President Biden’s inflationary Build Back Better (BBB) Act was virtually dead. But late yesterday, Democratic Senator Joe Manchin and Senate Majority Leader Chuck Schumer took various parts from the BBB corpse to build a new agreement on climate, energy, and tax increases.

After soundly rejecting more massive spending as inflationary–which last year’s $1.9 trillion American Rescue Plan proved to be–Manchin has done an about-face. He agreed to a new inflationary bill with a euphemistic name: the Inflation Reduction Act.

Americans should not be fooled. Just because the bill has “inflation reduction” in the name, doesn’t mean that it will reduce inflation. Provisions in this tax and spend bill will fuel demand and consumer spending in certain areas already facing supply constraints and will impose tax increases that will be borne by workers and households through high prices, pay cuts, and job losses. 

What’s happened

The Inflation Reduction Act of 2022 would raise roughly $739 billion over a decade mostly from a 15% corporate minimum tax and beefed up tax enforcement efforts at the Internal Revenue Service (i.e., more audits of small businesses), as well as projected savings from allowing Medicare to negotiate some prescription-drug prices.

About half of that money (roughly $369 billion) will be spent on climate and energy programs, such as tax credits for Americans to buy electric vehicles, and another $64 billion to extend Affordable Care Act healthcare subsidies for three years. 

The remaining new revenue would “make a historic down payment on deficit reduction” which they claim will fight inflation.

Reports are that they may bring this bill to a vote as early as next week. 

With nearly every other Democratic expected to support the bill and every Republican expected to vote against it, all eyes have shifted to Arizona Democratic Senator Kyrsten Sinema. Her support could be the make-it-or-break-it vote.  

Two devastating economic provisions of the bill

There will be plenty of analysis of the bill once the text is released, but there are already concerns about the impacts of price controls on drugs and massive federal spending overall.

However, two provisions stuck out to me at first blush. First, imposing a 15 percent minimum tax on the book income of large corporations is a favored provision on the left. The intent is to end legal tax deductions that corporations use to reduce their tax liability. They claim this revenue raiser is targeted at profitable large corporations, but it will have wide-reaching devastating economic impacts. 

The Tax Foundation concluded about the same proposal that was included in the BBB:

The proposed 15 percent minimum tax on corporate book income is the most economically damaging provision in the bill, reducing GDP by 0.1 percent and costing about 27,000 jobs. 

The Tax Foundation also found that certain industries would be disproportionately affected by this provision worsening current supply chain issues. The coal industry, automobile, and truck manufacturing would face 5-7% tax increases as a result. Energy and transportation are critical to getting goods produced and delivered. With ongoing supply-chain issues, introducing new taxes would lead to higher prices for consumers. 

Second, beefing up IRS enforcement with $80 billion empowers the IRS to hire tens of thousands of agents to conduct audits on individuals and small businesses. These taxpayers may in turn face greater compliance costs as they seek help to navigate audits and new tax burdens. Meanwhile, the IRS is woefully neglectful at basic customer service requirements such as answering taxpayer calls.

In addition, tax credits to buy electric vehicles will drive demand up for these cars, for those who can afford the high price tags. Yet, the industry is already struggling with supply chain constraints that industry experts say limit adoption. Pumping up demand will the government will drive prices even higher.

Bottom Line

Tax increases on businesses such as the ones proposed will leave workers with fewer jobs and smaller paychecks.

There’s no evidence that increasing federal spending right now will reduce inflation. The evidence so far has been the opposite. 

The economy is likely in recession with inflation at 9.1%, this bill will make matters worse.