On Monday, August 8th, 2022, the United States Senate announced that it had passed an inflation reduction act after an all-night voting session the previous day. But what exactly is this act, and will it truly curb the inflation sweeping the United States? Let’s take a look.
What is the Inflation Reduction Act?
The Inflation Reduction Act is a bill passed by the Senate for the purpose of curbing inflation. But it isn’t doing it through the traditional method of raising interest rates, rather, it is trying a new route by curbing corporation over-pricing techniques and raising taxes.
What is Included in the Inflation Reduction Act?
This act has several parts, and it’s easiest to address them separately.
Healthcare/Medicare
This bill took several steps to curb the overpricing of drugs, which is a common practice in the United States, which notoriously spends the most on healthcare each year, and its citizens receive the least amount of care. These steps include limiting price gouging on insulin, which disgracefully costs $200 for what companies pay $6 to make. Under this new bill, Medicare cannot be billed for more than $35 for each dose of insulin prescribed.
Unfortunately, citizens with private insurance can still be billed more than $35 for each dose. And this is bad news because it is likely that the pharmaceutical companies will charge private insurance for the money they are losing to Medicare payers.
On top of the limit on insulin, the act also ensures that Medicare patients can’t be billed more than $2000 a year out of pocket, limiting the amount of debt elderly members of the United States tend to take on. How will this be sustained? Well, under the act, Medicare can now negotiate lower prices directly with the pharmaceutical companies themselves.
Climate Change Efforts
The bill does finally address climate change, something which is long overdue in the United States which no longer recycles (well, they do, but no country will take recycling from the US, and they don’t want to process it themselves, so it ultimately ends up in a landfill).
Anyway, these provisions allow for consumer tax credits for installing items like solar panels on their home and purchasing an electric car. While this probably isn’t near enough to combat the rapidly changing climate, it is a step in the right direction.
Raising Taxes
The cost upfront of this bill is a paltry $430 billion, which lawmakers insist will be repaid by the tax raises, which are also included in the bill. With the passing of this bill, major corporations, like Nike or Amazon, who currently get away with paying little (or no) taxes, will have to pay a minimum of 15% to the federal government each year.
Additionally, hedge fund managers would also be subject to this increased tax. There is no reason to worry, however, as anyone making $400,000 or less will not be affected by this increase. A popular loophole that hedge fund managers actually use to avoid taxes will also be closed, meaning if you make above the aforementioned amount, you will be paying 15% taxes, end of story.
Not only are the taxes being raised, but part of the bill even goes to hiring more IRS auditors to ensure these rules are being followed. Hopefully, some of this money will be used to update the IRS computer systems, which seem to not have been updated since the 1980s.
What is Missing From the Inflation Reduction Act?
Of course, this bill is but a remnant of what was proposed, as the bill originally included free preschool for all American children, protected paid family leave, and expanded care for those on the Medicare system. It also had provisions for curbing price gouging tactics for those on private insurance.
While these items are missing, the bill still does a decent job of trying to curb spending and obtaining the money for the bill from the right places.
Will the Inflation Reduction Act Work?
If you’re asking because you are desperate for the prices of food and gas to decrease, don’t hold your breath, as this act, if it passes the house, will take a long time to make any changes. In fact, the repercussions (hopefully positive) of this act may not become apparent for years.
But there’s also something else no one has brought up, and that’s the fact that this bill depends on the increasing of taxes on corporations to cover the money it is about to print (yes, for a minute, inflation might actually get worse from this bill) and the problem that many corporations, when faced with higher tax rates, usually begin to exit the country.
It’s been done before, just look at the Google headquarters in Ireland, and you’ll realize that corporations will do a lot to ensure they can keep every cent of their money. While the bill did close interest delaying loopholes, it did not close the biggest loophole of all—leaving the US and importing goods instead.
If companies like Nike and Amazon begin to do this, well, then the bill is in trouble because it will be paid for by printing money without the promised return of tax income, and that’s a situation you don’t even want to consider as it will simply be printing more money which will lengthen the current recession. But, for now, think positive that the large companies who will now have to pay 15% taxes will do the right thing and actually pay those taxes.
There’s one final repercussion of this bill no one is discussing and that is the fact that one of the many ways corporations avoid taxes is by charitable giving. Will these large corporations continue to donate money even if it no longer protects them from paying taxes? They might, as their actual tax rate would be higher without the charitable donations, but it is still something worth keeping in mind as this bill goes to the house for voting later this week.
Overall, no bill is perfect, and given the options, this one isn’t too bad. After all, it really doesn’t affect the average consumer that much…well, until businesses raise their prices to make up for what they now have to pay in taxes…but that’s a discussion for another day.
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