The Goals and Anticipated Impacts of the Inflation Reduction Act
On August 16th, President Biden signed the Inflation Reduction Act (IRA) into law. The IRA includes key provisions for healthcare, tax collection, and energy investments. Through major decarbonization efforts coupled with investment into low-income and rural communities, the legislation aims to cut emissions 40% by 2030 to combat the climate crisis Healthcare provisions also made up a significant portion of the bill, allowing greater permissions for Medicare to negotiate prescription drug prices and cap out-of-pocket spending at $2,000 annually for recipients and an extension to Affordable Care Act subsidies. These goals appear to be lofty, which leaves two questions: does the inflation reduction act actually reduce inflation? Who is going to pay for it?
The Wharton Budget Model (PWBM) predicts a zero net change in inflation as a direct result of this bill. The model uses an impulse-response function, an econometric model that captures how an economy reacts to exogenous shocks. In this case, those exogenous shocks are the IRA’s spending and tax provisions. The PWBM predicts that there will be a minimal increase in inflation, .05 percentage points up through 2024, dropping by 0.25 percentage points in the late 2020s, thus creating a statistically insignificant effect on inflation. This raises a slight alarm, as a bill introduced to reduce inflation is actually projected to have an insignificant effect in decreasing it. It is perhaps the case that the IRA is intended more as an infrastructure and economic development bill rather than a true inflation reduction policy.
Aside from inflation, one promising projection is the $247.8 billion deficit decrease thanks to two key provisions in the bill: a 15% corporate tax rate on companies that make $1 billion in income, and lengthened holding periods for carried interest. This alleviates the concerns of individuals who are worried about funding the bill, as the IRA actually generates greater government revenue than spending over the next ten years. It further tames the fear that inflation may rise, as government revenue will offset the large increase in spending and curb inflationary pressures.
The IRA is by far the largest piece of legislation in 2022, and its true impact has yet to be revealed. Only time will tell whether the IRA matches up to the predictions set forth thus far. It is for certain, however, that the consequences of the IRA, for better or for worse, will shape U.S. economic, environmental, and healthcare policy for the coming decades.