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What's worse than a recession? Recession with tax hike

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Lawmakers are facing demands from the business community to rescind the provisions, which will grow stronger if the economy continues to weaken. The prospect of Washington doing something about them or anything else to help growth looks dim, however, with Congress under divided control and House Republicans hardly showing unity at first.

“This is a particularly challenging time,” said Chris Netram, administrative vice president for tax at the National Association of Manufacturers. “If you add tax increases on top of a slowing economy, what does that do for business? This puts our guys in a tight spot.

It’s the exact opposite of what usually happens when bad times come. Typically, legislators look to the tax system to help cushion the blow to both individuals and employers by finding ways to lower taxes. In the initial wake of the coronavirus pandemic, lawmakers sent checks to millions of Americans, among other changes, while making it easier for businesses to qualify for refunds.

Business advocates had hoped lawmakers would roll back at least some of the increases during last month’s session of Congress, though that failed due to a partisan dispute over Democrats’ demands to also expand the Children’s Tax Credit.

Many, though not all, economists believe a recession is looming, thanks to the Federal Reserve’s efforts to fight inflation with a series of sharp hikes in interest rates.

Two new tax increases started last week, including a minimum tax on large corporations. It’s an especially tricky tax, with the Treasury Department just beginning to explain exactly how it will work, and many companies say they are still trying to determine whether they will be hit by it.

Companies that buy their own shares are also subject to a new excise tax that came into effect on January 1. At the same time, a deduction for the purchase of equipment, machinery and other investments automatically decreased by 20% with the new year.

That’s in addition to two other business tax increases — which rolled out online last year — that Republicans used to help fund the 2017 tax cuts. They were widely seen as budget gimmicks and many hoped they’d be withdrawn now.

One requires companies to roll out a deduction for research and development expenses over five years, rather than taking on them all at once — something aerospace and defense giant Raytheon said would cost $1.5 billion.

Another reduction in the write-offs companies can take for interest payments on borrowed money, a provision that will hurt a bit more amid rising interest rates. In some situations, experts say, this can leave companies taxed even if they have no taxable income.

Together, they add up to $115 billion this year, according to estimates by the Joint Committee on Taxation and also the nonpartisan Tax Policy Center — a big change from how much big companies typically pay. Last year, corporate taxes totaled $425 billion.

“It’s a huge corporate tax delta,” said Donald Schneider, a former economist for the Ways and Means Republicans who is now deputy head of US policy at Piper Sandler, an investment bank.

Business leaders still expect the increases to be rescinded this year.

But an impasse among lawmakers has yet to be resolved, with Democrats turning down proposals to cut business taxes without cutting them for average Americans as well.

And it’s not entirely clear how much House Republicans care if taxes on big business are raised.

Although they managed a steep corporate rate cut the last time they were in charge of the House, many of these legislators have left Congress, the party’s relations with the business community have deteriorated in recent years, and the caucus has taken a populist turn.

This week, they chose Rep. Jason Smith (R-Mo.), an openly skeptical big-business agitator, to head the Ways and Means Committee, which directs tax policy.

In his campaign for the hammer, Smith scoffed at suggestions that he would revisit the Democrats’ new minimum tax on big business, saying it would be his “last” priority.

And in a statement this week after his choice, Smith signaled that, if anything, he would be skeptical of corporate tax breaks, saying he wants to examine whether lawmakers should “continue handing out tax breaks on corporations that have abandoned their American identity in favor of of a relationship with China”.

While the tax increases are a blow to the economy, some experts are downplaying the implications. With the exception of so-called bonus depreciation, tax increases tend to be targeted strictly at very large companies, which, at the moment, are not strapped for cash.

“The corporate tax hike alone will be a small drag on growth this year,” said Mark Zandi, chief economist at Moody’s Analytics.

“The economic fallout from higher corporate taxes is mitigated by corporations’ still historically low effective tax rates, ample cash reserves and significant investment needs due to efforts to improve global supply chain resilience and labor productivity,” said Zandi .

Goldman Sachs is in a similar field.

He sees R&D provisions, interest and bonus depreciation increasing effective corporate tax rates this year by 1.6 percentage points. This will mean a “small” reduction in the profits of large companies.

“Corporate tax policies taking effect in 2023 are expected to have a small impact on aggregate S&P 500 earnings, but the impact will vary across sectors,” it said in a research note last week.

“We estimate that all of these provisions would undercut the 2023 S&P. [earnings per share] by three percent.”