The Inflation Reduction Act Is an Economic Disaster

As has been widely noted, the Inflation Reduction Act of 2022 has nothing to do with inflation. At least, not directly. However, this act’s nonlinear effects on the economy will be, among its other disasters, very inflationary. The Inflation Reduction Act is a growing economic catastrophe.

What Is In the Inflation Reduction Act

The major provisions of the Inflation Reduction Act (IRA) constitute a radical assault on economic production. By reducing the GDP, it will actually add to inflation. As is shown in the post What Can We Believe in the Debate on Inflation?, the inflation rate is given by the percent increase in the money supply, plus the percent increase in the velocity of money, minus the percent increase in the GDP growth. Negative GDP growth is inflationary. Since we are already in a recession with two successive quarters of negative GDP growth, the anti-supply side policies of the act will only deepen that recession. Consider the major provisions of the act.

• A 15 % corporate minimum tax rate: Companies with incomes higher than $1 billion will have a minimum tax of 15 %. In addition, corporation stock buybacks will have a 1 % excise tax.
• Increase in the number of IRS agents: The IRA provides $80 billion for the Internal Revenue Service to hire up to 87,000 new tax auditors. The implications of this are disputed.
• Climate Change Expenditures: The act has numerous expenditures to lower U.S. emissions of carbon dioxide. These include federal investments in non-fossil fuel energy production, tax credits for lowering CO₂ emissions, and tax credits for households to offset energy costs. The act includes $386 billion of spending and tax breaks to battle carbon dioxide emissions.
• Medicare will be allowed to negotiate the price of prescription drugs: This will lower the copay costs of beneficiaries. Starting in 2025, Medicare recipients will have a $2,000 cap on out-of-pocket drug costs.
• Affordable Care Act subsidy extensions: The federal government currently subsidizes medical insurance premiums under the ACA to lower individual premiums. These premiums were scheduled to expire at the end of 2022. The Inflation Reduction Act extends the subsidies until the end of 2025.

Although the act provides subsidies to reduce some costs for some individuals and households, that is not the same as inflation reduction. Indeed, its deleterious effects on economic production will ultimately prove very inflationary.

What We Can Expect from the Inflation Reduction Act

One of the most economically destructive aspects of the new law is the imposition of a 15 % minimum corporate income tax, and 1 % excise tax on corporate stock buybacks. I have argued before that we should never tax companies at all. The common progressive objection to this proposal is that it favors the rich at the expense of ordinary people. However, this objection is easy to rebut.

Rich people grow richer from the ownership of corporate stock in one of two ways. The first is when they receive dividend payments from the company. The second is when they sell their stock at a profit. (If the rich sell at a loss, they obviously become poorer.) Therefore, at that point, the gains of the rich are taxed by income taxes.

As long as corporate profits are retained by the company, they do nothing to enrich the wealthy. They do offer the potential for future stockholder enrichment through dividends or stock sales. However, until then, those corporate profits are only at the disposal of the company itself. So why should they not be taxed?

The answer lies in what the company does with its profits. Their first choice would be to use that new capital to increase their ability to produce new saleable wealth. That, after all, is the main purpose for their existence. They could hire new labor, raise wages to retain or attract scarce skilled labor, train lower skilled labor to higher skills, buy new machinery, construct new factories, buy more intermediate goods to produce more final goods, etc., etc. When they do any of these things and increase their ability to produce new wealth, they benefit all of society. Society itself grows richer. These riches are distributed through the wages and salaries of all those employed by the company. Their products are useful to all those who buy them.

Nevertheless, perhaps a company can find no way to profitably invest their profits. In that case, their second choice would be to pay dividends to stockholders. At that point, the stockholders are taxed on their dividends as income. Their third choice would be to buyback corporate stock. This would increase the value of the remaining outstanding stock. The stockholder would then be taxed on the profits of that stock sale as income when he sold it.

Corporations and small businesses are the main producers of wealth in this country. To tax them at all reduces their capability to produce increasing amounts of wealth, i.e. a growing GDP. Introducing mandatory new taxes for which there are no tax breaks when we are already in a recession means that the recession will only grow deeper. The Atlanta Federal Reserve’s GDPNow estimate of real GDP growth for Q3 2022 is steadily falling. On August 16, the forecast was for +1.8 %; on August 17, it fell to +1.6 %. Then again, on August 24, it fell to +1.4 %. If their forecast keeps falling like this, pretty soon the forecast will be negative.

Another point is that the rich are not the only ones who profit from stock ownership. USAFACTS reports that in 2019 some 53 % of households were invested in the stock market in one way or another. Some owned stocks directly, and some owned them through 401(k) and IRA plans. USAFACTS provided the following chart of the time-development of the percent of Americans owning corporate stock.

A second threat to the economy posed by the Inflation Reduction Act is its intensifying war on fossil fuel energy supplies. Because of high gas prices, people are driving less. This reduction in gasoline demand has led to a small dip in its price. The fall in inflation has not been caused by an increase in the actual supply of gas. Due primarily to this dip, inflation ticked down to 8.5 % in July from 9.1 % in the month before.

The high cost of fossil fuels impacts the economy in several ways. It increases the cost of transportation of goods to where they are needed. It increases the price of food. Not only is oil needed to drive farm machinery, but it is also required to produce fertilizers.

However, the recent decrease in inflation will almost certainly be temporary. As already noted, the act discourages the production of many needed goods. The Medicare provisions alone amount to the price-fixing of medicines. Obviously, such price-fixing will discourage the pharmaceutical industry from producing those medicines and discourage research into new medicines. Burdening the supply-side of the economy this way in the middle of a recession will only deepen it. [NB: Despite the fact the U.S. has had two stright quarters of economic decline, many dispute the claim the country is actually in a recession. Typically, the nay-sayers point to a strong job-market after the rebound from COVID-19 economic shutdowns. They assert a recession is marked both by a fall in GDP output and by an increase in unemployment. However, a wave of corporate layoffs has just begun in 2022. This almost certainly means we are now in a recession.] As the United States falls into a deeper recession, the Inflation Reduction Act’s combat with the supply-side of the economy will make it even more intense. And, since a fall in GDP is inflationary, a renewed growth in inflation is to be expected.

The so-called “Inflation Reduction Act” is truly a growing catastrophe.

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