Does the Inflation Reduction Act increase taxes on people making less than $10,000 / year?

Question

Quoting Democrats rely on misleading messaging to sell Manchin-Schumer bill:

In 2023, the year in which the legislation would increase tax revenue most, individuals making less than $10,000 per year would pay 3.1% more in taxes

The standard deduction for single people or married people filing separately is $12,550. ie. you don't pay taxes on the first $12,550 that you make. Does the Inflation Reduction Act change the standard deduction or is the article spewing hot air?

Answer 1

There is no change in the US Federal Tax Rates for individuals included in the Inflation Reduction Act. The "Increased Taxes" that Joint Committee on Taxation's analysis shows is based off an increase in Corporate Taxes and a projection of the burden of said taxes on stakeholders vs. labor.

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The analysis cited by Fox News, among others, can be found here on page one of this document. The chart provided on page one shows an increase of 3.1% in the effective tax rate of earners making less than $10,000 per year. Note that this is not an additive calculation, but a multiplicative one, and is more commonly referred to as Percentage Points. The estimate provided by the JCT projects an effective tax rate of these tax payers increasing from 7.3% tax to 7.6% tax. For someone making $10,000, this amounts to an extra $30 per year in taxes paid.

It's a little unclear as to how the income categories are calculated, as the document implies that earners making between $10,000 and $20,000 per year are, and will continue to pay, a negative tax rate under the current law.

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As for where the taxes are coming from, this article from the Tax Policy Center seems to offer an explanation as to how the JCT arrived at it's numbers and why a law that has no change in tax rates on individuals is projecting to increase tax rates on Americans.

While the IRA proposes reforming the tax treatment of carried interest and Superfund cleanup fees, its primary tax increase is a 15 percent minimum tax on corporations’ “book” profits above $1 billion. Economists have long debated the precise portion of corporate taxes that end up falling on workers, as opposed to shareholders and other capital owners. JCT allocates the corporate tax 25 percent to labor and 75 percent to capital.

This section also links to this article titled "Who bears the burden of the corporate income tax?" for further details. Some key points to note from this article include the following

• Increases in corporate tax leads to reduced investment in US Corporations
• Reduction in investments in businesses leads to reduction in productivity, and therefore wages and compensation for labor
• The Tax Policy Center assumes that 80% of the burden of increased corporate taxes falls on stakeholders in the form of reduced profits, and 20% on labor in the form of lower wages / wage increases

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According to the TPC, the JCT report is inaccurate for the following reasons

• JCT allocates the corporate tax burden to 25% labor instead of the 20% used by TPC, although I can not independently verify this.

JCT allocates the corporate tax 25 percent to labor and 75 percent to capital.

• The JCT is ignoring the fact that the minimum tax is only applied on profits above $1 Billion USD, and that the burden of taxes on profits of this magnitude is disproportionately born out by stakeholders and not labor.

(S)uper-normal returns (...) comprise any returns above the normal returns a business could expect. (...S)tandard analysis assumes that the tax on excess returns is borne by shareholders.

• Because of the minimum $1 Billion profit limit, the businesses most likely to be impacted by this are most likely to be operating with extreme returns on investment and are more likely to not decrease spending on labor and efficiency

Distinguishing between normal and super-normal returns is especially important here since the corporate minimum tax under discussion would only apply to firms with $1 billion or more in profits. Given their financial status, it’s quite possible the businesses impacted are more likely to be earning excess or super-normal returns.

• Recent evidence has show that gross excess profits are almost entirely shared with high-income managers and executives.

The debate over corporate tax incidence is also continuing to evolve. Recent work has shown that firms share a substantial portion of their excess returns with high-income managers and executives. This all suggests that the corporate minimum tax under discussion, while not perfect policy, would be highly progressive.