Congress’s Sleight of Hand
On Tuesday of this week, President Biden signed the Inflation Reduction Act into law. A piece of legislative text ostensibly geared towards countering advances in the price level and forcing large corporations to pay a minimum income tax, the Act will likely fail to gain much ground on either front—though it isn’t for without trying.
It is well-known in Washington that a commonly used tactic on Capitol Hill is legislative misdirection. Policymakers hone in on a key issue facing the American people, identify the problem they—not their constituents—want to tackle, search for a catchy title or marketing strategy to affix to some forthcoming legislation, then bury their true intentions deep in legislative text as the bill makes its way through Congress. In fact, placing key policy language in a bullet point, below a numbered section, beneath a subjection, is optimal typography.
The Inflation Reduction Act touches on all of these, with all the elegance and subtlety of a sledgehammer. From the outset, the Act had the requisite, catchy title. Inflation is the predominate policy issue at the moment, and by placing “inflation reduction” right up front, made the bill all the more difficult to vote against. It had the appearance of an effective bipartisan policy solution. Whether Republican or Democrat, who doesn’t want to go back to their district and say they worked to bring down prices in this economy? What a great reelection talking-point. Remember, November is just right around the corner. Unfortunately, it also had the sleight of hand typical of Washington policy development. The reason why is the law will in no way reduce inflation. Ask any economist worth their salt or the non-partisan Congressional Budget Office that scored the bill. Both will tell you the Inflation Reduction Act will fail to bring down prices in any meaningful way, and could, in fact, add to prevailing upward price pressure.
Now for those of us within the beltway, this comes off as business as usual. In fact, such machinations have come to be expected in these circles. Marketing is key to passing new laws, and without it, good ideas commonly fall by the wayside. The truth is the Inflation Reduction Act is an environmental package. Nothing in the text provides for policies geared towards bringing out market disinflation. It provides for new federal outlays totaling $437 billion, with $369 billion earmarked for “Energy Security and Climate Change.” And while its drafters purport the legislation’s 15% minimum corporate income tax will be used to offset those investments—thereby bringing about a reduction in the deficit and hopefully taming inflation—it is more probable that revenue will fall short in zeroing-out new federal outlays, and consumer prices will remain unchanged.
Congress fails to grasp that the problem with corporate profits is that large companies are well-adept at finding ways to avoid them through offshoring earned revenue, or by reducing their tax bill through capital outlays. Other developed countries have accepted this reality, and rather than trying to play a game of cat and mouse with corporate profits, our peers have addressed the problem by imposing a value added tax on various stages of production. For some reason, though, such an idea is anathema to most voters in this country and is particularly repulsing to our elected officials.
All of this isn’t to say the Inflation Reduction Act doesn’t provide for much needed environmental investment or is in some way a bad deal. It’s actually a pretty good law—it’s just deceptive. The nation needs to increase its investments in energy security and make progress towards obviating the degradation caused by climate change. The nation also needs to take actions to bring down inflation. The problem is that the American people probably don’t know which issue this law is intended to address. But, then again, that’s the point, right?