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What is the Inflation Reduction Act?
The Inflation Reduction Act (IRA) is a federal law signed by President Joe Biden that had several goals, namely, to reduce the federal budget deficit, lessen the impact of inflation, increase clean energy production, and lower prescription drug prices.
Key Takeaways
- The Inflation Reduction Act was signed into law on August 16, 2022, by President Joe Biden.
- The IRA’s main stated goal was to reduce inflation, which in 2022 was running at about 8%.
- The Inflation Reduction Act authorized a total of $891 billion in spending on federal programs.
- The IRA was used to force corporations to pay their fair share in taxes and increase the IRS’s enforcement of the federal tax code on high-net-worth individuals.
- Democrats endorsed the legislation, while Republicans opposed it, citing a lack of support for traditional energy and large spending that could make inflation worse.
Understanding the Inflation Reduction Act
Here are the most important aspects of the Inflation Reduction Act:
Why Is It Called The Inflation Reduction Act?
The Inflation Reduction Act was named for its main goal of reducing inflation, which was running rampant in 2021 and 2022. At the time, the COVID-19 pandemic created supply chain disruptions that led to a shortage of goods throughout the world. This quickly drove up prices as there was not enough supply to match global demand for consumer goods.
At the same time, once pandemic lockdowns ended, consumers began spending money at a record rate. This pent-up demand for things like dining, travel, and entertainment caused prices to rise as well.
When it appeared that inflation was coming in at double-digit numbers, the Inflation Reduction Act was enacted in an attempt to slow down this negative barrier on the economy.
How Does the Inflation Reduction Act Affect Taxes?
Enhanced IRS Tax Enforcement
One of the main tenets of the IRA was to increase enforcement of the country’s tax code. To do so, President Biden allocated $80 billion in funding to the Internal Revenue Service (IRS) over a 10 year period.
This money is designed to increase the IRS’s capabilities in handling audits and tax compliance issues, namely:
- Increased staff: Hiring more agents specializing in auditing corporations and high-net-worth individuals.
- Improving taxpayer services: Making it easier for all Americans to file their tax returns and receive timely responses to inquiries.
- Technological improvements: Upgrade outdated IRS technology and systems.
The Inflation Reduction Act relies on the Congressional Budget Office (CBO) to project how changes to the tax law and increased enforcement will impact the federal budget over time.
IRA By The Numbers
- $800+ billion in federal spending.
- $369 billion investment in clean energy.
- $80 billion in funding for the IRS.
- $35 billion in projected savings for Medicare.
- 30% tax credit for installation of renewable energy projects.
- 15% minimum tax rate on corporations with over $1 billion in profits.
- 1% excise tax on corporate stock buybacks.
Inflation Reduction Act Controversies
While the policies in the IRA have been seen as positive by many, there are still those who oppose its adoption and believe it will ultimately harm the domestic economy.
Detractors of the Inflation Reduction Act claim that it will:
- Make inflation worse by increasing the US money supply.
- Increase the federal deficit, which is already out of control.
- Discourage investment by corporations by increasing their taxes.
- Harm the fossil fuel industry, leading to job loss and higher energy costs
The Bottom Line
According to many, the Inflation Reduction Act was a necessary piece of legislation that helped the United States come out of the COVID-19 pandemic with a stronger economy. And according to the
Inflation Reduction Act’s definition, it has done significant work in clean energy, affordable prescription medications, and increasing tax revenue.
However, it will take many years, if not a decade for these changes to fully take effect, and to see whether their intended positive outcomes come to fruition.
