Written by: Michael Buskin
Stanford – US President Joe Biden’s Inflation Reduction Act contains a variety of provisions that focus on supporting renewable energy and health insurance, and taxing businesses and the wealthy. This bill is the product of a bitter year-long battle within the party, after Senators Joe Manchin and Senators Kirsten Senema refused to approve a billion dollar bill proposed by Biden called “Building Back Better”.
Although this extensive “progressive” wish list failed to pass, the Left cheered the Inflation Reduction Act. The headline of a recent New York Times column asks, “Did Democrats Save Civilization?” Even Biden described the legislation as “one of the most important pieces of legislation in our history.”
While exaggeration is nothing new for an American president (Donald Trump is immersed in the practice daily on Twitter), the marketing of the Inflation Reduction Act crossed a red line. By claiming that the law would lower inflation, benefit the climate and tax only the wealthy and large corporations, Democrats engaged in the kind of propaganda that would be illegal if practiced by a private company.
In all, the law allocates $490 billion for new spending and tax breaks over the next decade’s budget. Its biggest provisions address expansions of the Affordable Care Act, drug subsidies under Medicare and tax credits for clean electricity, wind and solar projects, green manufacturing and nuclear power. Government agencies will hand out these large sums to recipients who adhere to various dictates (such as a requirement that a certain percentage of electric vehicle batteries be manufactured in America). Past experience with similar schemes suggests that multiple breaches are likely.
The law is also supposed to provide $764 billion in new “savings” and revenue. If it materializes (which is highly unlikely), it will offset and increase spending and tax credits; But this will only lead to a slight reduction in the budget deficit (0.5%) over the next four years, after which it is likely that a very different set of personalities will make budget decisions. The largest revenue item equals a $222 billion minimum tax rate of 15% on registered corporate income. But because it would limit the depreciation deductions that reduce the cost of investing in new capital, it would ultimately undermine investment and growth.
Proponents of the Inflation Reduction Act also claim it would raise $124 billion by spending an additional $80 billion on the Internal Revenue Service, which would add 87,000 agents — doubling its enforcement staff, but is unlikely to reach the expected amount will generate income. When the Internal Revenue Service previously targeted offshore accounts owned by wealthy Americans, it collected only $14 million of the $9 billion projected and spent $40 for every dollar it collected (giving new meaning to the phrase “good enough for the government”). If the Super Inflation Reduction Act’s expansion of enforcement activities produces similar results, we can expect to raise only $2 billion.
Moreover, the claim that the additional agents will only go after wealthy families and large corporations that “don’t pay their fair share” lacks any credibility, especially since every major corporation is already subject to intense scrutiny every year.
Certain provisions of the Internal Revenue Service are certainly worthy of support, provided they are reasonably elaborated and carefully directed. For example, the Internal Revenue Service needs adequate resources to clear the massive backlog of more than 21 million tax returns, and it could dramatically improve the recall response rate of just 10%, as well as modernize its legacy IT systems. But the $80 billion allocation to the Internal Revenue Service is a complete exaggeration, and it’s already generating a backlash.
Equally suspect is Biden’s promise not to raise taxes on anyone making less than $400,000. According to the Inflation Reduction Act filings with the Congressional Joint Committee on Taxation, taxes on each of the income groups – the poor, the middle class and the wealthy – will rise, even if they rise slightly more as the income scale goes up.
Overall, a law to reduce inflation will not raise much less revenue and generate much less savings and reduce the deficit than the ads that just promote it; It will be even far less efficient than its supporters claim in spending, subsidizing and regulating. But worst of all is the claim that this law will reduce inflation. Most likely, this law will worsen inflation in the short term, while only slightly reducing it over time (when it’s actually expected to fall anyway). The law’s title is clearly intended to mislead: its authors realized that inflation was the top concern of voters, while climate change was far below.
Even on the climate action front, proponents of the law have greatly exaggerated its impact. The provisions of the Inflation Reduction Act are likely to have a negligible impact on global warming (some commentators estimate a temperature drop of only 0.0009 to 0.028 degrees Fahrenheit in the year 2100). According to the Rhodium Group, “The package as a whole drives net emissions (of greenhouse gases) in the United States to fall 32% to 42% below 2005 levels by 2030, compared to 24% to 35% without it.”. For this law to have a greater impact, it must lead to technological breakthroughs (such as providing cheaper and more scalable battery storage capacity) or pressure other countries to reduce their emissions much more than they would otherwise. Both are possible, but not particularly likely.
In fact, credibility is a valuable asset – whether you’re a president or prime minister communicating with voters, lawmakers, allies and adversaries, or a CEO engaging employees, customers, suppliers and the financial markets. Once credibility is lost, it becomes very difficult to restore it. Biden described his apparently disastrous withdrawal from Afghanistan as an extraordinary success, and since then he has struggled to regain voter confidence. By insisting that inflation is temporary and that big spending bills would cost nothing, Biden dug himself an even deeper hole.
Blatant false propaganda about the Anti-Inflation Reduction Act is likely to deepen the distrust of government that has plagued America and many democracies. The US desperately needs leaders who speak plainly and simply, hold people honestly accountable, take responsibility when their proposals fail, and learn from their mistakes and those of their predecessors. These are small but necessary first steps towards rebuilding credibility and trust in government, which is essential in the face of more serious challenges ahead.
* Michael J. Boskin, professor of economics at Stanford University and senior fellow at the Hoover Institution, was chairman of President George HW Bush’s Council of Economic Advisers from 1989-1993, and chaired the so-called Boskin Committee, a congressional advisory body that highlighted errors in official US inflation estimates.