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Inflation Reduction Act
MILTON EZRATI is chief economist for Vested, a contributing editor at The National Interest, and author of “Thirty Tomorrows” and “Bite-Sized Investing.” Milton Ezrati
Washington’s Flawed New Law
New taxes, little help on inflation, and much central direction
ashington has enacted a new law. The Inflation Reduction Act (IRA) makes only tentative gestures toward inflation control. It mostly promotes Washington’s preferred green initiatives with a raft of grants, loan guarantees, and tax credits. It extends some health care benefits to low-income Americans.
Its sponsors aim to pay for all this by upping corporate taxes and using stepped-up IRS enforcement to collect more money from everyone.
The law will increase federal outlays by roughly $435 billion over the next five years. Its sponsors claim that the budget deficit will shrink because the law’s new taxes and enforcement efforts will raise government revenues more than enough to offset the additional spending.
There is, however, plenty of room for skepticism. Administration of the new corporate tax looks so complex that actual collections will likely fall far short of the estimate used in the legislation. It’s also doubtful that the $80 billion allocated for IRS enforcement will pay for that expense, much less net a revenue increase. The highly regarded Penn–Wharton budget model has determined that the legislation will neither have much effect on inflation nor provide any deficit relief. Separately, the Congressional Budget Office (CBO) sees a “negligible effect on inflation” from this legislation and no meaningful reduction in deficits.
Green initiatives take the bulk of the legislation’s outlays—$385 billion over the next five years. The law offers generous tax benefits and $40 billion in loan guarantees to promote carbon capture and “clean hydrogen” at electric facilities (regardless of energy source). It also offers tax credits and loan guarantees for nuclear power production and clean vehicles of all sorts. This support will extend to projects for advanced manufacturing, biogas, fuel cells, and energy storage technologies, including carbon capture and sequestration. Some $2 billion in direct loans will go to constructing and modifying electric transmission facilities.
The law allows the transfer of credits to unrelated parties, but only under certain circumstances. It also repeals the Trump-era moratorium on offshore wind leases.
The IRA also aims to reduce greenhouse emissions by 40 percent by 2030. The effort gives the Department of Energy the authority to advance an array of grants, rebates, direct loans, and cooperative agreements to pay for up to half the costs of promising projects. Some would aim to improve the efficiency of household heating and cooling systems and appliances, with $1 billion earmarked for “affordable housing.” Some $60 billion would go to what the legislation refers to as “environmental justice initiatives” through which it would aim to provide benefits to previously underserved neighborhoods.
The legislation also allocates $27 billion to the Environmental Protection Agency and more to the Agriculture Department to provide financial and technical support for projects that promise to reduce greenhouse gas emissions. Automakers will get $6 billion to produce hybrid and plug-in electric vehicles in the United States.
A striving for centralized control runs throughout this legislation. It gives the heads of all the agencies involved considerable discretion on what activities can qualify for support and how they would qualify. In other words, Washington would direct the emphasis not only on production, but also on the way people and businesses can pursue it.
Against this quest for government command and control, complexity and expense, practical people would naturally look for something simpler, less intrusive, and perhaps more effective. A carbon tax would do that. By making the emission of greenhouse gases expensive, such a tax would unleash a great diversity of effort to limit the use of fuel and the release of such emissions. Every American would seek ways to reduce his or her carbon footprint. Instead of the IRA’s list of preferred technologies and what are effective commands on how to use them, this kind of general effort would engage everyone’s imagination. It would also proceed with more vigor than the IRA’s dictates could possibly muster.
Furthermore, a carbon tax would replace this law’s huge outlays with added revenues, perhaps enough to offer Americans other needed benefits or even a cut in other tax burdens. Washington, however, isn’t likely even to consider such an approach. Its love of command and control stands in the way.
