The Inflation Reduction Act Is a Fiscal Disaster | Citizens Against Government Waste

The Inflation Reduction Act Is a Fiscal Disaster

The WasteWatcher

The Inflation Reduction Act of 2022 (IRA) will raise taxes, increase spending, and prolong both inflation and the recession.  Yet the White House and Senate Democrats continue to state otherwise, contradicting the expert analysts on which they usually rely.

According to the Joint Committee on Taxation (JCT), the IRA would raise taxes on taxpayers in nearly every tax bracket, with $14.1 billion being added to the tax burden of those making between $200,000 and $500,000, and $16.7 billion added to those making less than $400,000.  By 2031, those making less than $400,000 would be hit with more than two-thirds of the tax burden, mostly due to the increased level of subsidies provided to higher-income earners through Green New Deal programs, like the tax credit of up to $7,500 for electric vehicles available to individuals making up to $150,000 and couples making up to $300,000.  It is unclear how progressives can agree that is a progressive result. 

The agreement on the IRA was reached by Senate Majority Leader Chuck Schumer (D-N.Y.) and Senator Joe Manchin (D-W.Va.), the latter of whom claims he made the agreement because there are no tax increases, just the closing of loopholes.  Like many other members of Congress, Sen. Manchin has trouble with math.  The current top tax rate for carried interest, subject to the three-year holding period enacted by Congress in 2017, is 23.8 percent.  Changing the holding period to five years as proposed in the IRA would increase the tax to the top individual rate of 37 percent.  That is a 55.5 percent increase no matter what anyone says.  This new tax, which raises just $1.4 billion annually over the next 10 years, targets investors and would wreak havoc on thousands of small businesses that rely on private equity and venture capital investments to build their businesses and hire new employees. 

Half of the new taxes would fall on manufacturing, which is nonsensical after Congress just provided $280 billion in subsidies and tax credits to manufacturers to increase competition with China in the CHIPS Act, including incentives to make more semiconductors in the U.S. 

The minimum corporate tax of 15 percent on book income, which has previously been rejected by Congress, is supposedly targeted at large corporations.  But it will have a significant negative impact on broadband investment by increasing taxes on spectrum purchases and retroactively taxing past spectrum purchases, as well as increasing taxes on capital investment.  This provision also makes no sense just as tens of billions of dollars are being made available through both the American Rescue Plan Act and the Infrastructure Investment and Jobs Act, and private broadband investment reached $86 billion in 2021, bringing the total to $2 trillion since 1996.  Making spectrum licenses more expensive will delay and impede efforts to bridge the digital divide.

The IRA would also give the Internal Revenue Service (IRS) $124 billion to increase tax enforcement, including $80 billion to hire tens of thousands of agents over the next 10 years.  The Government Accountability Office has included the IRS on its High-Risk List since 1990 and has noted that the agency continually falls short in accomplishing its core mission.  The summary of these provisions by the Senate Democratic Leadership makes no mention of providing more resources to process the tens of millions of unprocessed tax returns, eliminating the mishandling of confidential taxpayer information, or improving the agency’s outdated information technology systems. 

Instead, the bill calls for “greater enforcement,” which in the past has led to targeting individuals and entities based on their political views rather than increasing revenue.  The IRA also provides $15 million for the IRS to report to Congress on how the agency could develop its own “free direct efile tax return system.”  This expenditure is both wasteful and duplicative.  The IRS has made several futile attempts to develop its own information technology systems, including $17 million on a Cyberfile program in 1995-1996, and those wasted tax dollars were among the many reasons that the highly successful Free File system began operating in 2003.  This public-private partnership allows up to 70 percent of taxpayers to file for free.  Only taxpayers know what they owe, so there is no reason to force them to pay for something that is currently free, or to give the IRS the ability to fill out their tax returns in advance and send them a bill.

The legislation would also impose damaging and dangerous price controls on pharmaceuticals.  The healthcare provisions in the IRA would severely dampen innovation in the pharmaceutical industry and lead to fewer drug choices for consumers, and fewer new life- saving medicines in the future.  While even a single new drug not being created is one too many, an August 2021 Congressional Budget Office (CBO) Simulation Model of New Drug Development report projected that H.R. 3, on which the drug price control provisions of the BBBA and the IRA are based, will decrease new drugs entering the marketplace by 8 percent in the third decade, resulting in at least 60 lost treatments.  But a November 29, 2021, issue brief published by University of Chicago economists Dr. Thomas Philipson and Troy Durie, found that the reduction in revenue would decrease research and development by 18.5 percent, leading to 135 fewer drugs and generating “a loss of 331.5 million life years in the U.S., 31 times as large as the 10.7 million life years lost from COVID-19 in the U.S. to date. These estimated effects on the number of new drugs brought to market are 27 times larger than projected by CBO, which finds only five drugs will be lost through 2039, equaling a 0.63 percent reduction.” 

The human cost of price controls is far too high.  Senators should search their conscience carefully before voting in favor of the IRA, including how they will explain to their family, friends, and constituents that they decided to prevent the development of a cure for a disease that one of them may have now or in the future. 

The bill also raises taxes on energy just after gas prices hit an all-time high, inflation is running at 9.1 percent, and families are having to cut back on food to pay their electric bills. 

Finally, the “deficit reduction” comes solely from higher taxes, as once again Senate Democrats have not found a single penny of government waste to eliminate, which is by far the more traditional and effective way to reduce the deficit. 

The damage that the IRA will cause to the economy, investment, and innovation should give at least one Democratic senator sufficient cause to say no.

 

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