Due to a number of circumstances, including Covid-19 supply disruptions, rising oil and food prices, and Russia's conflict in Ukraine, the world is currently suffering from high inflation. Likewise, the United States (US) is currently dealing with excessive inflation brought on by the inability of supply to keep up with demand and the increase of production costs. Following the Covid-19 pandemic, federal measures assisted in restoring employment and household income, but inflationary pressures also emerged. In attempt to combat such inflation the Federal Reserve has raised interest rates several times and the Congress passed the Inflation Reduction Act (IRA) which is considered an answer to some of the biggest challenges facing the country and a crucial step toward creating a more resilient and inclusive economy. The following will discuss the impact of the IRA on the US economy and evaluate its effects since its enactment.
The IRA is a US landmark federal law which seeks to contain inflation by lowering the deficit, bringing down the cost of prescription drugs, and boosting domestic energy output. The package also increases taxes on companies, and makes the greatest investment in climate change mitigation in US history. The legislation is the most aggressive response to the climate crisis in US history. The bill will advance environmental justice, solidify America’s position as a global leader in domestic production of renewable energy, and put the country on track to meet the climate goals set forth by the Biden Administration, including a net-zero economy by 2050. The act also addresses a number of credits and deductions, as well as new and renewed tax regulations that will have an impact on both people and corporations.
In order to significantly reduce the country’s carbon emissions by the end of this decade, the IRA allocates almost $400 billion in public support to clean energy. The money will be distributed using a combination of grants, tax incentives, and loan guarantees. The largest share goes to clean transportation, then clean electricity and transmission, including electric-vehicles (EVs) incentives.
Moreover, the law will impose taxes on firms with at least $1 billion in income, which is represented by a 15% corporate minimum tax rate. Individual and household taxes won’t increase; no family earning less than $400,000 will have their taxes increase by even a small amount. Corporation stock repurchases will be subject to an excise tax of 1%. One of the most significant provisions of the IRA is the prescription drug reform, which will enable Medicare to bargain for lower prices on a select number of prescription drugs, lowering the cost of medications for beneficiaries.
Furthermore, the law extends the Affordable Care Act (ACA) subsidy since medical insurance premiums under the ACA are already subsidized by the federal government to cut premiums, and it invests $80 billion in the Internal Revenue Services over the next ten years to help it carry out its obligations. These subsidies will be continued through 2025 after being set to stop at the end of 2022. According to the U.S department of Health and Human Services, if these subsidies weren’t continued, about three million Americans may lose their health insurance. The law also includes a number of initiatives aimed at lowering carbon emissions, tax credits for homeowners to offset energy expenses, and investments in clean energy generation.
The IRA is the most important piece of economic and climate change legislation, as well as the most important piece of health care legislation in more than a decade. The IRA will change the country as it is implemented during the next months. Household expenses that were previously beyond reach for many people will soon become more accessible. Families can save thousands of dollars by using prescription drugs, energy, and healthcare less frequently. EVs, energy-saving appliances, and sustainable energy will all become more affordable at the same time.
Regarding the impact of the main provisions in numbers, they will be examined as follows: First, regarding the cutting of prescription drug cost, five to seven million Medicare beneficiaries could see their prescription drug costs go down because of the provision allowing Medicare to negotiate prescription drug costs. In addition, thirteen million Americans will continue to save an average of $800 per year on health insurance premiums, and three million more Americans will have health insurance than without the law. The uninsured rate is at an all-time low of 8%. The law will benefit approximately 1.4 million beneficiaries each year. Fifty million Americans with Medicare Part D will be at ease knowing that their costs at the pharmacy are capped at $2,000 per year.
Second, concerning lowering energy costs, families that take advantage of clean energy and electric vehicle tax credits will save more than $1,000 per year. Families can purchase heat pumps or other energy-efficient home appliances with the help of $14,000 in direct consumer rebates, saving them at least $350 annually. A 30% tax credit will also enable 7.5 million more people to put solar panels on their rooftops, saving those families at least $300 annually. Tax credits of up to $7,500 for new and $4,000 for used electric vehicles can help families save as much as $950 annually. Further, according to the Congressional Budget office (CBO), the IRA will save $124 billion in taxes over the course of ten years, and it will reduce the deficit by hundreds of billions of dollars. In fact, the deficit declined by more than $350 billion in 2021, and decreased by 50% to reach $1.4 trillion in 2022 compared to $2.6 trillion in 2021. In addition, according to the estimations of the American Clean Power, the renewable energy workforce will redouble and generate $600 billion in private sector investment, and it will create nearly 500,000 new jobs in that sector alone.
Third, regarding inflation, in a statement released after the Senate’s passage of the bill, president Biden asserted that the legislation would bring inflation relief to Americans. But according to the Penn Wharton Budget Model (PWBM), an organization at the University of Pennsylvania that conducts economic analysis, there is small belief that the act will affect inflation in any way. PWBM is not the only organization making this statement since according to the CBO the bill won’t even scratch the surface of the inflation problem in the near future. According to a recent report by Moody’s Investors Services, the IRA will probably have medium- to long-term economic advantages through boosting productivity and investment, but it is unlikely to lower the high inflation rates now in place. This finding offered further support for the viewpoint. In addition, in a 2022 report by Moody’s analytics that is assessing the macroeconomic consequences of the IRA, the report forecasts that the IRA will reduce inflation over ten years budget horizon only by 0.33% in the fourth quarter of 2031 with no change during 2023 except starting the third quarter of 2023 where it will start to decline by 0.1%.
According to a new report by Climate Power, in the six months since the IRA came into law, more than 100,000 green jobs have been created in the US as a result of $ 90 billion invested in new private sector investments on 94 clean energy ongoing projects. By the end of the decade, the sector could employ 38 million people and will create over nine million new greens jobs worldwide, according to the International Renewable Energy Agency. New opportunities for electricians, technicians, mechanics, construction workers, and many other occupations are being created by the wind, solar, and electric vehicle industries. The report also highlighted several states where billions of dollars have been invested in new green jobs since the IRA came into effect, including for example Georgia that have invested $15.27 billion which will create 16,627 green jobs to supply the manufacture of EVs in the US, Tennessee has already created 11,753 jobs through $10.9 billion of clean energy investment, and Michigan with $7.2 billion is going to create 9,572 jobs in the state’s clean energy and potentially 167,000 over the next ten years.
With regards to health care, the Department of Health and Human Services has released a list of twenty prescription drugs for which the coinsurance cost for Part B beneficiaries may be reduced from April 1 through June 30, 2023. Medicare beneficiaries who take these drugs may potentially save up to $372 per dose, depending on their individual coverage on April 1 thanks to IRA.
Last, regarding inflation, it decreased in February, the consumer price index (CPI) grew by 0.4%, bringing the annual inflation rate to 6%, down from January’s 6.4%. Core CPI, which excludes volatile food and energy costs, increased by 0.5% in February and 5.5% overall. Although the annual level was in line, the monthly number was somewhat over the 0.4 percent prediction.
Hence, it remains clear that, since its passage, the IRA is in the process of realizing it goals in terms of creating green jobs and lowering medicines prescription, with a slight effect on inflation. Overall, the IRA will have a materially positive economic impact. In the short term, it will help millions of Americans with lower incomes and those who are older pay for their health insurance premiums and prescription drug expenditures. Additionally, it is the first significant attempt made by the government to address climate change and its damaging long-term repercussions on the economy. The government’s future budget deficits will be reduced as a result, which will help with the economy’s serious problem of rising unemployment. Further, all of this is more than paid for and, contrary to its name, it will only have a very minor impact on inflation.
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