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It shouldn’t be surprising to know that currently, the world’s most powerful country, the USA, is also facing an economic crisis. Education, healthcare, loans, etc, everything has become expensive in the past few years. And it is not taking any natural course, as inflation usually does, but in the wake of COVID-19, America is going through the worst inflation in the last 40 years.
Inflation Reduction Act, 2022
Joe Biden signed a law on 16th August 2022, making it into an act. IRA or Inflation Reduction Act is designed to:
- Bring down the costs for families
- Make big corporations pay appropriate taxes,
- Fight the climate crisis and
- Reduce the deficit.
According to the official website of Whitehouse (whitehouse.gov), currently, the cost of prescription drugs is up to 2 to 3 times more costlier in the US than in other parts of the world. The new IRA will help somewhere around 5-7 million people by cutting down the costs of their prescription drugs.
The Act also promises that the price of a month’s supply of insulin for Medicare enrollees with diabetes will be capped at $35. An American would be able to save $800 per year, on average, on health insurance premiums.
IRA is not the first bill to advocate and act for clean energy in America. In the past, America has introduced a number of bills to combat climate change. However, this is the first time a bill that is mainly a bill to fight climate crises sounds like an economic bill.
Also Read: War and Sanctions shrink Russian economy by 4%
Whether Inflation Reduction Act is different from the Acts passed earlier?
There Can’t be any simple “Yes” or “No” of this question. For example, the Clean Air Act,1970 was passed to reduce air pollution and protect the ozone (O3) layer of the atmosphere and also promote public health. The cornerstone of the act was that it gave the optimum power to Environmental Protection Agency (EPA) to take effective measures to curb pollution.
Public health and the environment have benefited greatly from the Clean Air Act. Despite increases in the gross domestic product (GDP), the number of miles driven by vehicles, and the size of the population from 1980 to 2015, the total emissions of the 6 primary air pollutants covered by the National Ambient Air Quality Standards (NAAQS) decreased by 63% in the US.
Nevertheless, in several regions of the US, pollution levels continued to be higher than the NAAQS.
How the Inflation Reduction Act will help Americans save on taxes?
Under the IRA, American families can benefit from clean energy and electric vehicle tax credits and save up to $1000 a year. A lump sum of 7.5 million families will be able to power their houses using a solar system of power generation with the help of 30% tax credit saving around $9000 over the course of the life of the systems.
Families in the US will be able to save $950 each year by lowering tax credits up to $7500 for new electric vehicles and up to $4000 for used electric vehicles.
However, the Act says that in order to be eligible for the tax credit, NEV manufacturers must complete vehicle assembly in North America and source a sizable portion of key battery components, such as metals like lithium, nickel, and cobalt, from the US or other nations with which it has free trade agreements.
How the Act will prevent Tax Evasion by large firms?
According to the reports compiled to estimate taxes paid by large profitable corporations in the US, a total of 55 wealthy corporations did not pay even a penny towards income tax in 2020. The top one percent of people earning in America is said to evade taxes of around $160 billion every year.
According to the Congressional Budget Office, an estimated $124 billion will be saved over the course of 10 years of the Inflation Regulation Act from collecting taxes already in hands of the wealthy and large corporations in the US.
It is also claimed under the IRA that any family who makes less than $4,00,000 annually will be exempt from paying any extra taxes than what they already pay.
One of the main aims of the IRA is to reduce the trade deficit. As claimed by the committee of the Inflation Reduction Act, it is supposed to accomplish $100 billion dollars in deficit reduction. The website says, “126 leading economists – including 7 Nobel Laureates, 2 former Treasury Secretaries, 2 former Fed Vice Chairs, and 2 former CEA Chairs – have said reducing the deficit will help fight inflation and support strong, stable economic growth.”
How is the IRA supposed to bring down the prices?
The act intends to bring down inflation in three ways.
- By bringing down the federal deficit it will make sure that there is less money floating in the economy which in turn leads to less demand and fewer price hikes.
- It will encourage the manufacture of some items, primarily in the field of renewable energy. Having more supply than demand might eventually assist to reduce some expenses.
- By enabling Medicare to bargain with drug firms over their prices, one provision of the law will assist in controlling the rise in the cost of some prescription medications.
But since food and fuel prices are worst hit by inflation in the US, the IRA still doesn’t concretely indicate how it plans to lower prices of the same. It is given that the effects of this bill won’t be seen in the coming 2-3 years but with the new tax credit policies in the bill, Americans would be able to increase their savings definitely.
Is there more politics than the economy attached to this act?
According to a Chinese social science expert, the Inflation Reduction act is just another policy to bring down China as a leading tech giant and claim the number one position in the global tech market. To them, the inconsistent and confusing plan once again demonstrates that the Democrats and Republicans have only agreed to take action against China’s tech rise under the catchy banner of fighting inflation and combining all those muddled mishmash policies.
Looking closer at the act’s specifics, we can observe that it primarily focuses on funding for clean energy, medicare, and closing tax loopholes. The act hardly makes any difference in terms of lowering inflation.
Such announcements of lower inflation have a history of failing in the US. In addition to announcing the collapse of the Bretton Woods pact on August 15, 1971, former President Richard Nixon also suggested measures to lower inflation and boost employment.
For the following five years, the US economy endured the disgrace of high unemployment and high inflation as a result of these failed policies. The central banks of today are acting swiftly and forcefully to prevent runaway inflation as a result of the lessons learned during the 1970s.
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