Democrats’ anti-inflation plan could cut costs over time

President Biden said Thursday that energy, taxes, and health care reach an agreement With Senator Joe Manchin III of West Virginia, it would ease inflation and lower the cost of living for American families. This major promise helped bring the centrist senator into the House for a bill that holds the remnants of the president’s expanded domestic agenda.

Inflation has become tamed Top priority For Democrats and Mr. Biden, who has seen his approval rating drop as Americans face soaring costs for food, gas, rent and other goods and services. With few policy tools under his immediate control to beat off rapid price gains, Biden sought to portray the new package as an economic salve that would put money back in consumers’ pocketbooks.

To what extent can the package, known as the Inflation Reduction Act, ease the most Rapid price gains in 40 years remains to be seen. But many economists agreed that the tax and other provisions would likely help reduce price pressures somewhat, although the overall effect is likely to be modest and likely not be felt for months or years.

The The plan focuses on nearly $370 billion in tax incentives and spending programs It aims to encourage consumers, businesses and electric utilities to switch to low-emission sources of energy on the road and in electricity generation. It also includes nearly $300 billion in federal spending savings, which will be achieved by giving Medicare the ability to negotiate lower prescription drug prices, and money to lower health insurance premiums for the 13 million people who get their insurance through the Affordable Care Act.

Biden said the health savings from those moves would amount to $800 per family per year, and that the energy allowance would reduce family energy bills by “hundreds of dollars.”

The new spending and tax credits will be more than offset by a $313 billion tax increase on large multinational corporations that are currently cutting their tax bills below the actual rate of 15 percent, along with a new crackdown by the Internal Revenue Service on corporations and high-earning individuals who dodge of taxes. And it would collect more than it spends, which would have the effect of reducing the federal budget deficit by $300 billion.

As a result, the bill could help mitigate inflation in two ways. Reducing the federal budget deficit should reduce the purchasing power of consumers in the economy, at least to some extent. In particular, it can take money from high earners, through increased tax enforcement, and large corporations. Its investments in emerging, low-emissions energy sectors can accelerate growth and help the economy run more efficiently.

To fight inflation, we want policies that increase supply or reduce demand. “It does both,” said Maya McGuinness, president of the Center for Responsible Federal Budget in Washington, who has lobbied lawmakers to support deficit-reducing policies. Almost every one of these policies, by themselves, will combat inflation. And on the network, the whole package will definitely do that.”

Mr. Manchin told reporters Thursday that independent experts assured him the legislation would curb explosive price growth. In remarks at the White House, Mr. Biden said the bill would “actually reduce inflationary pressure on the economy,” adding that it would “strengthen our economy in the long run as well.”

But many outside experts, and even supporters of the bill, were constrained in their estimates of how far the package would cut the inflation rate above 9 percent in June. The size of the deficit reduction is relatively small compared to the overall economy, they said, and noted that tax increases won’t start affecting individuals and businesses until next year at the earliest.

“This legislation will bring down inflation,” said Jason Furman, an economist at Harvard University and a former chair of the White House Council of Economic Advisers under former President Barack Obama. “I don’t think it’s going to lower it that much.”

Senior administration officials said Thursday that economists at the White House and the Treasury Department have not yet analyzed the impact of the agreement on inflation. One external projection — from the University of Pennsylvania’s Penn Wharton budget model — estimates that the plan will add 0.05 percentage points to the country’s inflation rate in 2024 but subtract a quarter of a percentage point annually in subsequent years.

“That’s not a ton of money compared to the economy as a whole,” said Alexander Arnon, associate director of policy analysis at Budget Model. “From an inflation perspective, it’s very small.”

Cecilia Ross, who chairs Biden’s Council of Economic Advisers, said in an interview Thursday that the plan would make a “meaningful contribution” to a broad range of ongoing government efforts to lower inflation. That includes the administration’s work to remove supply chains clogged by the pandemic and the Fed’s swift moves to raise interest rates, which are intended to cool the economy by making money more expensive to borrow and spend.

Ms Ross said the effects of the bill could start to show in economic data, which in turn could prompt the Fed to change course in raising interest rates. She said: “It can make a huge difference to their policy making, because they see inflation coming down, while employment remains strong – so we still have maximum jobs or a strong job market that makes their lives easier – they will be able to start adjusting their own policies.

At a news conference Thursday, Treasury Secretary Janet L. Yellen urged Congress to pass the legislation “immediately,” which she said would help lower costs for American families.

“I see it as a major contributor to lowering the cost of prescription medications, which is a very heavy burden for many families on their family budgets,” said Ms. Yellen.

The Treasury Secretary added that measures in the bill that would reduce the deficit are an “appropriate accompaniment” to the Fed’s rate increase. Regarding the degree to which the legislation affects inflation and how quickly it will take effect, Ms Yellen said she had no “numerical estimates” of participation.

The agreement infuriated White House and Treasury officials Wednesday night, to their dismay that it did not include a measure that would bring the United States into compliance with the global tax agreement. Ms. Yellen has mediated with more than 130 countries around the world.

This agreement requires countries to adopt a global minimum tax of 15 percent. A proposed minimum corporate tax on the domestic “written income” of large US corporations would not align with this agreement, which Mr. Manchin said would put US companies at a competitive disadvantage.

Mr. Manchin’s willingness to support the legislation came after months of deliberation about the impact of any bill on inflation. Democratic lawmakers, White House officials and outside advisers such as Lawrence Summers, a former Treasury secretary in the Obama administration, urged Mr. Manchin to support legislation they said could help mitigate price hikes.

“I’ve been in conversation with Senator Manchin and other senators about inflation, the risk of inflation, and how policy can boost inflation or reduce inflation,” Mr. Summers said in an interview. “I hope the talks will be fruitful.”

Mr. Summers added that he believed the bill was “anti-inflationary” on the basis of supply, demand and pricing.

“I think on the grounds of economic growth and efficiency, it boosts investment by reducing the budget deficit,” Mr. Summers said. “It promotes efficient resource allocation by flattening the corporate tax field, and it encourages investment with clean energy incentives. I think fundamental progressive goals make healthcare affordable.”

But business groups have already voiced opposition to the tax changes and some tax experts believe the legislation could actually add to inflation.

Rohit Kumar, head of the Washington Tax Policy Group at PricewaterhouseCoopers, said the new tax floor would make investing in plant and equipment more expensive, while giving Americans more money in the form of tax credits. He suggested that this dynamic could drive prices higher.

“The money will increase over time, as you will be chasing fewer goods,” said Mr. Kumar, a former aide to Republican Senator Mitch McConnell of Kentucky.