The Inflation Reduction Act is poised to reduce after-tax incomes for Americans across every income bracket, according to a report released last week by the Tax Foundation.
The legislation carries a $740 billion price tag — including $369 billion to combat “the existential crisis of climate change,” according to recent remarks from President Joe Biden, who signed the legislation this week. The report showed that after-tax incomes for individuals for every group apart from the top 1% would fall by 0.2%, while those in the top 1% would see after-tax incomes cut by 0.3%.
“On a long-term dynamic basis, the smaller economy reduces after-tax incomes relative to the conventional analysis and most of the expanded tax credits will have expired,” the report explained. “On average, tax filers in every quintile would experience a drop in after-tax incomes.”
The projected reductions in earnings occur despite repeated promises from top Biden administration officials that taxes for individuals earning under $400,000 would not rise. “No one — let me emphasize — no one earning less than $400,000 a year will pay a penny more in federal taxes,” Biden said during the Tuesday bill signing.
The most economically harmful portion of the Inflation Reduction Act is a 15% minimum tax on book income for companies with more than $1 billion in profits. In a recent survey of executives conducted by accounting firm PwC, 28% of respondents cited tax policy as a serious business risk, with business leaders in the pharmaceutical and life sciences sector particularly concerned over the law’s provisions geared toward lowering the costs of prescription drugs and health insurance.
The Tax Foundation model does not consider the $80 billion in funds to hire 87,000 new Internal Revenue Service agents, which is forecast to increase audit rates for middle-class Americans, despite promises to the contrary from the White House. The agency employed nearly 79,000 full-time employees as of fiscal year 2021.
Beyond the tax implications of the law, inflation is expected to rise in response to a deluge of new and expanded government programs. “By increasing spending, the bill worsens inflation, especially in the first four years, as revenue raisers take time to ramp up and the deficit increases,” according to the Tax Foundation. “To the extent the tax credits and health-care subsidies are expected to be extended on a permanent basis, these policies put upward pressure on inflation.”
Indeed, Sen. Joe Manchin (D-WV) — who made a deal with Majority Leader Chuck Schumer (D-NY) to advance the legislation through the divided Senate — admitted on Tuesday that the Inflation Reduction Act would not have an immediate effect on rising price levels.
“Well, immediately it’s not,” Manchin told Fox News reporter Hillary Vaughn. “We’ve never [said] anything would happen immediately, like turn the switch on and off.”
Another study from economists at the University of Pennsylvania’s Wharton School found that the Inflation Reduction Act would “very slightly increase inflation” over the next two years and “decrease inflation thereafter,” with both estimates “statistically indistinguishable from zero, thereby indicating low confidence that the legislation will have any impact on inflation,” despite its high price tag.