A package of tax increases, lower drug prices and other provisions aimed at reducing the federal budget deficit could alleviate rapid price gains.
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Jim Tankersley and
President Biden said on Thursday that an energy, tax and health care agreement reached with Senator Joe Manchin III of West Virginia would relieve inflation and bring down the cost of living for American families. That key promise helped bring the centrist senator on board for a bill that carries the remnants of the president’s expansive domestic agenda.
Taming inflation has become a top priority for Democrats and Mr. Biden, who has seen his approval rating sink as Americans have faced soaring costs for food, gas, rent and other goods and services. With few policy levers under his immediate control to beat back rapid price gains, Mr. Biden sought to portray the new package as an economic salve that would put money back in consumers’ pocketbooks.
The extent to which the package, known as the Inflation Reduction Act, could alleviate the most rapid price gains in 40 years remains to be seen. But many economists agreed that the tax and other provisions would likely help reduce price pressures somewhat, although the overall effect is likely to be modest and potentially will not be felt for months or years.
The plan centers on nearly $370 billion in tax incentives and spending programs meant to encourage consumers, businesses and electric utilities to switch to lower-emission sources of energy on the road and in electricity generation. It also includes nearly $300 billion in federal spending savings, to be achieved by giving Medicare the power to negotiate for lower prescription drug prices, and money to lower health insurance premiums for 13 million people who get their insurance via the Affordable Care Act.
Mr. Biden said that health savings from those moves would amount to $800 per family per year, and that the energy provisions would bring down family energy bills “by hundreds of dollars.”
The new spending and tax credits would be more than offset by a $313 billion tax increase on large multinational corporations that currently reduce their tax bills below an effective rate of 15 percent, along with a new crackdown by the Internal Revenue Service on businesses and high-earning individuals that evade taxes. It would raise more than it spends, which would have the effect of reducing the federal budget deficit by $300 billion.
As a result, the bill could help mitigate inflation in two ways. Reducing the federal budget deficit should reduce consumer spending power in the economy, at least somewhat. In particular, it could take money from high earners, via increased tax enforcement, and large corporations. Its investments in emerging low-emission energy sectors could speed growth and help the economy operate more efficiently.
“To fight inflation, we want policies that will increase supply or reduce demand. And this does both,” said Maya MacGuineas, president of the Center for a Responsible Federal Budget in Washington, which has pressed lawmakers to support policies that reduce the deficit. “Almost every one of these policies, in and of itself, will fight inflation. And on net, the entire package most certainly will.”
Mr. Manchin told reporters on Thursday that he had been assured by independent experts that the legislation would tame rampant price growth. In remarks at the White House, Mr. Biden said the bill “will in fact reduce inflationary pressure on the economy” adding that it “strengthens our economy in the long run as well.”
But many outside experts, even supporters of the bill, were restrained in their estimates of how much the package would reduce an inflation rate that topped 9 percent in June. They said the size of the deficit reduction is relatively small compared to the overall economy, and noted that the tax increases will not begin to hit people and companies until next year at earliest.
“This legislation will lower inflation,” said Jason Furman, a Harvard economist and former chair of the White House Council of Economic Advisers under former President Barack Obama. “I don’t think it will lower it by a lot.”
White House and Treasury Department economists have not yet analyzed the agreement’s effect on inflation, top administration officials said on Thursday. One outside projection — from the University of Pennsylvania’s Penn Wharton Budget Model — estimates that the plan will add .05 percentage points to the nation’s inflation rate in 2024 but subtract a quarter of a percentage point annually in later years.
“This is not a ton of money compared to the economy as a whole,” said Alexander Arnon, the budget model’s associate director of policy analysis. “From an inflation perspective, it’s pretty small.”
Cecilia Rouse, who chairs Mr. Biden’s Council of Economic Advisers, said in an interview on Thursday that the plan would make “a meaningful contribution” to a wide range of ongoing government efforts to reduce inflation. That includes the administration’s work to clear pandemic-clogged supply chains and the Federal Reserve’s rapid moves to raise interest rates, which are intended to cool the economy by making money more expensive to borrow and spend.
Ms. Rouse said the bill’s effects could begin to show up in economic data, which could in turn lead the Fed to alter its path of rate increases. “It could very well make a difference to their own policymaking,” she said, “because to the extent that they see that inflation is coming down, while employment is remaining robust — so we still have maximum employment or a strong labor market that makes their life easier — they will be able to start to moderate their own policies.”
At a news conference on Thursday, Treasury Secretary Janet L. Yellen urged Congress to “immediately” pass the legislation, which she said would help lower costs for American families.
“I see that as making a very important contribution to lowering the cost of prescription drugs, which is for many households a very severe burden on their household budgets,” Ms. Yellen said.
The Treasury secretary added that the measures in the bill that would lower the deficit are an “appropriate accompaniment” to the Federal Reserve’s interest rate increases. Regarding the degree of the impact that the legislation would have on inflation and how quickly it would take effect, Ms. Yellen said that she did not have “numerical estimates” to share.
The agreement blindsided White House and Treasury officials on Wednesday evening, and to their dismay it did not include a measure that would put the United States in compliance with the global tax agreement Ms. Yellen brokered with more than 130 countries around the world.
That pact requires nations to adopt a global minimum tax of 15 percent. The proposed corporate minimum tax on the domestic “book income” of large companies would not align the United States with that agreement, which Mr. Manchin has said would put American companies at a competitive disadvantage.
Mr. Manchin’s willingness to back the legislation followed months of deliberations about the impact that any bill would have on inflation. Democratic lawmakers, White House officials and outside advisers such as Lawrence H. Summers, the former Treasury secretary in the Obama administration, urged Mr. Manchin to back legislation that they said could help ease rising prices.
“I’ve been in dialogue with Senator Manchin and other senators about inflation and the risk of inflation and how policy can promote inflation or reduce inflation,” Mr. Summers said in an interview. “I hope the conversations have been productive.”
Mr. Summers added that he believed that the bill is “anti-inflationary” on supply, demand and pricing grounds.
“I think on economic growth and efficiency grounds, it promotes investment by reducing budget deficits,” Mr. Summers said. “It promotes efficient resources allocation by leveling the corporate tax playing field, and it promotes investment with clean energy incentives. I think on fundamental progressive objectives, it makes health care more affordable.”
But business groups have already expressed their opposition to the tax changes and some tax experts believe the legislation could actually add to inflation.
Rohit Kumar, the head of PwC’s Washington tax policy group, said that the new minimum tax would make it more expensive for manufacturers to invest in factories and equipment, while giving Americans more money in the form of tax credits. This dynamic, he suggested, could push prices higher.
“It’s going to be more money over time, chasing fewer goods,” said Mr. Kumar, who is a former aide to Republican Senator Mitch McConnell of Kentucky.