The "Shrink the Economy" Act
The title given the act is a masterpiece of duplicity. It’s not about inflation at all, but instead is about raising taxes and spending more money on ObamaCare and green projects. It’s important, therefore, to consider the provisions of the act and their likely effects and not get fixated on inflation. The act will raise marginal tax rates on labor and capital, making the economy smaller than otherwise. It will do little to offset global warming. Moreover, it is a tragically missed opportunity to do something meaningful to reduce the growth of carbon dioxide emissions.
This is the second paragraph of David R. Henderson, “The ‘Shrink the Economy’ Act,” Defining Ideas, August 11, 2022. It’s about the misnamed Inflation Reduction Act.
One tax provision that has received the most attention is the minimum 15 percent tax on corporations. Why should companies in the current 21 percent tax bracket worry about the 15 percent minimum? Aren’t they already paying at least 15 percent? No. The reason is that the 21 percent tax is on corporate income after deductions. But the 15 percent tax is on corporate income without some of those deductions. One major such deduction is for corporate investment. Under the tax law, companies can “expense” investments, taking a deduction for purchase of capital in the year that they made the purchase. But in their financial statements, they must depreciate the asset they purchased over the life of the asset. The 15 percent tax is applied to their income as reported on their financial statements rather than on their income minus completely legal deductions.
Ironically, this provision will hurt manufacturers. Democrats in recent years have claimed that they want to encourage manufacturing in the United States. But those tears for lost manufacturing have now shown themselves to be crocodile tears.
And, on carbon taxes, electric vehicles, and the hated N-word:
That’s a shame, because if their real concern had been global warming, the Senate Democrats could have had a bigger effect with a smaller cost. A basic principle in economics is that if you want to reduce a negative externality and you can’t get all the parties together, you tax the externality.
I’m skeptical of carbon taxes because I’m not convinced that taxing carbon is the least-cost way to address global warming. It might be better to wait until the world is warmer and use improved technology either to engage in geoengineering to reduce the world’s temperature or to adjust to higher temperatures. But if politicians are dead set on reducing carbon, the best way to do it is with a carbon tax. That way, they don’t put themselves in the position of central planners trying to decide which particular technologies to subsidize.
Consider one example: the subsidies to electric vehicles. Ignore the ironic fact that because of the domestic-content constraints the senators put on for those producers to qualify, few EVs would qualify for the subsidies. Even if all EVs did qualify, what are the odds that EVs are the way to go? Have the senators been outside lately where they would see electric bicycles whizzing by, bicycles that can be powered with a fraction of the coal or natural gas used to produce electricity for electric cars and trucks? Yet those bicycles will not get the subsidies. Nor should they. No one should get the subsidies.
And what about the hated N-word: nuclear? Nuclear power produces zero carbon emissions and is incredibly safe as well as being relatively expensive. But improved lower-cost technologies that are starting to appear in some states, combined with a tax on carbon production, might just make nuclear power the least-cost way of producing electricity in at least some parts of the country where non-nuclear electric power is relatively expensive.
Read the whole thing.