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On Sunday, August 7, the U.S. Senate passed the Inflation Reduction Act. This is a scaled-down compromise of Biden’s original Build Back Better Act, introduced in 2021. Proponents of this bill say it will increase the federal government’s revenue by $739 billion by adding a 15% corporate minimum tax, prescription drug pricing reform, IRS tax enforcement, and closing the carried interest loophole. This bill will also invest in clean energy and healthcare to the tune of $433 billion. So, if the Senate Democrats have done their math correctly, this bill should reduce the deficit by at least $300 billion over the next ten years.
But should we take the Inflation Reduction Act at face value?
Let’s look at what’s in the bill, why it’s called “Inflation Reduction,” and how we should plan for the future if it passes.
If you want to read this 730-page monster of a bill, you can do so here. Alternatively, if you would prefer the 1-page summary issued by the Senate Democrats, you can find it here. There is a more detailed, but at 37 pages much more readable, summary of the tax provisions outlined by the Congressional Research Service here.
Democrats claim that much of the bill’s income will come from adding a 15% corporate minimum tax to corporations posting an average of at least $1 billion per year for the past three years. It’s well known that many large corporations pay less than 10% (and some less than 5%).
The Washington Post had this article with graphics showing the effective tax rates on very large firms over the past three years, and indeed, most of them currently pay well below 15%. In theory, this 15% corporate minimum tax should bring in money.
In reality? Color me skeptical. Just reflect for a moment on the fact that the actual bill is 730 pages long. Are there carve-outs and exemptions? Oh yes.
And can corporations turning more than $1 billion per year in profits afford excellent lawyers and accountants?
Most definitely. I’m sure that corporations will have slightly increased taxes, thanks to this bill. But will the federal government get its estimated $313 billion? I’m not holding my breath.
The next biggest source of income should come from prescription drug pricing reform.
Pharmaceutical companies will be expected to enter into pricing agreements with the federal government. If they cannot agree on a price, then pharmaceutical companies will have to pay an excise tax of between 185.7% and 1900%.
For example, if the government wants a company to charge $5 for a drug, but the company insists it costs $10, they may actually have to charge $200 and then give that remaining $190 to the government as the excise fee.
Does this sound ridiculous?
It’s supposed to. A 1900% excise fee is really a gun to the head. The federal government will be setting prices for certain drugs beginning in 2026.
That’s what this is.
Proponents claim that these drug negotiations will lower the amount of money paid by Medicare to pharmaceutical companies, thus saving the federal government an estimated $288 billion.
Will it?
Who knows. Again, pharmaceutical companies can afford lots of lawyers, and a 730-page bill contains lots of wiggle room. This is just where Senate Democrats claim their numbers come from.
The next large source of income is the one that should be most concerning for the average citizen.
The federal government plans to beef up IRS enforcement by increasing its budget to $80 billion (it’s currently $12.6 billion) and hiring approximately 87,000 new employees. Congress estimates that this will bring in another $124 billion.
Naturally, Treasury Department officials claim that they probably won’t bother auditing households earning less than $400,000. This is baloney; we all know who gets audited.
I’ve been audited. I got audited when I was 26 years old. My then-husband had been staying at home with our infant, and I had been working full-time when our first child was born. I was filing our taxes at the time, and the IRS claimed I’d miscalculated some of my maternity benefits. We were kids with an annual income of $30,000, and we got audited.
Now, because I’m a stickler for details, at the time the actual audit took place, my then-husband had found a job, and I had just quit my job because my second child was about to be born, I had time to comb through the documents myself. I found that the IRS had made the mistake. I handled the audit, I actually got money back from the feds, but that’s beside the point. The point is that, despite claims to the contrary, audits do not necessarily target high earners.
I found out later that my experience in getting audited was not unique.
Two major features of our little family red-flagged the IRS. One, which most small business owners already know, was that I filed my taxes myself. We were so broke at the time, and I thought I could save money by doing our taxes.
The second thing that set off the IRS’s alarm bells was that we were claiming the Earned Income Tax Credit (EITC). I didn’t know this back then, but the IRS also prioritizes auditing anyone claiming EITC. Claims from the government that audits really only target high earners are demonstrably false.
House Republicans just released an analysis based on recent audit rates and tax filing data that confirms this. Based on previous audit rates, Americans earning less than $75,000 per year will receive 60% of the increased audits. Why?
Because people in that income bracket typically don’t have the resources to argue, they just pay up.
And most disturbing of all, the IRS is preparing to use force to collect what it wants. Think this is crazy conspiracy-theory stuff?
Look at the job posting on the IRS’s website.
On August 11, the job posting said they wanted people “willing to use deadly force.” You can see the screenshot of it here. As of August 12, the website simply says, “be willing and able to participate in arrests, execution of search warrants, and other dangerous assignments.” Either way, they are preparing to collect money forcefully. Why else would they have so much ammo?
I would never encourage anyone to cheat on taxes. In theory, correct enforcement of existing laws sounds like a good thing.
But I am skeptical of the claims about how this IRS on steroids will get the truly rich to pay their share. My gut says that those who can afford armies of lawyers will be alright. Everyone else will need to be meticulous in their paperwork because scrutiny is about to go through the roof.
More than scrutiny, I think harassment may go through the roof, even if it’s unintended. The IRS makes mistakes. I know this from experience.
I’m sure plenty of people are thinking, “Well, if you don’t have anything to hide, you don’t need to worry about it.”
That’s childish, and it doesn’t hold up against actual experience. Even if the IRS only had the best interests of the country at heart, they are still human beings that make mistakes. All of us need to bear this in mind moving forward.
And last but not least.
Finally, the Senate estimates that they will gain another $14 billion in revenue from closing loopholes related to stock buybacks.
So, that’s where the federal government expects it will collect money as part of “Inflation Reduction.”
Where will it go?
Some will go to families for health insurance. In 2021 and 2022, the American Rescue Plan Act expanded eligibility for families to receive health insurance subsidies. This was supposed to be an emergency provision expiring at the end of 2022, but instead, it’s being extended through 2025.
And then there will be a lot of subsidies available for so-called “green” energy projects. These will be available both at the industry level and also to homeowners who want to do things like buy electric cars, put solar panels on their roofs, and so on.
What does all this have to do with reducing inflation?
Inflation is the rise in the cost of goods and services; it is the corresponding loss in the purchasing power of money. The U.S. printed $5.2 trillion extra dollars in 2020 for Covid relief. This came on top of $4.5 trillion for quantitative easing and $3 trillion for infrastructure.
We have put huge amounts of paper money into the system. We can complain about supply problems, or war, or whatever. These things have all caused problems, to be sure. But the most basic, fundamental reason for inflation is that we printed trillions of dollars out of thin air, chasing roughly the same amount of goods as before. Of course, the dollars will be worth less. It just takes time for prices to shake out, and that’s exactly what’s happening.
Maybe we should call the bill the “Illusion of Inflation Reduction Act” because that seems to be really what the Senate Democrats are going for. They’re not addressing the core problems behind inflation because they can’t. You can’t release $13 trillion into the global monetary system and then suck it back in. But Congressional Democrats know they’re about to get clobbered in the midterms because people are miserable, and this is them throwing a bone to constituents, trying to do something that they think will, if not ease actual inflation, at least make people feel it less.
(Want to be able to eat despite inflation? Check out our free QUICKSTART Guide to building a 3-layer food storage system.)
Personally, I am very skeptical about the Senate Democrats’ assertions about how they will collect more money from large corporations.
Historically, the federal government has collected more revenue when they’ve simplified the tax code, not made it more complicated. This new bill adds more complications.
And yes, American families are struggling and need help, but the nature of the deductions in this bill is not aimed at the correct demographic. The people struggling in the U.S. are the working poor paying for gas with their credit cards and living in cars, not upper-middle-income people wanting to give their homes “green” upgrades. I find subsidies for home improvements particularly annoying because it’s essentially a tax break for people that can already afford to remodel their homes. The working poor probably aren’t considering buying a $50,000 electric car. Those $7500 rebates don’t help them. They’re only helping certain kinds of energy companies and the upper-middle-income consumers who can afford large purchases.
I don’t know if this oversight is due to stupidity, malice, or some combination thereof.
I can’t help but think of Orwell’s world in 1984, where there is the Inner Party, comprising something like 1% of the population; the Outer Party, comprising something like 15% of the population; and then the proles. The Inner Party makes all the real decisions; the Outer Party is the equivalent of our working professionals, who participate in the lies but are also subject to the most intense efforts at mind control; the proles are considered barely human and largely ignored but kept ignorant and impoverished.
Anyway, this round of Democratic “help” in the form of credits for home remodeling and expanded insurance coverage really seems aimed at helping our own relatively well-off Outer Party, not our desperate proles.
So, is there any way to prepare for this?
I think this bill is mostly yet another vehicle to distribute money to favored industries while decreasing the quality of life for the rest of us. So, a lot of the standard preparedness advice about planning for disruptions in food and energy will still apply. If your income is anything more complex than “here’s my paycheck from a giant firm,” I would seriously consider getting an accountant if you can at all afford it.
If you really can’t, keep everything organized. I was able to argue with IRS when I got audited because I had kept my W-2s and bank statements from the past five years. I was able to provide documentation. Get yourself a file cabinet (you can probably find one at a thrift store), and organize banking and tax info by year. If you have receipts to keep track of, put them into labeled envelopes paper-clipped into your annual tax folder.
And finally, just try to find something you enjoy. There is so much to worry about; make plans to the best of your ability, and then, knowing you’ve done what you can, do your best to find some enjoyment in life. Chronically miserable, anxious people make far more mistakes. Maybe all you can do is sit around a fire in your grill with a few beers and some good friends, but if it takes off some stress, go for it.
What are your thoughts on the Inflation Reduction Act?
Do you think this bill will help the average American? Do you think it will legitimately decrease inflation? Or do you think it’s another “creatively” named piece of legislation that means exactly the opposite of its title? (Patriot Act, anyone?) Let’s hear your thoughts in the comments.
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About Marie Hawthorne
A lover of novels and cultivator of superb apple pie recipes, Marie spends her free time writing about the world around her.
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