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Inflation Reduction Act

Final Bill Still No Threat to Inflation, Penn Wharton Scholars Estimate

Joseph Boris  

Joseph Boris  

Penn Wharton Budget Model of Senate-Passed Inflation Reduction Act: Estimates of Budgetary and Macroeconomic Effects

The finalized Inflation Reduction Act of 2022 (H.R. 5376) will reduce noninterest cumulative deficits by $264 billion over 10 years, including through tax increases that will mainly affect higher-income Americans, but it will barely touch inflation, the Penn Wharton Budget Model estimated.

In its cost assessment, released August 12, the Budget Model also projected the legislation would reduce U.S. gross domestic product by 0.1% within its first decade and increase GDP by 0.3% in 2050. The latest estimate from the Budget Model—a research tool prepared by economists and data scientists from the University of Pennsylvania’s Wharton School—was released the same day the House of Representatives passed the bill, following Senate passage on August 7. President Joe Biden is scheduled to sign the measure into law this week.

The deficit and GDP calculations include the impact of debt reduction, carbon-emissions reduction, and tax incentives on investments and working hours, the three scholars who prepared the estimate wrote.

The Inflation Reduction Act “would have no meaningful effect on inflation in the near term but would reduce inflation by around 0.1 percentage points by the middle of the first decade,” according to the co-authors. “These point estimates, however, are not statistically different from zero, indicating a low level of confidence that the legislation would have any measurable impact on inflation.”

A similar conclusion was drawn in the Penn Wharton Business Model’s earlier estimate, issued July 29, while the bill was pending in Congress. The earlier report assessing the bill’s budgetary and macroeconomic impact that from 2022 through 2031 had forecast $260 billion in new revenue, including through a new 15% minimum tax on income as stated in financial reports by corporations with yearly profits exceeding $1 billion as well as a 1% excise tax on corporate share buybacks.

According to the latest estimate, government spending will increase in order to pay for the legislation’s climate-related provisions, along with an extension of health insurance plan subsidies under the Affordable Care Act that will be greater than the savings realized from changes to how prescription drugs are priced. For a summary of the tax provisions in the legislation, see Summary of Senate-Passed Inflation Reduction Act of 2022.

“However, additional tax revenues are greater than the spending increases, which leads to a decrease in government debt,” the report said.

It said that “most, but not all, of the tax increases fall on higher income households,” adding that “future generations, including higher-income households, gain from the improved economy, including a reduction in carbon emissions.”

As government debt declines, private capital will increase slightly by 2050 and workers will become more productive, which will be reflected in wages that increase by 0.1% the same year, the Penn Wharton scholars forecast. Moreover, they said, the increase in private capital combined with the accumulated productivity increases from the impact of the bill’s climate and clean-energy measures will lead to the slight increase in GDP.

In official reports to Congress, prepared before the House approved the legislation, both the Joint Committee on Taxation and the Congressional Budget Office estimated that the Inflation Reduction Act would reduce the federal deficit by $91 billion over its 10 years.

 

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