Inflation Reduction Act Won't Fix Inflation, Will Hurt the Economy
(AP Photo/Susan Walsh)
Inflation Reduction Act Won't Fix Inflation, Will Hurt the Economy
(AP Photo/Susan Walsh)
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At the eleventh hour, Democrats are scrambling to rush through a slimmed-down version of their reconciliation package from last year, this time apparently with key Sen. Joe Manchin (D-WV) on board. Unfortunately, the so-called Inflation Reduction Act (IRA) is full of recycled bad tax policy ideas that are unlikely to have any impact on inflation whatsoever — as nonpartisan studies have already found.

The bill is framed as combating inflation because it is likely to be scored by the Congressional Budget Office as reducing deficits, which in a vacuum would indeed be a good way to address inflation. The problem is the way it tries to do that.

First, the bill includes $433 billion in new spending — a counterintuitive addition to a bill portrayed as reducing deficits. This spending includes $369 billion in energy and climate investments and $64 billion to extend Affordable Care Act premium subsidies.

To “offset” this new spending, the IRA includes $288 billion in attempts to reduce spending that are likely to do more harm than good. This largely comes from efforts to control prices of prescription drugs (officially reducing deficits by reducing entitlement spending) that amount to little more than short-sighted price controls, likely to hamper new development in and research for health care solutions in the long run. 

But what’s worse, a large chunk of that $288 billion represents yet another use of one of Congress’s favorite budget gimmicks in recent years. In Washington budget math, canceling or postponing a regulatory change that is scored by CBO as increasing spending — even if it never goes into effect — counts as deficit reduction. By repeatedly postponing the implementation of this regulation that never went into effect and never will, Congress has repeatedly created budget room out of thin air, and is set to do so one last time in the IRA.

But while more serious spending reduction proposals would have been welcome to combat inflation, tax increases on productive businesses and individuals would never have been. Unfortunately, the IRA includes $451 billion worth of those — all recycled bad ideas that should have stayed on the Build Back Better drawing room floor.

By far the largest chunk comes from implementing a 15 percent “minimum book tax,” in reality creating a secondary, parallel corporate tax code. This tax idea has been long floated by progressives who don’t seem to understand that “book income” and “taxable income” are often different for good reasons — namely, that they are different measures for different purposes.

Book income is an accounting of cash flow, meant to represent the fiscal health of the business, while taxable income takes into account all the deductions and exemptions that Congress put in the tax code on purpose. “Minimum tax” proposals are ham-fisted efforts to pretend that Congress is upset with the amount of taxes businesses pay without having to identify and eliminate provisions of the tax code that are apparently too generous. The reason is simple — many of the actual provisions of the tax code that allow businesses to reduce their taxable income are generally good policy and broadly supported in Congress.

The next biggest chunk of “new revenue” comes from stepped-up IRS enforcement efforts. Not only could such efforts encourage greater IRS harassment of taxpayers, including the low-income taxpayers Democrats always manage to convince themselves will not be targeted this time, but it also comes at a time when the IRS is still failing to handle its most basic responsibilities. Until the IRS shows that it can protect private taxpayer data and process returns and handle taxpayer inquiries in a timely manner, further enforcement funding should be off the table.  

Taken together, all these tax increases will harm the economy at a time when it is starting to falter, and do nothing at all for inflation. The Penn-Wharton Budget Model has already found that the impact of the IRA on inflation would be “statistically indistinguishable from zero,” a nice way of saying “nonexistent.” 

Much like a zombie, the ideas in the IRA should have stopped moving a long time ago, and are likely to cause a whole lot of economic pain if allowed to keep moving. Unfortunately, they just seem hard to kill.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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