In the midst of a recession, with inflation eating away an average of $6,800 in purchasing power from the incomes of families with two workers, the so-called Inflation Reduction Act would impose tax increases, manipulative federal subsidies, and price controls on every American family.
The bill would deepen the growing recession, continue to depress household incomes, and will continue to increase prices.
Release of the bill marks a major reversal for its key supporter, Sen. Joe Manchin, D-W.Va., who in 2010 said, “I don’t think during a time of recession you mess with any of the taxes, or increase any taxes.”
Yet this proposal, negotiated chiefly by Manchin and Senate Majority Leader Chuck Schumer, D-N.Y., is intended to raise taxes by roughly $570 billion over the next decade—$4,500 per household.
Further, the bill would increase spending on crony corporatist subsidies and wealth redistribution by roughly $510 billion over the next decade. However, the true cost would be nearly $200 billion higher after accounting for budget gimmicks.
The bulk of the new subsidies are designed to have a far greater impact than their price tag implies. These subsidies could shift trillions of dollars of investment away from conventional energy sources and into green energy pipe dreams.
This shift would leave our economy smaller, less dynamic, and less innovative, and will trap millions in poverty. The bill also contains $250 billion in on-paper spending cuts that simply reflect the burdens of the drug price controls in the bill.
Far from helping consumers, these price controls will mean fewer lifesaving drugs are produced and will slash vital research budgets.
To add insult to injury, the spending will be front-loaded, and the revenues will be back-loaded. Though supporters of the bill claim it will reduce deficits over the next decade, it will likely increase deficits in the first few years, stoking inflationary pressures in the near term.
When the spending expires in a few years, some in Congress will want to repeat the gimmick all over again, claiming to pay for three years of spending with 10 years of taxes.
Inflation occurs when the government prints money to cover budget deficits. It’s good that Senate Democrats want to reduce the deficit, but front-loading new deficits and raising taxes are counterproductive. Raising taxes on firms increases their costs, which fall on households through higher prices, reduced production of goods and services, less investment, lower productivity, and lower wages.
The best path to take would be to drop the distortionary tax increases and spending subsidies, and instead reduce the deficit by cutting spending.
In truth, reducing the size, scope, and coercive intrusions of the government is the only way to mitigate inflation and lift the economy out of a recession at the same time.
Tragically, this bill does none of those things. Instead, it doubles down on the disastrous policies that got us into this “stagflationary” mess.
Here’s what’s in the bill:
Green New Deal Policies
Americans are suffering under the weight of high inflation. And two areas where that pain is being felt especially hard is at the gas pump and at the grocery store. Regular retail gas prices are about double what they were when President Joe Biden took office. Food price inflation is at levels not seen in more than 40 years.
The left and the Biden administration can try and play all the word games they want, but the Inflation Reduction Act may be their biggest misinformation campaign yet. Instead of addressing the underlying issues causing inflation, especially when it comes to energy and food, the bill only will exacerbate the problems.
There’s no end to the Biden war on energy in this legislative monstrosity. In fact, the bill is a signal to the energy sector that the war is going to be taken to a whole new level. The government-imposed shift away from conventional fuels that provide us affordable and abundant energy is going to shift even further.
If you are an oil company or refiner, why invest? Especially when this bill is telling them that Washington politicians want to kill off their industry. We have already seen the damage inflicted by efforts to block affordable and abundant energy and centrally plan a far-left vision for a “clean energy” future.
And it means pain for Americans. But the Biden administration and the left appear to be perfectly fine with inflicting this pain on Americans. In fact, rising energy prices are not unintended consequences of their policies, but rather the envisioned outcomes. This is something the left hasn’t been shy about acknowledging:
- Biden stated: “[When] it comes to the gas prices, we’re going through an incredible transition that is taking place that, God willing, when it’s over, we’ll be stronger, and the world will be stronger and less reliant on fossil fuels when this is over.”
- Then-President Barack Obama said: “Under my plan … electricity rates would necessarily skyrocket.”
- Transportation Secretary Pete Buttigieg reportedly “argued that more Americans should purchase electric vehicles so that they ‘never have to worry about gas prices again.’”
If Congress and the administration were serious about high energy and food prices, they would be reducing spending, not ramping it up. They would be reducing regulatory obstacles across supply chains, not increasing them. And they wouldn’t be presuming that Washington politicians should dictate how energy is generated and consumed in this nation.
The reported overall spending for the climate and clean energy provisions is $369 billion. Here are just some of the bill’s lowlights:
It spends $9 billion for promoting electric appliances and energy-efficient retrofits.
Do you like your natural gas stove or fireplace? Well, this bill is part of a broader effort to make these appliances relics of the past. If that seems like an exaggeration, there are already left-wing cities and states banning new hookups for natural gas appliances.
It creates tax credits to have homes run on “clean energy” and for the purchase of “clean vehicles.”
If American consumers demand those types of products and features, that’s one thing. The creation of this tax credit is a recognition that Americans don’t desire the products and, therefore, Washington politicians must induce Americans to “do the right thing.”
An important point to bear in mind: All of this new spending will come on top of the federal government’s voluminous regulations. Americans will be getting the worst of both worlds. There was already the Biden regulatory avalanche, and now this proposed bill would force taxpayers to use their hard-earned money to subsidize wasteful spending.
For example, as Washington politicians spend money to try to induce people to buy the appliances the government wants you to buy, there are currently proposed new conservation regulatory standards at the Department of Energy for commercial water heating equipment; consumer furnaces; walk-in coolers and freezers; commercial refrigerators, freezers, and refrigerator-freezers; packaged terminal air conditioners and packaged terminal heat pumps; dehumidifiers; dedicated-purpose pool pump motors; general service fluorescent lamps; clothes dryers; and distribution transformers.
It invests in unreliable electricity sources (and goods) while sending a clear signal that other electricity sources and gas-powered vehicles are disfavored.
The legislation includes production tax credits to manufacture solar panels and wind turbines, and a $10 billion tax credit to build “clean technology manufacturing facilities” that make electric vehicles, as well as those wind turbines and solar panels.
It also includes grants to retool auto manufacturing plants to manufacture clean vehicles and up to $20 billion in loans to build “clean vehicle” manufacturing facilities.
There are also “roughly $30 billion in targeted grant and loan programs” to get states and utilities to shift toward “clean electricity,” and tax credits and grants for clean fuels and clean commercial vehicles.
It punishes conventional fuel sources that provide affordable and reliable energy.
For example, the legislation would increase the costs for oil and gas drilling by increasing the royalties companies have to pay for offshore drilling from 12.5% to 16.66% (and as high as 18.75%), and for onshore oil drilling from 12.5% to 16.66%. It also includes a methane emissions fee for petroleum and natural gas companies.
It funds efforts that try to dictate agricultural practices.
The bill would provide more than $20 billion to support “climate-smart agricultural practices.” The climate efforts within the bill should be considered in a broader light. There is a major disdain on the left for American agriculture practices, which they view as causing “incalculable damages.” This bill just helps to support that disdain.
But there is another issue. Congress would be blessing the Biden administration’s egregious abuses at the U.S. Department of Agriculture in which, without proper authority, it used the Commodity Credit Corp. as a climate change slush fund to create out of whole cloth funding for “climate-smart agricultural practices.”
Transforming Economy, Not Reducing Costs
By changing energy production in such a dramatic fashion, this legislation is also a pretext for far greater changes to our country.
Energy impacts every aspect of our lives and every sector of the economy. By dictating how we produce and consume energy, this bill would dictate how we live our lives and limit the freedoms we enjoy.
It’s a pretext for control. And there is little to no regard for the high prices incurred by Americans and the costs that will arise for trying to achieve the left’s radical climate agenda. And what’s even worse, this is all pain for no gain.
As explained in a new Heritage Foundation report:
Eliminating all U.S. emissions would mitigate global temperatures by less than 0.2 of a degree Celsius by 2100. Even if all other Organization for Economic Cooperation and Development economies eliminated greenhouse gas emissions as well, the world average temperature increase would be mitigated by no more than 0.5 of a degree Celsius by 100.
This legislation is many things (e.g., cronyism, wasteful, costly, controlling, and arrogant), but it certainly isn’t about improving our lives, which affordable and abundant energy does. And regardless of the bill’s name—which is an insult to the intelligence of every American—it has nothing to do with addressing inflation.
Expanding Government-Run Health Plans
The health care provisions are the latest play out of the single-payer, government-run health plan playbook. The plan would extend the Obamacare COVID-19 expansion beyond its current end date, force government price controls on pharmaceuticals in Medicare, and claim Medicare savings to offset the cost of the entire package.
Sold as a temporary measure in response to COVID-19, the American Rescue Plan made Obamacare subsidies more generous for those who were already receiving subsidies and made subsidies available to individuals who were previously not eligible (those earning above 400% of poverty rate, which equals $106,000 for a family of four).
This COVID-19-related provision is set to expire at the end of the year. The Schumer-Manchin proposal would extend the Obamacare expansion for another three years.
The Congressional Budget Office has noted that allowing this expansion to end (as originally intended) would save taxpayers $64 billion and not reduce the number of people with individual health insurance coverage.
As Heritage Foundation senior fellow Edmund Haislmaier has explained, the expiration would not cause premiums to soar, and many of those higher-income individuals who lose the subsidies have other coverage options.
So, as Heritage senior fellow Doug Badger notes, the real winners of the extension are the big insurance plans that pocket the government subsidies. Of course, those aiming for government-run health care are also winners as they most certainly are eyeing to make this next “temporary” expansion permanent in the future.
Medicare Drug Price “Negotiations”
The proposal’s Medicare price “negotiation” is another win for single-payer, government-run advocates. Heritage senior fellow Bob Moffit explains that the so-called Medicare prescription drug “negotiation” plan has nothing to do with negotiation and everything to do with government price setting.
Based on previous versions of this scheme, the secretary of health and human services would extend a purchase price to the manufacturers, the manufacturers could submit a counteroffer, but the secretary has the final authority to set the price and, in certain cases, could impose penalties on the manufactures for not agreeing to it.
Government price controls are a key piece in single-payer advocates’ plans for the health care sector, and pharmaceuticals are just the beginning.
Seniors only need to look at the Department of Veterans Affairs to see a version of this in practice. Seniors should expect less access to critical drugs and treatments than they have today, and everyone will be harmed by lack of newer drugs and cures being developed as a result in the future.
Independent analysts, whether they are from the Congressional Budget Office or academia, might differ on estimates of the number of new medications that will not be produced and distributed. But there is no doubt that the proposal will discourage investment in research and development of new and breakthrough medications.
Equally as damaging, it appears the savings generated from rationing prescription drugs for seniors will go to offset the Obamacare expansion and the new climate change agenda, rather than shoring up and protecting Medicare’s solvency.
Yet Another Minimum Tax
The Manchin-Schumer bill would impose a new 15% corporate minimum tax on businesses. Unlike the regular U.S. corporate income tax, which is applied to taxable income, the new minimum tax would start from a taxpayer’s financial statement income under U.S. financial accounting principles and would then apply a complex series of adjustments to ultimately tax companies’ “adjusted financial statement income.”
To some, the idea of a minimum tax on businesses may not sound controversial on first blush, but the devil is in the details.
One important detail is that the tax code already has several provisions that explicitly or implicitly act as minimum taxes. In addition to having to calculate corporate income taxes the usual way, many businesses already must calculate their tax liability under the Base Erosion Anti-Abuse Tax system. They also must calculate a minimum tax on so-called global intangible low-taxed income. Business income received by individuals is subject to individual alternative minimum-tax rules.
Regardless of what happens with the corporate minimum tax in the current Senate bill, there may well be another minimum tax coming down the pike soon. Since the Manchin-Schumer tax doesn’t comport with the Organization for Economic Cooperation and Development’s global minimum tax scheme, there will be continued pressure from the left to add still another minimum tax on businesses.
This situation is a bit like a king imposing a tax on the people of his kingdom based on the “size” of their crop yield. He then proceeds to measure each of their crop yields by weight, by volume, by price, and by area, and for each farmer he collects the tax based on the measure that is least favorable to the farmer.
In the case of the Manchin-Schumer bill, the new measure of income used—adjusted financial statement income—is problematic. In addition to significantly complicating the tax system, this way of measuring taxpayer income disfavors those who make capital investments to grow their businesses.
When businesses purchase capital goods such as machinery and equipment, under the current corporate tax system they can deduct those costs when determining their regular tax liability. However, under the new minimum tax calculations, things like newly purchased farm or factory equipment wouldn’t be fully deductible for many years. All the while, inflation would eat away at the value of that legitimate business deduction.
In other words, the corporate minimum tax would punish businesses for investing. That is exactly the wrong prescription for American workers, because when businesses stop growing, good jobs are hard to come by.
And contrary to the stated aim of the bill—reducing inflation—smothering business investment will reduce production and, if anything, drive up prices.
“Carried Interest” Tax Hike
Current law requires that capital gains and wages be treated differently. Wages are deductible as a business expense by the employer and taxable to the recipient as ordinary income. Income generated by capital assets is taxed and then capital gains from the sale of those assets are also generally taxed (but at a lower rate if held more than one year). Payments to purchase capital assets are generally not deductible.
Many investment managers are compensated with a combination of wage or salary income and some incentive-based compensation based on the profits from the investments (if any profits are forthcoming). The latter portion of the compensation, known as the “carried interest,” is usually taxed as a capital gain.
The bill effectively treats all capital gains from certain partnerships, financial instruments, and contracts as if they were wage income, but does not allow a deduction for those wage payments. It applies to “any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person.”
It is, therefore, an asymmetric “heads the government wins, tails the taxpayer loses” treatment since the compensation is taxed as if it were wages, but the wages paid are not deductible. It can be expected to reduce the return on investments and therefore have an adverse effect on productivity and wages in the long run.
IRS Slush Fund
The bill would provide an upfront appropriation totaling $78.9 billion for the Internal Revenue Service. That would effectively be a slush fund for the IRS, which could be spent with little congressional direction through 2031.
According to the Biden administration’s proposal, this funding would be used to add nearly 87,000 new IRS agents. The bill provides the Treasury secretary or her designee the flexibility to take such personnel actions as are deemed necessary to administer the Internal Revenue Code.
The Congressional Budget Office projects additional IRS enforcement spending could yield approximately $200 billion in higher revenues (for a net deficit reduction of about $120 billion). However, the CBO acknowledges this estimate is uncertain and differs from previous analysis.
What we do know is that the IRS bureaucracy will be charged with finding about a quarter of the Inflation Reduction Act’s deficit reduction.
The new agents and new funding could be used to subject small businesses and middle-class taxpayers to more IRS scrutiny. The bill includes a disclaimer stating: “Nothing in this subsection is intended to increase taxes on any taxpayer with a taxable income of [less than] $400,000.”
Of course, examining and enforcing payment of legally owed taxes is unlikely to be interpreted as increasing taxes. Based on IRS data, individual filers reporting less than $50,000 of income accounted for 62% of underreported taxes.
The new funding is equal to six times the normal annual IRS budget, which supports about 35,000 enforcement agents. It’s implausible that the scandal–ridden and union-dominated agency will be able to absorb so much extra funding, personnel, and power and avoid waste, fraud, and abuse.
Although the authority is not included in this legislation, Biden has even proposed requiring financial institutions to provide the IRS sensitive information on bank accounts with as little as $600.
According to Gallup, only 37% of Americans have a favorable opinion of the IRS, making it one of the least popular federal agencies. With the IRS’ politicized history, that’s not surprising.
Inflation Recession Act
The Biden administration and its liberal allies in Congress have gone out of their way to impose new burdens and to bloat the government. The result has been the ensuing inflationary crisis and now a recession.
Instead of heeding the economic warning lights, they have offered this bill, which is identical in purpose and philosophy to what created the current economic mess. If enacted into law, this bill would exacerbate the economic crisis and lead to a longer and much more painful stagflation.
This piece originally appeared in The Daily Signal