Analysis: The Inflation Reduction Act Farce

by James D. Agresti

 

In a major reversal, U.S. Senator Joe Manchin (D–WV) struck a deal with Senator Chuck Schumer (D–NY) to enact a major climate, entitlement, and tax bill. This legislation has been praised by President Biden, Al Gore, and other proponents of highly progressive policies.

Dubbed the “Inflation Reduction Act of 2022,” Senate Democrats voted to pass this bill only 11 days after releasing its 725 pages of text. House Democrats followed suit five days later. Democrats pushed this bill so rapidly through Congress that the Congressional Budget Office estimates it won’t be able to “provide a complete cost estimate for the legislation” until more than a week after Congress passed it.

Manchin’s press release claims the law will:

• “address record inflation by paying down our national debt, lowering energy costs and lowering healthcare costs.”
• “displace dirtier products” and ensure “American energy is affordable, reliable, clean and secure.”
• bring “good paying energy and manufacturing jobs back to America.”
• “make America more energy secure” and “financially sound.”
• not raise taxes on “families and small businesses making less than $400,000 a year.” 
• “lower the cost of healthcare for working families and small businesses.”
• support “the everyday hardworking Americans we have been elected to serve.”
• adopt “a tax policy that protects small businesses and working-class Americans….”

In reality, the legislation will do almost none of what Manchin claims it will—and often the exact opposite. If President Biden signs the Inflation Reduction Act of 2022, and it is not repealed by a future Congress and President, the law will:

• have no material impact on inflation.
• increase pollution by subsiding electric vehicles, which emit more toxic pollutants over their lifespans than normal cars. 
• enrich “green” energy investors while doing little-to-nothing to help workers.
• raise energy costs and make America poorer by subsidizing products that are much more expensive.
• harm the manufacturing sector.
• enact hidden taxes that fall on Americans of all income groups.
• reduce incentives to work by giving people more welfare.
• increase the costs of prescription drugs for working Americans by pushing more of the research and development costs onto them.
• target wealthy people with IRS audits while letting the vast bulk of tax dodgers continue cheating the honest taxpayers of America.

Inflation

Contrary to its name, there is no credible evidence the Inflation Reduction Act will reduce inflation.

The Penn Wharton Budget Model—which is often touted by Democrats like Schumer—estimates that the bill’s effects on inflation are “statistically indistinguishable from zero, thereby indicating low confidence that the legislation will have any impact on inflation.” Moreover, the model is biased in favor of the bill because it uses an admitted “assumption” that reducing carbon dioxide makes society “more productive.”

Likewise, the Congressional Budget Office (CBO) estimates the bill could increase or decrease inflation by up to 0.1 percentage points in 2023, a result that is also statistically indistinguishable from zero.

Manchin, Schumer, and the Committee for Responsible Federal Budget claim that the bill’s tax increases will reduce inflation by decreasing the federal deficit. There is a grain of truth in this because the Federal Reserve has been aggressively printing money to finance the federal debt, a policy which fuels inflation.

However, any deflationary aspects of the bill must be measured against its inflationary elements. CBO notes that these include but are not limited to the “inflationary effects” of “health insurance subsidies” and “government purchases of goods and services.” In fact, CBO found that such dynamics can lead to a situation where the bill causes inflation “even when the overall deficit was reduced.”

More importantly, Manchin and Schumer’s statement that federal deficits spur inflation is a tacit admission that the deficit spending they previously voted for—which is far greater than the supposed deficit reduction in this bill—is fueling the high inflation that is punishing Americans. Since the start of the Biden administration less than two years ago, Manchin, Schumer, and nearly all Democrats voted for:

• the “American Rescue Plan,” which enacted $1.9 trillion in deficit spending mainly devoted to social welfare programs and bailouts for state and local governments and private union pension funds. 
• the “Infrastructure Investment and Jobs Act,” which enacted $256 billion in deficit spending for roads, public transit, “clean school buses and ferries,” electric vehicle charging stations, etc. 

This was on top of the bipartisan “Covid relief” spending of 2020, which added $3.4 trillion to the national debt. Taken together, this is $5.5 trillion in deficit spending, or 18 times the supposed deficit reduction of the Inflation Reduction Act, which CBO estimates to be about $300 billion.

Put another way, the bill’s deficit reduction would undo about 5% of the inflationary damage that Manchin and company caused by deficit spending in the past 2.5 years. 

That also assumes the enhanced Obamacare subsidies in the bill will end in just three years, a budget gimmick used to shroud the long-term costs of this policy. The bill raises taxes for 10 years but only funds this entitlement for three years. If Congress extends it, as lawmakers often do with entitlements, the bill will reduce the deficit by $87 billion, or less than one-third of CBO’s estimate.

Manchin’s press release decries “the severe threat of inflation and the consequences of unprecedented domestic spending,” but this bill increases spending on a host of programs detailed below. Far from a course change, Manchin is now voting for “taxing and spending” instead of mere “spending.”

Pollution

Contrary to Manchin’s claim that his bill will “displace dirtier products,” it heavily subsidizes electric vehicles, which emit more pollution over their lifespans than normal cars. Yet, Manchin’s bill codifies an alternate reality by rewriting federal law to define electric vehicles as “clean.”

The belief that electric vehicles are “clean” is based on a childish notion that ignores all pollution which doesn’t come out of a tailpipe. Assessing the environmental impacts of energy technologies requires measuring all forms of pollution they emit over their entire lifespan, not a narrow slice of it. To do this, researchers perform “life cycle assessments” or LCAs. Per the EPA, LCAs allow for:

• the estimation of the cumulative environmental impacts resulting from all stages in the product life cycle, often including impacts not considered in more traditional analyses (e.g., raw material extraction, material transportation, ultimate product disposal, etc.). By including the impacts throughout the product life cycle, LCA provides a comprehensive view of the environmental aspects of the product or process and a more accurate picture of the true environmental trade-offs in product and process selection.

LCAs are subject to multiple levels of uncertainty, but an assessment published by the Journal of Cleaner Production in 2021 shatters the notion that electric cars are environmentally friendly. The LCA found that manufacturing, charging, operating, and disposing of electric vehicles increases “fine particulate matter formation (26%), human carcinogenic (20%) and non-carcinogenic toxicity (61%), terrestrial ecotoxicity (31%), freshwater ecotoxicity (39%), and marine ecotoxicity (41%) relative to petrol vehicles.”

Even before that LCA, the European Environment Agency admitted in 2018 that electric vehicles “could be responsible for greater negative impacts” on “human toxicity” than standard cars. On the other hand, the report notes that electric vehicles “potentially offer local air quality benefits” because the pollution from their manufacturing, charging, and disposal is usually emitted away from densely populated areas.

However, electric vehicles emit local pollution due to road, tire, and brake wear, and these forms of pollution are worse in electric vehicles than standard cars. Per a 2016 paper in the journal Atmospheric Environment, “Electric vehicles are 24% heavier than their conventional counterparts,” and this creates more “non-exhaust emissions” like “tire wear, brake wear, road surface wear and resuspension of road dust.”

LCAs have found that electric cars emit less carbon dioxide (CO2) than standard cars, but carbon dioxide is an organic, colorless, non-carcinogenic gas that has no toxic effects on humans until concentrations exceed at least 6 times the level in Earth’s atmosphere. Thus, CO2 has no bearing on which product is “dirtier,” to use Manchin’s word. 

Beyond giving consumers $7,500 towards the purchase of each new domestically manufactured electric vehicle, the bill also provides $4,000 for used ones. This is on top of state handouts for electric vehicles, like $2,500 in MA and $4,000 in NJ. All of this money goes towards creating more pollution.

Jobs

Contrary to Manchin’s claim that the bill will bring “good paying energy and manufacturing jobs back to America,” it will enrich green energy investors while neglecting workers and harming the manufacturing sector.

As explained in scholarly publications like the encyclopedia Environmental and Natural Resource Economics, the financial benefits of “green energy” subsidies “largely accrue to the owners of capital” because: 

• “energy development,” whether “green or fossil fuels,” is “capital-intensive,” which means it uses much more materials and equipment than human labor. 
• growth in “the green jobs sector does not necessarily imply net job creation” since it reduces the jobs “that would have been produced from fossil fuels,” and thus, “net job creation may be zero (or negative).” 
• consumers suffer because green energy mandates subsidize “inefficient technologies that are more costly,” and this reduces people’s standards of living. 

The bill also increases taxes on certain large corporations, and half of these taxes would come from the manufacturing sector. Per CBO, this “would reduce the incentive for those large corporations to invest,” which means less productivity and lower standards of living.

Taxes

Contrary to Manchin’s claims that his bill does not raise taxes on “families and small businesses making less than $400,000 a year,” it does exactly that by enacting hidden taxes that fall on Americans of all income groups.

Hidden taxes are those that are not apparent because they generally don’t appear on purchase receipts, paychecks, or tax returns. Some examples include excise taxes, employer payroll taxes, and corporate income taxes. Although businesses write the checks for such taxes, they are ultimately borne by individuals via lower wages, higher prices, and lower profits.

In the words of the Congressional Budget Office, “the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.” Likewise, the Congressional Research Service explains that individuals “bear the burden of the taxes paid by businesses” because “corporations are not persons who can bear the burden of taxes, but merely legal entities through which individuals earn income.” 

U.S. households paid an average of $7,000 in hidden federal taxes in 2018, and Manchin’s bill adds to this tab via taxes on corporations, crude oil, methane, offshore drilling, and more. 

As such, Congress’ Joint Committee on Taxation estimates that the bill will slightly increase average taxes on every income group for the next 10 years. This includes families who make less than $10,000 per year to those who make more than $1,000,000.

Energy Costs

Contrary to Manchin’s claim that the bill will lower energy costs, it enacts a form of stealth spending (called tax preferences) to subsidize products that are far more costly than other options. Regardless of whether these additional costs are paid by consumers or taxpayers, they ultimately make America poorer and less competitive because they deliver less energy for every dollar spent.

Due to government interventions and the complexities of the electricity market, measuring the costs of energy technologies can be extremely difficult and uncertain. However, there are simple ways to estimate their relative competitiveness. One of them is to compare their market shares and how much government subsidizes and restricts them.

For example, solar provided 1.5% of all U.S. energy in 2021, while natural gas supplied 32%. This 20-times differential is in spite of 40+ years of aggressive government actions to bolster solar while constraining the use of fossil fuels through taxes and regulations. Some examples of how government has boosted solar include the following:

• Since 1978, the federal government has continuously provided tax credits for solar energy systems ranging from 10% to 30% of their production or capital costs.
• In 1998, the U.S. Energy Information Administration (EIA) reported, “For many years, state and federal governments, as well as environmentalists and utilities, have strongly supported the use of solar energy—especially in the U.S. Department of Energy’s research and development budget.”
• In 2011, the New York Times reported that “taxpayers and ratepayers are providing subsidies worth almost as much as the entire $1.6 billion cost” for “a compound of nearly a million solar panels,” and “similar subsidy packages have been given to 15 other solar- and wind-power electric plants since 2009.”
• From 2007 to 2016, the federal government subsidized solar at 200 times the rate of natural gas.
• In 2016, EIA reported, “More than 70% of [energy-related] physical science grants went to solar energy research with virtually all of the remainder for other renewable energy (e.g., fuel cells).”
• Many states have required utilities to purchase electricity from customers with solar panels for much more than its actual value, thus transferring these costs to the electric bills of customers who don’t have solar panels.
• 30 states and the District of Columbia have required utilities to generate or obtain specified amounts of their electricity from renewables like solar, essentially forcing its use. 

Collectively, these facts prove beyond all doubt that solar energy is not competitive.

Another simple way to estimate the relative cost of energy technologies is to look at the prices of energy in places with different energy mixes. California, for example, gets more of its electricity from solar than any other state and also has the highest electricity prices in the continental U.S., or 77% more than the national average. Moreover, this doesn’t account for all of the government spending on solar that is borne by taxpayers instead of consumers.

Another prime example is Germany, where wind and solar provide 33% of the country’s electricity, as compared to 12% in the United States. As a consequence of this and other factors, the average price of household electricity in Germany is about three times that of the United States.

Manchin claims his bill won’t move the U.S. “closer to the unstable and vulnerable European model of energy we are witnessing today,” but it takes the U.S. down that road by using taxpayers’ money to subsidize the same technologies that Europe has supported. 

Worse still, Manchin’s bill hides those costs from consumers and voters by using tax preferences that don’t show up in electricity bills or appear as line items in federal budgets.

Welfare

Contrary to Manchin’s claim that the bill will “lower the cost of health insurance,” it will make taxpayers pick up the tab for enhanced Obamacare subsidies. Moreover, all of this welfare will go to people with incomes greater than 400% of the poverty line. 

Per CBO, the bill “would reduce the incentives of some people to work, mainly because of the enhanced health insurance subsidies, pushing down output and pushing up inflation.” Likewise, the Penn Wharton Budget Model found that this handout “reduces the incentive to work.”

CBO estimates that some of this work-deterring, inflation-producing welfare will go to people with high incomes, like:

• 64-year olds with incomes up to $163,700 per year.
• young families with incomes up to $192,700 per year.
• older families with incomes up to $304,100 per year.

Prescription Drugs

Contrary to Manchin’s claim that his bill will “lower the cost” of prescription drugs, the bill will simply shift more of those costs onto working Americans.

The main reason why Americans pay more for prescription drugs than almost anywhere else in the world is because the governments of other nations use price controls and bargaining power to get rock bottom prices, while pharmaceutical companies are able to fund R&D and make profits by selling to Americans. 

Manchin’s bill empowers Medicare, which pays medical costs for almost everyone aged 65 and older, to employ the tactics of foreign governments. This leaves U.S. workers to shoulder more of the tab for drug development and the profits that drive it. Medicare already does this with hospitals by paying them an average of 13% below their costs of caring for Medicare patients. Hospitals then make up the difference by charging the private sector exorbitant rates.

This is part of a trend in which politicians shift the costs of their welfare policies to the private sector. These are stealth taxes on Americans that increase the costs of their products and services.

IRS Audits

Contrary to Manchin’s claim that the extra IRS funding in his bill won’t be used to target people making less than $400,000 per year “because they are already paying their taxes,” the bill will let the vast bulk of tax dodgers continue to cheat the honest taxpayers of America. It also complicates tax code, which is a major cause of tax misreporting and a waste of people’s time and money.

In 2021, the IRS spent $13.7 billion and employed 78,661 full-time equivalent workers. Manchin’s bill would supercharge this agency by adding about $80 billion to it over the next 10 years. CBO estimates this would increase the 2031 IRS budget by more than 90% and would “more than double the IRS’s staffing.” 

Biden’s Treasury Secretary and the IRS Commissioner have promised that they won’t use these added resources to audit people making less than $400,000 year, but that is where a massive amount of tax fraud occurs. This is especially true of people who work under the table, which is very common for illegal immigrants. A 2019 IRS study found that the tax non-compliance rate for people whose incomes were subject to:

• withholding is 1%.
• “substantial information reporting but not withholding” is 5%.
• “subject to little or no information reporting” is 55%.

Beyond outright fraud, one of the main reasons why people and corporations misreport their taxes is because the tax code is extremely complicated, a problem that Manchin’s bill makes worse. As explained by CBO:

The complexity of the tax system partly results from tax expenditures that are designed to affect behavior by taxing some endeavors more or less than others. … Complexity also arises from efforts to achieve certain equity goals. Provisions that phase out various tax credits and deductions at higher income levels are designed to target benefits toward people with the greatest need, but they make taxes more difficult to calculate.

Manchin’s bill does this in droves by implementing the provisions above and many more detailed by CBO. As explained by the IRS’s Taxpayer Advocate, “tax law complexity leads to perverse results” because:

• “taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments.”
• “sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.”

U.S. taxpayers (including businesses) spend roughly six billion hours per year complying with the requirements of federal tax law. This amounts to 48 hours per household, or the labor equivalent of more than three million full-time workers. Per the IRS’s Taxpayer Advocate:

• these figures do not include “millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits.” 
• the cost of complying with federal income tax laws was $195 billion in 2015, or 10% of income tax receipts.

Manchin claims the tax code is “unfair” because “some of America’s largest companies pay nothing in taxes” and that his bill will fix this by forcing them to pay a “minimum tax of 15%.” However, progressive Ph.D. scholar Robert D. Atkinson explains that the reason why large companies pay “less than 15 percent in profit taxes is because Congress put in place tax provisions to encourage companies to invest in ways more aligned with the public interest.” 

In brief, Manchin’s bill stokes the tax problems he bemoans and punishes successful Americans by siccing more IRS agents on them. 

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James D. Agresti is the president of Just Facts, a research and educational institute dedicated to publishing rigorously documented facts about public policy issues.
Photo “Joe Manchin” and “Chuck Schumer” by Senate Democrats. CC BY 2.0.