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.
Another excerpt:
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.
READER COMMENTS
Michael
Aug 13 2022 at 10:15am
The bill is, mildly, about inflation in the sense that the bill is mildly deficit reducing and should therefore be mildly disinflationary.
David Henderson
Aug 13 2022 at 10:57am
I address that point in my article. It’s not clear that it’s mildly deficit/debt reducing.
Thomas Lee Hutcheson
Aug 14 2022 at 10:53am
Reducing the deficit is desirable as it shifts resources from consumption toward private investment, but it does not reduce inflation now or in the future.
Spencer Bradley Hall
Aug 13 2022 at 7:52pm
Yes, the economy is being run in reverse. “The 2.5-percent decline in labor productivity from the same quarter a year ago is the largest decline in this series, which begins in the first quarter of 1948.”
Productivity and Costs, Second Quarter 2022, Preliminary – 2022 Q02 Results (bls.gov)
“Capital expenditures, their level and mix, and applied innovation statistically prove to be the most important determinants of labor productivity growth.” Alan Greenspan’s: The Map and the Territory
If DFI financing is for projects that increase productivity, then the initial inflationary effects of DFI financing are quickly overcome by improved technology: larger output, lower unit costs, or increased utility (higher quality).
All debt incurred which reduces unit costs of production and promotes productivity is obviously quite often “good” debt, regardless of how it is financed, with new money or existing savings.
Spencer Bradley Hall
Aug 14 2022 at 8:47am
Frictionless financial perpetual motion requires that, income not spent, is reintroduced into the economy, thereby sustaining and promoting economic momentum.
If a debt was acquired to finance the acquisition of a (1) [new-security], the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an (2) [existing-security] or to finance the purchase of an existing house (read bailout), or to finance (1) [inventory-expansion], rather than refinance (2) [existing-inventories].
The former types of investment are designated as (1) “REAL” [new construction] as contrasted to the latter (2), which constitute “FINANCIAL” investment [existing property].
FINANCIAL speculation (the transfer of title to existing goods, properties, or claims thereto), provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy.
Compared to REAL investment, FINANCIAL investment is rather inconsequential as a contributor to employment and production.
Only debt growing out of REAL investment or consumption makes an actual direct demand for labor and materials.
Thomas Lee Hutcheson
Aug 14 2022 at 10:49am
Of course, the IRS will not reduce inflation – only the Fed can do that – but the “duplicity” can at least be partially excused by some commentators blaming the Administration! For inflation. And Henderson may have forgotten the “duplicity” of inserting “jobs” into the 2017 “Tax Cuts [for the rich]and [no particular relation to] Jobs Act” and the vast that the IRA at least modestly reduces the deficit whereas the better named “Tax Cuts for the Rich and Deficits Act” of 2017 increased the structural investment-taxing deficit whereas the IRA modestly reduces it.
Whether the investments subsidized by the bill will have positive NPV’s when evaluated at the shadow price of CO2 emissions I do not know. They do point to the danger that the failure of conservatives to get behind taxing netCO2 an methane emissions will at some point lead to vastly more costly measures to deal with CO2 accumulation.
Zeke5123
Aug 14 2022 at 10:49am
I haven’t had the chance to review in depth, but my understanding is that the CAMT (ie the book minimum tax) basically allows 167 deductions (eg expensing) in computing adjusted financial income as a result of Sinema’s requested changes.
Now, it wouldn’t exclude other capital investments (eg 197 amortization).
vince
Aug 14 2022 at 3:30pm
1. The bill reduces the future deficit, not the total debt. We will still have a deficit, which is inflationary.
2. If the bill has little effect on inflation an carbon emissions, I suspect the real purpose is pork and crony capitalism. And maybe PR to give a boost to the Biden administration.
3. “Nuclear power produces zero carbon emissions and is incredibly safe”. Until something like Fukushima happens.
4. The argument that the corporate tax burden is split between only labor and shareholders is flawed. It assumes no effect on consumers, who can offset higher prices from corporation by obtaining lower prices from noncorporations.
Ginsu
Aug 14 2022 at 4:46pm
The total number of deaths caused by nuclear power related accidents is a rounding error compared to the number of deaths caused by the use of fossil fuels, lmao
Jose Pablo
Aug 19 2022 at 6:09pm
Like the number of deaths cause by terrorist attacks is a rounding error compare with the number of people killed in a given year
or like the number of people killed in mass shootings is a rounding error compare with the number of people killed in gun related incidents …
People is particularly prone to irrational thinking following media covering of particular events.
Jose Pablo
Aug 19 2022 at 6:38pm
People killed in plane crashes is a rounding error compare to people killed in all kind of transportation crashes.
vince
Aug 14 2022 at 3:55pm
“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 purpose of the investment expensing is to encourage investment in durable goods. Isn’t it hard enough to run a company without trying to do something that Congress encourages, only to be later punished for the effort?
And now we get a tax that applies only to corporations with profits over $1 billion. This is how the tax law becomes insanely complicated. My corp has $1.9 billion in profit. I split it into two corps that escape the tax. Now the IRS writes regulations to combine the corporations. The two corporations hire attorneys to split and dilute ownership further to re-avoid the tax. And on and on.
Another problem with the tax is it ignores profit per share. A corporation with 20 shareholders could have .999 billion in profit and not pay the tax, even though each shareholder is likely a billionaire simply by being a shareholder in that stock. Another corporation with $1 billion in profit could have 1 million shareholders whose equity in the stock is a meager addition to a 401k held to supplement Social Security in retirement.
Get rid of corporate double taxation, which creates all kinds of perverse reactions, and let taxes pass to shareholders.
Jose Pablo
Aug 19 2022 at 6:11pm
“Isn’t it hard enough to run a company without trying to do something that Congress encourages, only to be later punished for the effort?”
Rule #1: never follow any Congress encouragement if you are running a going concern.
Thomas Lee Hutcheson
Aug 14 2022 at 4:44pm
There is no doubt that there were better ways to reduce the deficit (eliminate business taxation entirely and more than make up the revenue lost with increased collections through the personal income tax) than IRA. None of the comments I have read so far have suggested an alternative, however.
David Henderson
Aug 14 2022 at 5:03pm
That argument is relevant only if the IRA will reduce the deficit. If you read my whole article, you’ll see that I make a reasonable case that it won’t.
Vivian Darkbloom
Aug 15 2022 at 6:54am
The best way to reduce the deficit is to reduce government spending and taxes and regulation which are obstacles to investment and effecient market allocation of resources This bill does not do any of those things. (You may also cite this comment as a “suggested alternative”).
As far as “inflation reduction” is concerned, the CBO has estimated that in 2022 and 2023 the net effect would be a range of 0.1 percent reduction and a 0.1 percent increase. If my math skills are up to speed, I think that averages out to ZERO.
https://www.budget.senate.gov/imo/media/doc/58357-Graham.pdf
Beyond those years it is highly likely that the rate of inflation will be lower than it is now, but for reasons that have nothing to do with the provisions of this bill.
The CBO is also hindered in respect of the effect on the deficit of the 10-year budget window. I’m not aware of any major legislation proposed by either party over the past 30 years that has not been engineered to game this.
Another point: The CBO and JCT scoring of the bill were done before the recent text and floor amendments that were added just before the bill was passed by the Senate.
Jose Pablo
Aug 19 2022 at 6:28pm
The continous increase in government spending and “regulation” is a diret consequence of political incentives.
Let’s congressmen/women pay 1% of any new spending out of their own pockets and less them pocket 1% of any net positive effect of regulatory reductions (as per the CBO estimates).
You’ll see.
Jose Pablo
Aug 19 2022 at 6:16pm
Are you really surprised that the title of the bill is all about “political marketing”?
Were you really expecting otherwise?
I am really sorry to unveil that Santa Claus are the parents.
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