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‘Inflation Reduction Act’ Has Little Inflation Help, UPenn Study Says

Economy Jul 30, 2022 02:54
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(Bloomberg) -- The Inflation Reduction Act of 2022, the breakthrough US legislative deal on key parts of President Joe Biden’s agenda, likely won’t reduce inflation at all, according to a study.

And that’s coming from researchers influential with the senator whose vote was crucial to sealing the deal, Joe Manchin of West Virginia.

The study, from the Penn Wharton Budget Model, estimates the act would cause inflation to “very slightly” rise until 2024 then slide after that. 

Overall, the researchers said in the report Friday, there’s “low confidence that the legislation will have any impact on inflation.” 

The surprise deal late Wednesday, hammered out between Manchin and Majority Leader Chuck Schumer, hinged partly on Manchin’s demands that it not add to inflation. 

“Reduction” in the title is a also bit of branding aimed at one of the biggest concerns among voters heading into the November midterms. 

Republicans may capitalize on public angst over consumer prices cruising at 40-year highs, the economy contracting and, according to a recent Census Bureau survey, four in 10 Americans saying it’s somewhat or very difficult to cover usual household expenses.

Manchin in the past has leaned on the economists and data scientists at the University of Pennsylvania’s Wharton school rather than using the government’s own estimates, including from the nonpartisan Congressional Budget Office. 

In December, Manchin had cited Penn Wharton findings that the expanded child tax credit in Biden’s earlier, more expansive, “Build Back Better” proposal would add to inflation as a reason to oppose it.

The newly proposed bill, which doesn’t yet have all Senate Democrats on board, would impose a 15% domestic corporate minimum tax, funnel $80 billion to the Internal Revenue Service to increase tax audits, and raise taxes on carried interest.

The revenue from these tax changes, along with savings from allowing Medicare to negotiate drug prices, is designed to fund $370 billion in spending on climate and energy programs and three years of premium subsidies for Obamacare beneficiaries. It would also go toward deficit reduction.

Estimated Impact

In its report Friday, Penn Wharton estimates the bill would reduce the budget deficit by $248 billion over 10 years, less than the $300 billion estimate provided by Senate Democrats. An official score by the CBO is not yet available. 

The researchers added that if Obamacare subsidies are extended to 10 years, rather than three years in the bill now, then the deficit would shrink by just $89 billion.

They also flagged that estimating the overall impact of the new, slimmed-down bill is challenged “by the smaller size of the program’s spending and taxes relative to the overall U.S. economy.”

According to their modeling, the personal consumption expenditures index -- the main inflation gauge watched by the Federal Reserve -- may rise over the first few years, up to 0.05 percentage points in 2024. It would then create a 0.25 percentage point fall later in the decade. 

“These point estimates, however, are not statistically different than zero,” they wrote.

©2022 Bloomberg L.P.


‘Inflation Reduction Act’ Has Little Inflation Help, UPenn Study Says

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