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The impact of the Inflation Reduction Act in the United States

  On August 12, following the passage of the Inflation Reduction Act (THE INFLATION REDUCTION ACT OF 2022) by the US Senate on the 7th, the House of Representatives passed the bill with 220 votes in favor and 207 votes against, and the next step will be US President Biden. Signed into effect. The bill is Democrats’ reintroduced budget adjustment bill after the Build Back Better Act was shelved. According to CBO estimates, the Act’s ten-year total expenditure increase is 486.4 billion US dollars, the total revenue increase is 780.6 billion US dollars, and it is planned to reduce the deficit by 294.2 billion US dollars in ten years.
  The bill’s spending focuses on energy and climate, while revenue comes from drug price reform, the corporate minimum tax rate, and enhanced IRS enforcement. The bill is a reduced version of Biden’s original BBB plan, with major cuts in content and scale, excluding the large-scale expenditures on family benefits, personal tax credits, housing, and higher education in the BBB plan. Controversial projects such as raising the corporate income tax rate and increasing the tax on the wealthy have also been abandoned.
  In terms of spending, energy and climate spending ($388.1 billion) mainly includes tax credits for clean energy, manufacturing, infrastructure, and vehicle purchases. cost, promote economic decarbonization, and ensure energy security. The medical aspect ($98.3 billion) is mainly to extend the ACA government subsidies established in the 1.9 trillion bill, and the goal is to reduce residents’ medical expenses.
  In terms of revenue, the main sources are the establishment of a 15% minimum corporate tax rate and the strengthening of IRS enforcement (investment of $79.6 billion, expected return of $203.7 billion), with revenue of $313.1 billion and $124.1 billion, respectively. Meanwhile, drug price reform ($321.8 billion) includes allowing Medicare to negotiate prescription drug prices and establishing an inflation rebate. Similar to health care spending, drug price reform may reduce drug prices and improve health care costs for U.S. residents.
  Will the Inflation Reduction Act succeed in reducing inflation?
  In 2020-2021, the aggressive fiscal stimulus policies launched by the United States for two consecutive years were financed through the monetization of fiscal deficits. This has made the consumption of goods by American residents rapidly overheated, and at the same time, excessive financial subsidies have further weakened the enthusiasm of American workers for employment, and the recovery of industrial production in the United States in 2021 will falter. The direct cause of the “stagflation” of the US economy.
  However, there is no absolute causal link between fiscal deficits and inflation. For example, if the large-scale fiscal subsidies in the early stage are offset by a larger tax on the wealthy, since the propensity to consume is much higher for the lower-income group than for the higher-income group, this combination may reduce the deficit, but may push up inflation. For another example, an energy infrastructure spending bill will increase the deficit, but it may reduce residents’ energy bills in the long run, and the impact on inflation may actually be reduced.
  Facing the surging public opinion caused by the persistently high inflation in the United States, in order to accumulate political capital before the mid-term elections, Biden repackaged the original bill as a tool to reduce inflation, starting from the inflation caused by the fiscal deficit in 2020-2021. Propagating that deficit reduction is equivalent to lowering inflation. But historically, fiscal deficits and inflation have not been directly linked. Only in the stage of fiscal deficit monetization, the deficit can establish a direct transmission relationship with inflation. At present, the Fed has already stopped buying bonds, and the direct chain of fiscal deficit-inflation has been cut off.
  Since reducing the deficit and reducing inflation are not directly related, the impact of each item of the bill on inflation is more critical. According to CBO estimates, the impact of the Act on U.S. inflation in 2022-2023 is almost negligible, and may even have the effect of pushing up inflation, while the impact on the economy is also quite uncertain.
  The bill will have little or even a small increase in deficit reduction until 2027, due to drug price reforms and IRS enforcement revenue not being paid back until the second half of the bill, making inflation at its worst In recent years, the effect of the bill on inflation has been greatly reduced.
  A major source of income in the bill is the 15% minimum tax rate on companies (income over $1 billion), which may inhibit American companies when the current consumption of US residents is still far overheated compared to the production side. The willingness to invest will hit the supply side, slow down inflation, and at the same time curb non-residential investment, which is detrimental to the long-term competitiveness of the U.S. economy.

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