Biden’s Inflation Reduction Act won’t help US deficit much

It was Shakespeare who coined the phrase, “What is in a name, a rose by any other name would smell as sweet.” Those words were put in Juliet’s mouth to tell Romeo that it didn’t matter that he was from a rival family. Well, it turned out it did matter as we know how it ended. 

And so, what is in a name when you’re talking about the Inflation Reduction Act? 

Now, the theory is that deficits cause inflation. So what are the actual facts? The Congressional Budget Office, which is the arbiter of such things, says the deficit is going to increase between now and 2026 by $22 billion dollars. Well, that means in the near term, if anything, the bill is inflationary; modestly so.

In fact, the big long-term deficit cuts don’t occur until 2028. Think about that. We’re going to have two midterm elections and two presidential elections by then. So anything could happen. Who knows what the situation is going to be in 2028? 

So that’s really not a meaningful deficit reduction. Or over the average amount of the…deficit reduction in the bill, even including those long-term deficits, is just 30 billion per year. The government spends on average, about 4.5 trillion. This is just a tiny fraction of that… less than two tenths of one percent. So to call the deficit reduction meaningful at all, is a bit of a stretch. It is just four one-hundredths of 1% of GDP. It has nothing to do with inflation reduction, no matter how you want to name it. 

Also, there are some big tax increases in the bill. Some of them on the energy sector, which are going to make the price of gasoline, a very sensitive inflation topic, go up. There also is going to be a large tax increase on manufacturing corporations. The bill contains something called a “alternative minimum tax” for companies.

Well, the difference between the alternative tax and the regular tax is largely the depreciation of purchases of plants and equipment. Right now, the bill allows you to write them off right away. Whereas the profit base for what the government now wants will not allow you to do that. It’s based on how much the company tells its shareholders that the machinery wore out. That’s likely, according to the National Association of Manufacturer, going to reduce GDP by $68 billion. 

Now admittedly, the National Association of Manufacturers is not completely a disinterested observer here. But regardless of the size, this is going to be a negative for GDP. It’s likely to reduce wages by about $17 billion and likely to cost about 220,000 jobs over the long term. This reduces the supply side of the economy. It makes U.S. manufacturers less competitive. If anything that will prove to be inflationary. There are other provisions in the bill that are also going to prove to be inflationary.

The bill increases the number of IRS agents to make the IRS larger in terms of employment than the Pentagon. If anyone’s ever seen the Pentagon, you know that’s a lot of people. Basically tens of millions of Americans will be audited, including large portions of the middle class. Particular targets will be the small business community because IRS agents tend to view that’s where the money is.

That tends to be distracting both for the business and drives up their costs in terms of accounting and lawyers, even if they’re now currently paying their taxes in full…another inflationary aspect of the bill. So from the point of view of deficits reducing inflation, the bill doesn’t do much. 

In terms of raising the costs of production for businesses in America, the bill does a lot. Calling it the Inflation Reduction Act really doesn’t make a lot of sense.