Reducing inflation is an urgent social and moral responsibility

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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 Senator Kirsten Senema refused to approve a bill proposed by Biden at a cost of trillions of dollars under the label “Build 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 a US president (Donald Trump engages in this 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 decrease 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 is equivalent to $222 billion in a minimum tax 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, adding 87,000 agents and doubling its enforcement staff, but it is unlikely to raise the expected amount of revenue will yield. When the Internal Revenue Service previously targeted offshore accounts owned by wealthy Americans, it collected only $14 million of a projected $9 billion, spending $40 for every dollar it collected (giving new meaning to the phrase “good enough for the government.”) Superinflation Reduction Act expanded enforcement activities with similar results, we can expect to raise only $2 billion.

The claim that additional agents will only go to wealthy families and large corporations that “don’t pay their fair share” lacks any credibility, especially since every large corporation is already subjected 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 submitted to Congress’ Joint Committee on Taxation, taxes on each of the income groups—the poor, the middle class, and the wealthy—would rise, even if they rise slightly more as the income scale goes up.

In general, a law to reduce inflation will not generate much less revenue, save much less, and reduce deficits much less than the advertising that just promotes it; Rather, it will be much 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). It is clear that the title of the law is intended, misleading, its authors realized that inflation is the concern of voters, while climate change occupies a much lower level.

Even on the climate action front, proponents of the law have greatly exaggerated its impact.

In fact, credibility is a very valuable asset. Once credibility is lost, it becomes very difficult to regain 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.

Indeed, the United States desperately needs leaders who speak plainly and simply, hold people honestly accountable, take responsibility when one of their proposals fails, 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.

* Professor of Economics at Stanford University, Senior Fellow at the Hoover Institution, former Chairman of George HW Bush’s Council of Economic Advisers from 1989-1993


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