Can ‘Inflation Reduction Act’ really act on ever-rising prices in US?

by Anadolu Agency


With US inflation at record levels since 1981, the Biden administration is looking for ways to curb rising prices with the so-called “Inflation Reduction Act.” But, some experts argue its impact on ever-rising prices will be limited, albeit making the US economy less dependent on international energy prices in the long run.

After weeks of negotiations the Senate approved the 755-page the bill on Sunday and it now awaits passage the House of Representatives, where it is expected to pass on Friday.

Republicans, however, have denied the proposal, calling it ‘irresponsible’ as the country faces a feared recession.

“This is the strongest bill you can pass to lower inflation, continue to cut the deficit, reduce health care costs, tackle the climate crisis,” US President Joe Biden said during a virtual roundtable of US business leaders last week.

“It will make our tax system more fair by making corporations pay a minimum tax,” he underlined, adding that the bill would not raise taxes on families making less than $400,000 per year.

There are many other goals that the legislation seeks to achieve. Regardless of its name, it does not focus primarily on measures to reduce inflation.

It has other ambitious targets, such as enacting historic deficit reduction to fight inflation, investing in cleaner production, and reducing carbon emissions by roughly 40% by 2030.

To achieve these targets, it proposes investments of nearly $300 billion to reduce the deficit and $369 billion for energy security and climate change programs over the next ten years.

The new public spending is planned to be funded by drug pricing and major tax reform.

For example, by imposing a new corporate minimum tax of 15%, it would raise $313 billion revenue, as well as $124 billion ($204 billion gross) from reducing the tax gap through stronger enforcement by the Internal Revenue Service (IRS).

With tax provisions, prescription drug-pricing and increased IRS tax enforcement, it is projected that the bill, if passed, would produce to $739 billion in total.

The Committee for a Responsible Federal Budget also estimates that the package would reduce debt by nearly $2 trillion over two decades.


Political labelling

“Using a code name like the inflation reduction act is more like a political labelling of the set of policies associated with the proposal of the Biden administration,” Ceyhun Elgin, a professor of macroeconomics at Bogazici University in Istanbul, told Anadolu Agency.

Inflation is highly unpopular in the US nowadays, he said, arguing that the Biden administration “wanted to benefit from this by relating this proposal to reducing inflation.”

The proposal contains many measures to subsidize environmentally friendly domestic investment in the US and finance it by increasing taxes on corporations, he explained.

“I believe it will not immediately decrease inflation. However, it may make the US economy less dependent on international energy prices in the long run,” he said.

“Since the tax increases are expected to be more than the increased spending on investment subsidies, the act will also reduce the US budget deficit and may have a small reductionary effect on inflation through that channel,” he added.


Modest impact on inflation

Echoing Elgin’s views Cem Oyvat, a senior economics lecturer at London’s University of Greenwich, said the legislation would have a modest positive impact on inflation.

He explained that the inflation that the US has been facing is mainly driven by supply-side factors, with energy prices being one of the main factors behind it.

“As the Inflation Reduction Act aimed to reduce the US’ dependency on fossil fuels, it will reduce the energy costs and also the global demand on fossil fuels, which both will help decreasing inflation,” he said.

The bill also seeks to bring down prescription drug costs, which will have a minor positive effect on inflation, he added.

Despite being called the Inflation Reduction Act, he underlined that it had several other benefits that relate to climate change, environmental justice, and income inequality.

“The bill subsidizes transition to renewable energy, which would reduce the dependence on fossil fuels. It allocates over $60 billion on investments targeting environmental justice,” he said.

It also aims to close tax loopholes, which would have a positive impact on income inequality, he added.

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