Democrats Call for More Tax Code Changes Beyond the Schumer-Manchin Bill

Rising inflation and declining approval ratings have plagued the Biden administration as far back as fall of last year, when Democratic Senator Joe Manchin of West Virginia and Senate Leader Charles Schumer of New York began their original talks around the president's Build Back Better (BBB) agenda.

Now, 10 months and a name change later, the Party may have finally found a partial solution to both woes in the form of Schumer and Manchin's newly negotiated Inflation Reduction Act of 2022.

In addition to prescription drug pricing reforms and investments toward combatting climate change, the Act aims to impose a 15 percent corporate minimum tax rate on companies that earn over $1 billion in a year, which it projects will net $313 billion in tax revenue. Projections also said that an additional $124 billion will be raised through enhanced IRS tax enforcement.

While the bill's $433 billion spending allocation may be a far cry from the $3.5 trillion BBB bill that progressives originally hoped for, its aim to boost tax enforcement and derive tax revenue from wealthy corporations is an inflation-fighting tool that lawmakers had suggested to Newsweek prior to Schumer and Manchin's announcement.

But leading progressives in the Democratic Party say more can be done.

Senator Elizabeth Warren or Massachusetts and Congressman Ro Khanna of California both argue that in order to reduce the price hikes being levied on average consumers, Congress must address the growing gap between them and the wealthy. The potential new tax on corporations contained in the Schumer-Machin bill could be a step in that direction.

"The distortions in our economy that come from the wealthiest handful of Americans and giant corporations drive inequality and also push up inflation," Warren told Newsweek. "The same companies that don't want to pay taxes also have the power of market dominance, and that means when the conversation turns to inflation, they recognize an opportunity not only to pass along whatever increased costs they may face, but also to bump prices up an extra dollop in order to pad out their own profits."

"It's price gouging, pure and simple, and the reason they can do it is because of power," Warren added. "Price gouging is not a question of who's a good guy and who's a bad guy. It's who's got the power to dominate a market, and it's that power that every single day lets them squeeze consumers and continues to derive inequality throughout the economy."

To address this issue, Warren told Newsweek that these corporations must face additional taxes. She also went a step further, suggesting that conglomerates with outsized market dominance be "broken apart."

Khanna added to this list of potential future steps, telling Newsweek that combatting inflation will also require further revision of the tax code.

"What is really needed is higher progressive taxation, including a wealth tax," Khanna said, drawing on ideas from French economist Thomas Piketty, who last month spoke before the Congressional Progressive Caucus. "That would be deflationary because you wouldn't need the Fed expanding the monetary supply."

Both Warren and Khanna said that the revenues derived from these tax measures could be used to benefit average Americans. Citing Piketty, a leader in the study of wealth inequality, Khanna said the United States could see long-term economic returns through these measures by investing the newly acquired tax revenue in trade school programs and K-12 schooling.

He argued that these investments be made without printing additional dollars, allowing inflation to cool off.

The funding being put toward climate change in the Schumer-Manchin measure could ultimately become a concrete example of this strategy playing out. However, the bill still faces a major hurdle before Democrats can point to it as a strategy of the future.

While the bill only needs 51 votes to pass, rather than the usual filibuster-proof 60, moderate Democratic Senator Kyrsten Sinema of Arizona, who stood in the way of efforts to pass BBB, has previously opposed any new corporate tax hikes, and it remains to be seen how she will approach the Schumer-Manchin bill.

When asked about the feasibility of passing even more ambitious tax efforts in the future, some of which may require Republican support, Khanna said the following:

"There's growing populist anger against the concentration of economic and political power, so I do think that eventually this country will put in place a wealth tax," he told Newsweek. "Right now, it's hard, but there is a populist element where I could see some Republicans eventually also being for it."

The top 10 percent of U.S. earners control slightly over 77 percent of the nation's wealth while the bottom 50 percent hold just under 3 percent, according to data gathered during the first quarter of 2022 by Statista, a consumer and market data firm. Subsequently, as this issue has grown, so has the attention it's received, especially in wake of rising inflation.

Former Treasury Secretary Larry Summers, who served in the Clinton administration, appeared on Bloomberg Television last week, where he said the U.S. can "raise substantial revenue by cutting corporate-tax loopholes" in order to fight inflation. He added that additional revenues can be generated and inflation subsequently reduced by "taking some of the money out of high-income tax evaders who then go and spend the money."

Less than a week after making these comments, and following the announcement of the Inflation Reduction Bill, Summers appeared on CNN, where he acknowledged reporting from The Washington Post that he had spoken with Manchin about how the bill would not lead to higher prices.

Summers, or any Democrat for that matter, would unlikely be able to change the minds of most of the chamber's Republicans over the prospect of new tax hikes. Leadership has expressed significant frustration over Schumer and Manchin having kept the them in the dark regarding their new bill. However, Warren's idea of cracking down on corporate power stands as one priority that has crossed the political aisle.

Republican Senator Chuck Grassley of Iowa has teamed with Democratic Senator Amy Klobuchar of Minnesota in bringing forth the American Innovation and Choice Online Act, a bill, which among other things, prevents companies like Apple, Amazon, Facebook and Google from prioritizing their own products over smaller firms who sell through their platforms.

This bill has drawn the support of other Republican Senators, including Lindsey Graham of South Carolina and Josh Hawley of Missouri. Hawley has been particularly active in going after large corporations. In April of 2021, he introduced the Trust-Busting for the Twenty-First Century Act that aims to "crack down on mergers and acquisitions by mega-corporations and strengthen antitrust enforcement."

Preventing corporations from becoming so large that they dominant their respective industry is the type of thinking that Hal Singer, an antirust and consumer protection expert with the research firm Econ One, said is needed to combat rising prices.

"It's easier to coordinate prices among a smaller set of firms than a larger set of firms," Singer told Newsweek. "If I worked in an industry with two or three rivals, it'd be much easier for me to form a cartel and coordinate my prices, either explicitly or tacitly, than if there were, say, 20 firms in my industry."

Singer said that leaders in highly concentrated industries—air travel, meatpacking, and shipping being examples—have taken on the practice of announcing their intention to raise prices during earnings calls. Their rivals, which listen in on the calls, can then "interpret that as a signal" that they too can raise their own prices without experiencing a significant loss in demand.

"It's making a bad situation worse," Singer said. "It's not the root cause of inflation, but it's causing inflation to accelerate."

Power imbalances in economy ultimately play a role in the persistence of price hikes, Singer added, and preventing the wielding of such power is a piece in the fight against inflation and wealth inequality. Bill Gale, an expert on federal economic policy with the Brookings Institution, said that a bolstered tax code targeting the most wealthy can serve as the other piece.

By collecting taxes that the wealthy may currently have the means to evade, Gale said the government could chip away at the spending power of America's top earners. This in turn would help drive down prices, he said. However, beyond the effect of combatting inflation, Gale sees tax reforms that diminish the wealth gap as "good policy" in general. He believes that by combatting this inequality America's economy will find itself in a healthier place as it heads toward the future.

"Forget about inflation for a second," Gale told Newsweek. "We should be taxing high income households significantly more, because right now they're able to avoid taxes through various mechanisms. We should enforce the tax system better, because one out of every $7 or so that's owed to the government is not being paid."

Correction 7/29/22, 4:58 p.m. ET: This story has been corrected to say that the Inflation Reduction Act will raise an additional $124 billon through IRS tax enforcement rather than investing that sum in additional enforcement.