As Election Day draws near, one issue continues to be at the forefront of voters’ minds — inflation. While the effects of inflation are tangible and painful, the causes remain abstract and confusing to the average voter. Different pundits put forward different explanations, generally tied to things that most people spend very little time thinking about — supply chain disruptions, monetary policy, labor market tightness, and so on. But the one thing that sounds like it definitely did reduce inflation is also the thing that unequivocally did not: the Inflation Reduction Act (IRA).
Passed in the summer of 2022 as a partisan bill, the IRA was a mishmash of different policies. It included price controls for prescription drugs, a new corporate minimum tax based on “book income," a massive funding injection for the IRS’s tax enforcement efforts, a new tax on corporate stock buybacks, and green energy tax credits.
Initially, the IRA was projected to reduce federal deficits by around $300 billion over a ten-year period. Advocates of the IRA argued that this deficit reduction would reduce inflation, implicitly accepting the premise that government deficit spending drives inflation. That was a curious argument given that just over a year earlier, the Biden-Harris administration recklessly pushed forward with a massive stimulus package that added $1.9 trillion to the federal deficit even as the economy was already recovering and warnings abounded that another stimulus package was wasteful and unnecessary.
In other words, if government deficit spending drives inflation, then the IRA was projected to undo just about 16 percent of the damage that Biden’s American Rescue Plan Act did in the first place. And that’s only part of the picture — since 2020, the federal government has added nearly $9 trillion to the national debt, and is on pace to add another $1.9 trillion this year. Deficit reduction of $300 billion from the Inflation Reduction Act would have worked out to a mere 2.8 percent of the amount added to the national debt since President Biden took office.
One supposes that “we undid 2.8 percent of the inflationary pressure we created in the first place” just doesn’t have the same ring to it.
But if it can be believed, the narrative that deficit reduction in the IRA contributed to reduced inflation is actually even more disingenuous than that context makes it seem. That’s because the projected $300 billion in projected deficit reduction has proven to entirely illusory.
Since the IRA went into effect, it became clear that the green energy credits were a lot more popular than initially believed. Projections that these credits would reduce incoming revenue by $271 billion were revised less than a year later to cost $536.4 billion. Budget projections are a notoriously inexact science, but it is rare that a provision as large as that proves to be twice as costly as initially estimated.
Other projections have proven to be similarly optimistic. The IRS recently bragged of recovering its first $1 billion from additional enforcement funding in the IRA, but that represents a small fraction of the $80 billion funding injection the IRS received that was supposed to more than pay for itself — the Congressional Budget Office had estimated that additional IRS funding would return $200 billion in additional tax revenue. Considering that the first $1 billion was likely the lowest-hanging fruit, it is becoming increasingly clear that taxpayers were sold a bill of goods when it came to increased IRS funding helping the agency crackdown on tax cheats.
All told, updated estimates now have the IRA adding about $200 billion to the national debt. It’s the height of irony for President Biden and Vice President Harris to tout the IRA as a key reason for inflation rates having come back down when the bill did not even end up doing the one thing that they claim it did.
So don’t be deceived by people who have read no further than the bill’s title claiming that the Inflation Reduction Act reduced inflation. It didn’t even succeed in reducing the deficit.
