On August 16, with a wide grin on his face and a sense of renewed optimism in the air, President Biden signed the Inflation Reduction Act into law. This bill is perhaps the most significant piece of legislation that Biden has been able to pass since ascending to power over a year and a half ago. In a time of heightened partisanship and polarity both in Congress and across the US today, being able to get this bill through is a pretty substantial accomplishment for Biden and the Democratic party.
And boy, did they need that.
With a presidency mired by a series of foreign policy crises and an inflation-ridden economy recovering from the devastating impacts of the pandemic, Democratic hopes of winning just about anything at the midterms in November were disappearing quickly. Placing on top of that an uncertainty over Biden’s political future, the Democrats were desperate for a win soon. So despite the obstacles in the way, getting the Inflation Reduction Act (IRA) passed might just give Democrats a fighting chance in November. But aside from the political talking points of the bill, one must first comprehend what’s in it and how it helps.
Firstly, the IRA can be split into three distinct topics: climate policy, health care reform, and corporate tax reform. Starting with the first and probably most weighty part of the bill, the climate change policy that the IRA addresses is very extensive. Measures include tax credits for consumers that purchase electric vehicles, heat pumps, and solar panels, loan guarantees for companies that choose to invest in clean energy projects, and payments for the reduction of methane emissions. Essentially, this part of the bill incentivizes rather than regulates individuals and companies, encouraging the development of the clean energy industry in America. This brings the country to the same level as EU investments in climate change policy, thus also increasing global economic competitiveness in this sector. Moreover, incentives also help the development of these industries in North America, which both revitalizes domestic manufacturing and reinforces the US’ commitment to NAFTA. All of this amounts to a whopping $370 billion, the largest ever investment put forward by Congress for climate change mitigation.
The health care reform brought forward by this bill is also very significant. Perhaps the most important part of this piece is the provision that gives Medicare the ability to negotiate with pharmaceutical companies for the cost of medication. This effectively brings down the cost of prescription drugs for Medicare beneficiaries, with a $2,000 cap on out-of-pocket spending for these drugs starting in 2025. Another huge part of the health care reform here is the extension of subsidies on insurance premiums bought through Affordable Care Act marketplaces until 2025. This was initially brought up in the American Rescue Plan Act of 2021, but those subsidies were set to expire at the end of this year.
And finally, the tax policy. This area of the IRA is slightly more complicated. The big piece here is a new 15% corporate minimum tax for companies that have a reported $1 billion or more income on the books. Additionally, the bill includes a 1% stock buyback tax and an $80 billion investment in the IRS. All in all, the bill supposedly promises $300 billion for deficit reduction once all the revenue and costs are put together.
So on the surface, the IRA looks like a pretty solid bill, right? Well, once you look further, a lot of drawbacks to the bill are discovered.
Although the investments in climate change mitigation promise a 40% reduction in carbon emissions by 2030, that still does not reach the amount needed for the US to fulfill its commitment to the Paris Agreement. Furthermore, although the bill does a great job at promoting the development of the domestic clean energy industry, there are no provisions that address the critical resources and raw materials needed for this expected growth. On top of that, heavy compromise to get the bill passed still saw some concessions for future fossil fuel development. All thanks to Senator Joe Manchin. There’s more. Medicare’s ability to negotiate drug prices could suppress innovation in that area, and the 15% corporate minimum tax, according to Wilson Center fellow and former congressman Mark R. Kennedy, “reflects a double jeopardy that mitigates the impact of incentives in the tax code to invest and pursue other priorities incented in the code”.
But above all, the Inflation Reduction Act doesn’t… wait for it… reduce inflation.
The bill is named as the one thing it doesn’t do. And that’s sort of to be expected. With such a colossal fiscal investment as this bill, none of it addresses the current inflation issues plaguing the country. According to the Congressional Budget Office (CBO), the bill will have a “negligible effect” on inflation this year and about a 0.1 percentage point effect on inflation in 2023.
Not only that, but the Tax Foundation predicts that the IRA alone will have a -0.2% effect on GDP in the long term and the Joint Committee on Taxation (JCT) states that in 2023, low to middle-income earners will pay up to $16.7 billion in taxes. A complete contradiction to Biden’s “grow the economy from the bottom up and the middle out” philosophy.
But alas the Democratic party was able to get something done. For once, they’ve finally used their majority, albeit slim, to their benefit and with impeccable timing as well. In the past month, Biden’s approval ratings have gone from an all-time low of 37.5% to 41.6%. All in good time for midterms. This law does have the potential to do some real good in all fairness, but is it enough? We might not get that answer immediately, but for now, the image of Biden handing over the pen he signed the bill with to Manchin represents the incredible amount of hard work and cooperation to get this passed and hopefully bodes well for the future.
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