Biden's flagship economic package clears Senate hurdle: What are its implications?

US President Joe Biden’s flagship economic package has cleared a divided Senate and will be voted on in the Democrat-controlled House of Representatives on Friday. The bill seeks to raise an estimated $740 billion in revenue by the end of the decade and pledges around $440 billion in new investments. The funds will be collected by raising corporate tax, reducing the government’s healthcare expenditure by capping prescription drug costs and more robust IRS tax collection.

The deal, which Democrats have named the Inflation Reduction Act (IRA), seeks to rein in the galloping prices in America today and also aims to meet several long term goals that fight chronic problems in American society.

Most importantly, the IRA includes the largest ever US government effort on climate change by pledging close to $400 billion toward the cause.

A sore point about the bill is the proposed taxes on big corporates which will essentially pay for the sweeping changes in policy on climate and healthcare. Many executives have cried foul and Republicans said that the bill would slow down investments, not inflation.

Corporates bitter about taxes

Even though some business groups have pushed back against the legislation, Goldman Sachs has said that the bill will not dent corporate profits.

Much of the money to fund America’s climate goals and healthcare cover would come from a 15 per cent minimum tax on a handful of corporations with yearly profits above $1bn and a 1 per cent tax on companies that repurchase their own stock.

According to a Goldman Sachs analysis published on Sunday, the IRA tax provisions will “lower per-share profits next year among S&P 500 companies by just 1.5 per cent.” Goldman Sachs said the fiscal impact of IRA is modest because the new taxation and new investments “roughly offset”.

Biden too had said that the overall price tag on the package would be zero because the tax revenue would over the spending costs. Additionally, the US would have an extra $300bn for deficit reduction, according to the estimates.

Impact on inflation

Independent analysts have said that the IRA would have a minor impact on inflation. Many have pointed out that the causes of inflation in today’s situation are not addressed by the bill. However, Nobel Laureate Joseph Eugene Stiglitz argues in an op-ed that the climate-driven adverse events that the US is witnessing more regularly now will lower the standard of living even more than inflation. The investments in climate, he says, “will yield far-reaching returns.”

The IRA, for example, ensures that seniors above the age of 65 in America will not have to pay more than $2000 a year out of their pockets for medications. It also extends subsidies to enable 13 million people afford health insurance. In a first, the IRA also enables the Medicare programme (the US government’s health insurance) to negotiate better prices with pharmaceutical companies, who are also balking at the bill because they allege it seeks to set prices rather than negotiate. The powerful pharma lobby also says that the bill has nothing for those with private health insurance and does not address the problem of middlemen in pricing dynamics.

However, those who back the bill say that the drug-pricing provision could have an immediate impact on suppressing inflation.

Stiglitz writes for Project Syndicate that the thrust on renewables in the policy reforms could lead to lower fossil fuel prices today. He says this based on the hypothesis that markets are forward looking – that an anticipation of increased renewable supply could subdue fuel prices today.

He also argues that, “according to some of the more prevalent theories, anticipations of future inflation are a key determinant of current inflation, so even the bill’s slower-moving inflation-dampening provisions could have anti-inflationary benefits today.

However, the bill saw stiff resistance from Republicans and narrowly passed the Senate by a margin of 51-50 with Vice President Kamala Harris casting the tie-breaker vote.

Republicans said the bill’s corporate taxes would hurt job creation and drive prices higher at a time the country was already witnessing its worst inflation since the 1980s.

Scaled down deal

The latest bill is a scaled down version of a more ambitious $3.5 trillion package that Biden had proposed last year as part of his Build Back Better initiative. Several proposals had to be abandoned under the previous deal including universal preschool, paid family leave, and expanded child care aid.

The thinner version of the bill will raise $313 billion from taxes on big businesses, $288 billion from prescription drug caps, and $124 billion from plugging gaps in Internal Revenue Service’s (IRS) tax enforcement.

Even though the bill is smaller in size, its proponents are convinced that it is big on impact. Analysts say that the bill does take aim at resolving old problems in the American system including pharmaceutical costs, taxing big corporations and commitments to slowing global warming.

The “Inflation Reduction Act” also gives Democrats something to showcase ahead of the midterm elections in November at a time when the average American is feeling bad about the economy.