventories rose in June.
Thursday: Initial jobless claims, a proxy for layoffs, are expected to have risen slightly last week. The closely watched labor market metric has slowly trended upward in recent weeks, hitting its highest level of the year last week.
Existing-home sales are expected to have declined by 6.3% in July, following a drop of more than 5% the prior month. The U.S. housing market has cooled rapidly as record high prices and higher mortgage rates weigh on sales.
August 11: Wholesale prices decline 0.5 percent as inflation eases in July
Wholesale prices dropped 0.5 percent in July to hit a 9.8 percent annual increase, down from an 11.3 percent annual increase in June as 40-year high inflation continued to show signs of easing. The Labor Department's producer price index showed that demand for goods dropped 1.8 percent from June to July as demand for services increased only 0.1 percent.
Taking out the more volatile categories of food, energy, and trade, final demand for goods rose 0.2 percent in July to hit a 5.8 percent increase on the year, down from 6.4 percent from last month. Thursday's numbers follow Wednesday's release of the consumer price index, which showed that annual retail inflation dropped in July to 8.5 percent from 9.1 percent in June.
While the CPI is a more direct measure of the inflation that consumers actually feel at the pump and in the grocery store, the PPI more closely tracks inflation on the supply side. The PPI jumped from around 2 percent before the pandemic to more than 11 percent in March of this year, leveling off twice in 2020. The CPI dipped three times over the same period while climbing from a pre-pandemic level of 2.5 percent to more than 9 percent in June.
August 10: New figures suggest inflation may be at a turning point
Inflation didn't rise between June and July according to new figures from the Labor Department's consumer price index, the first numbers in some time that suggest rising prices may finally be at a turning point. That's pretty much in line with the month-to-month changes in core inflation that happen under more "Normal" economic circumstances when annual inflation is closer to 2 or 3 percent.
"We are at a major turning point in terms of inflation," said Brian Bethune, an economist at Boston College, who in an interview with The Hill called the figures a "Good sign." "It's one month. One month does not make a trend - you're going to hear that a thousand times, but I also project that the inflation rate will moderate in August because we're seeing further declines in gasoline prices. So it's looking like we've turned a corner," he said.
Inflation had already taken three dips as it rose from zero percent at the height of the pandemic in March 2020 to more than 9 percent on an annual basis in June 2022. Wholesale prices decline 0.5 percent as inflation eases in July Average US gas price falls below $4 per gallon.
“It does seem like these numbers show that inflation is starting to moderate,” Gerald Epstein, an economist at the University of Massachusetts. “There are a number of forces that are lowering inflationary pressures, including the drop in oil prices and gasoline prices.”
"The fact that core inflation has held steady," he added, "Is encouraging, because it suggests that supply and labor costs are certainly not adding to inflation. Wages went up 5.2 percent on average in July, and that's still well below the inflation rate of 8.5 percent. So there's less of a cost-push pressure than there has been. On the other side of that coin, it also means that real wages have been continuing to fall for most workers."
August 10: Consumer prices rose 8.5% in July, less than expected as inflation pressures ease a bit
On a monthly basis, prices were flat as energy prices broadly declined 4.6% and gasoline fell 7.7%. That offset a 1.1% monthly gain in food prices and a 0.5% increase in shelter costs. Excluding volatile food and energy prices, so-called core CPI rose 5.9% annually and 0.3% monthly, compared with respective estimates of 6.1% and 0.5%. Even with the lower-than-expected numbers, inflation pressures remained strong.
Ter is up 26.4% over the past year, eggs have surged 38% and coffee is up more than 20%. Despite the monthly drop in the energy index, electricity prices rose 1.6% and were up 15.2% from a year ago.
Used vehicle prices posted a 0.4% monthly decline, while apparel prices also fell, easing 0.1%, and transportation services were off 0.5% as airline fares fell 1.8% for the month and 7.8% from a year ago.
Clogged supply chains, outsized demand for goods over services, and trillions of dollars in pandemic-related fiscal and monetary stimulus have combined to create an environment of high prices and slow economic growth that has bedeviled policymakers.
The July drop in gas prices has provided some hope after prices at the pump rose past $5 a gallon. Following the CPI report, market pricing reversed, with traders now anticipating a better chance of a lesser 0.5 percentage point move.
ICYMI:
August 15: Homebuilder confidence dips for the eighth straight month
Record home prices and elevated interest rates caused homebuilder confidence to fall for the eighth straight month in August, according to a new survey. The housing market index calculated by the National Association of Home Builders and Wells Fargo dipped six points this month and turned negative for the first time since May 2020.
One in five reported having to reduce prices over the past month to boost sales or prevent cancellations. Home builders have been warning for months that while many Americans want to buy a house, they are often priced out of the market, as affordable homes often aren't profitable in the current environment.
The recent construction slowdown will further constrict supply, a major factor behind record housing prices. Home sales dipped for the fifth straight month in June but prices ticked up for the 124th straight month, according to the National Association of Realtors. The NAHB survey found that buyer traffic hit the lowest level since 2014 and that homebuilder confidence declined the most in the West and Northeast, where prices are highest.
August 13: Sinema took Wall Street money while killing tax on investors
Sen. Kyrsten Sinema, the Arizona Democrat who single-handedly thwarted her party's longtime goal of raising taxes on wealthy investors, received nearly $1 million over the past year from private equity professionals, hedge fund managers, and venture capitalists whose taxes would have increased under the plan.
Sinema's defense of wealthy investors' tax treatment offers a jarring contrast to her background as a Green Party activist and self-styled "Prada socialist" who once likened accepting campaign cash to "Bribery" and later called for "Big corporations & the rich to pay their fair share" before launching her first campaign for Congress in 2012. She's been far more magnanimous since praising private equity in 2016 from the House floor for providing "Billions of dollars each year to Main Street businesses." After her election to the Senate, Sinema interned during the 2020 congressional recess at a private equity mogul's boutique winery in northern California.
During a two-week period in September alone, Sinema collected $47,100 in contributions from 16 high-ranking officials from the private equity firm Welsh, Carson, Anderson & Stowe, records show. By the time the bill was up for debate during a marathon series of votes, Sinema had already forced Democrats to abandon their carried interest tax increase.
After private equity lobbyists discovered a provision in the bill that would have subjected many of them to a separate 15% corporate minimum tax, they urgently pressed Sinema and other centrist Democrats for changes, according to emails as well as four people with direct knowledge of the matter who requested anonymity to discuss internal deliberations.
Sinema worked with Republicans on an amendment that stripped the corporate minimum tax on private equity from the bill, which a handful of vulnerable Democrats also voted for. Liberal activists in Arizona say they plan to make Sinema's reliance on donations from wealthy investors a campaign issue when she is up for reelection in 2024."There are many takes on how to win, but there is no universe in which it is politically smart to fight for the favorable tax treatment of the wealthiest people in the country," said Emily Kirkland, a political consultant who works for progressive candidates.
August 9: Biden signs chips and science bill into law
"Today is a day for builders. Today America is delivering," Biden said at the bill signing event at the White House. The bill - formerly known as the CHIPS and Science Act - passed the Senate and House at the end of July, after more than a year of work on Capitol Hill and multiple iterations of the legislation.
“We are better positioned than any other nation in the world to win the economic competition of the 21st century. You’re the reason why I’m so optimistic about the future of our country,” Biden said, thanking lawmakers and business leaders at the White House, which included the chief executives of Lockheed Martin, Intel, and Micron.
He called the CHIPS and Science Act a "Once in a generation investment in America itself," and said the bill will create good jobs, employ workers, grow the economy, change the course of human health and disease, lead the world in future industries and protect U.S. national security.
The passage of the bill represented a major bipartisan win for the Biden administration. The House GOP encouraged members to vote against the legislation after Schumer and Sen. Joe Manchin announced an agreement on a larger climate and health care spending package shortly following the upper chamber's passage of the chips bill.
McConnell had threatened Republican votes for the chips bill if Democrats moved forward with the larger package - which they intend to pass with a simple majority in the Senate through a process known as budget reconciliation - and House Republican leaders moved to oppose the chips bill once it became clear there was a deal on the reconciliation bill. With the bill signed into law, the Biden administration will now go about implementing the legislation.
For Fun:
August 15: Some Spiders May Enter REM Sleep
The study cautiously characterizes the behavior as "REM sleep-like," since the researchers haven't yet shown that the spiders engage in sleep as it is typically defined by scientists. Klein called REM sleep a "Paradox" because an animal's muscles become largely paralyzed during the sleep phase, while the brain appears to light up as though awake.
He also called it a "Black box" because it's unclear why humans and other animals go into the paradoxical sleep state, and it has been debated since REM sleep was discovered in humans some seven decades ago.
Some of the humans' most vivid and bizarre dreams take place during REM sleep, said John Lesku, a zoology professor at La Trobe University in Australia who studies sleep in animals.
So it's not out of the question that animals in which REM-like sleep has been observed - like dogs, cuttlefish, and maybe jumping spiders - might be dreaming, he told The Post, although it's hard to say for certain because dreams, even in humans, are impossible to prove.
If jumping spiders do enter REM sleep, they might be consolidating memories or behavior patterns, as some jumping spiders have sophisticated cognitive abilities and make complicated decisions, Taylor said.