Originally published at Project-Syndicate | August 25th, 2022
Listen to US President Joe Biden and other proponents of the recently signed Inflation Reduction Act, and you would think that America has single-handedly rescued the world from inflation, climate change, and corporate greed. Unfortunately, all of the law’s big promises shrivel under scrutiny.
STANFORD – US President Joe Biden’s Inflation Reduction Act (IRA) contains a variety of provisions focused on subsidizing renewable energy and health insurance, and taxing corporations and the wealthy. It is the product of a contentious year-long intraparty struggle, following Senators Joe Manchin and Kyrsten Sinema’s refusal to go along with Biden’s multi-trillion-dollar “Build Back Better” bill.
Though that sprawling “progressive” wish list didn’t make it, the IRA nonetheless has stoked elation on the left. The headline on a recent New York Times column goes so far as to ask, “Did Democrats Just Save Civilization?,” and Biden himself has described the legislation as “one of the most significant laws in our history.”
While hyperbole is nothing new for a US president (Donald Trump engaged in the practice daily on Twitter), the marketing of the IRA has crossed a red line. By claiming that the law will reduce inflation, benefit the climate, and tax only the rich and big corporations, the Democrats have engaged in the kind of false advertising that would be illegal for a private company.
All told, the law allocates $490 billion in new spending and tax credits over the next ten-year budget. Its largest items are extensions to the Affordable Care Act (Obamacare) and Medicare drug subsidies, and tax credits for clean electricity, wind and solar, green manufacturing, and nuclear energy. These large sums will be doled out by government agencies to recipients who abide by numerous diktats (such as that a certain percentage of an electric-vehicle battery be made in America). Past experience with similar schemes suggests there will be manifold abuses.
The law also supposedly provides $764 billion in “savings” and new revenues. If realized (a very big “if”), these would more than offset the spending and tax credits; but they would lead to only a small reduction in the budget deficit (of 0.5%) in the next four years, after which an entirely different cast of characters likely will be making budget decisions. The largest revenue provision is a $222 billion 15% minimum tax on corporations’ book income. But since this will curtail depreciation deductions that reduce the cost of investing in new capital, it ultimately will undercut investment and growth.
Proponents of the IRA also claim that it will raise $124 billion by spending an additional $80 billion on the Internal Revenue Service, which will add 87,000 agents – more than doubling its enforcement staff. But this is unlikely to yield as much as predicted. When the IRS previously targeted wealthy Americans’ foreign accounts, it raised only $14 million of the $9 billion that had been projected, spending $40 for every $1 it raised (and giving new meaning to the expression “good enough for government work”). If the IRA’s vast expansion of enforcement activity yields similar results, we can expect just $2 billion to be collected.
Moreover, the claim that additional agents will go after only wealthy households and big corporations that are “not paying their fair share” is not credible, not least because every major corporation is already closely audited every year.
To be sure, there are some IRS provisions that I would support, provided that they are sensibly scaled and carefully targeted. For example, the IRS needs enough resources to clear its immense backlog of more than 21 million tax returns, and it could dramatically improve its 10% call-response rate and update its antiquated IT systems. But $80 billion for the IRS is complete overkill, and it is already generating a backlash.
Equally dubious is Biden’s pledge not to raise taxes on anyone making less than $400,000. According to the IRA’s official scorekeepers on the congressional Joint Tax Committee, taxes will go up for every income group – the poor, the middle class, and the rich – even if they do increase by a bit more the higher you go up the income scale.
All told, the IRA will not only raise far less revenue and yield far fewer savings and less deficit reduction than advertised; it also will spend, subsidize, and regulate far less efficiently than its supporters contend. But worst of all is its titular claim to be reducing inflation. Most likely, the law will exacerbate inflation in the near term, while reducing it only trivially down the road (when it is projected to have declined already). The title of the law is clearly meant to deceive: Its drafters recognized that inflation is voters’ top concern, whereas climate change ranks much lower.
And even on the climate front, the law’s proponents have vastly exaggerated what it will do. The IRA’s provisions are likely to have an imperceptible impact on global warming (with some commentators estimating temperature reductions of just 0.0009-0.028°F in 2100). According to the Rhodium Group, “the package as a whole drives US net [greenhouse-gas] emissions down to 32-42% below 2005 levels in 2030, compared to 24-35% without it.” For the law to have a larger effect, it must lead to technological breakthroughs (such as cheaper, vastly more scalable battery storage) or push other countries to reduce their emissions much more than they would have done otherwise. Both are possible but not particularly likely.
Credibility is an extremely valuable asset – whether you are a president or prime minister communicating with voters, legislatures, allies, and adversaries, or a CEO engaging employees, customers, suppliers, and financial markets. Once lost, it is not easily regained. Biden described his obviously disastrous withdrawal from Afghanistan as an extraordinary success, and he has been struggling to regain voters’ trust ever since. By insisting that inflation was transitory and that his big spending bills would cost nothing, he dug an even deeper hole for himself.
The brazen false advertising about the IRA is likely to deepen the distrust of government that is plaguing America and many other democracies. The US badly needs plain-speaking leaders who will give an honest accounting, take responsibility when something doesn’t work, and learn from their and their predecessors’ mistakes. Those are small but necessary first steps toward re-establishing credibility and trust in government, which will be essential to confront far more serious challenges ahead.
Michael J. Boskin: Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.