Key Aspects of the US Inflation Reduction Act Explained:
The Inflation Reduction Act isn’t all about inflation. It's about reducing the US budget deficit. The bill will invest $300 billion in reducing the deficit run by the US government.
It will also invest $369 billion in energy security and climate change. So it’s about energy and climate policies with the aim to reduce the cost of energy. By addressing the cost of energy, which is one of the biggest contributors to inflation, the aim is that inflation would fall and we’d live in a cleaner world. Two birds with one stone. So what are the key policies to reduce the cost of energy and raise revenue:
· New 15% Corporate Minimum Tax – Making business and the 1% pay their share. Aiming to reduce clear wealth gaps in the US. Another key policy targeting business was a 1% surcharge on corporate stock buybacks. Companies buying back their own stock have taken greater ownership of their businesses and driven up asset prices. This contributed to one of the biggest asset bubbles ever seen. There is now an incentive to spend profits elsewhere, such as in research and development.
· Reducing Costs of Drug Prescriptions – Costs are capped at $2000 per annum. This will start in 2025 and affect 50 million people. Health premiums are also lowered for millions of Americans on health insurance. There is also a $35 cap on a month’s supply of insulin, benefitting 3.3 million Americans. The aim is to have as few Americans uninsured as possible. In 2010, 18.2% were uninsured, and in 2020 this was 11.5%.
· IRS Tax Enforcement – Remember the Biden administration hiring 87,000 new IRS agents? Well, this gave the IRS $80 billion in funding. They will use this to hire and incorporate tougher enforcement. This is again targeting the rich. The Biden administration suggested anyone who earns less than $400,000 per annum won’t be affected. The main target could be undeclared cryptocurrency profits. The last bitcoin halving was on 11th May 2020 with a price of $8,821.42. In less than a year, on April 14th, 2021, the price was at $63,233, representing a 617% increase. The IRS are on the hunt for these profits and anyone dodging tax.
· Carried Interest Loophole – Carried interest is the part of profits that partners earn when managing certain funds such as venture capital, private equity, or hedge funds. The loophole is that rather than being taxed as earned income, it can be counted as capital gains. Capital gains are taxed at 20%. This doesn’t seem in fitting with the rest of the Inflation Reduction Act. It gives asset managers more money through lower taxes, but it does make sense. The US Chamber of Commerce reported that eliminating the policy would lose 4.9 million jobs and lead to a $96 billion loss in tax revenue over five years. Keeping the loophole in place makes sense for the budget deficit approach.
· Energy Security of the US – The act will "reduce carbon emissions by roughly 40 per cent by 2030”. How will they do it? They plan on increasing the number of jobs in the energy sector and reducing emissions across the entire economy. Companies will be incentivised to adopt clean energy tax credit programs. Workers will be given fair wages. Clean-energy production will be produced through American-made products. Another example of the US pivoting to self-sufficiency and isolation. All while still maintaining international interests in anything and everything. The tax credits are for wind, solar, nuclear, clean hydrogen, clean fuels, and carbon capture.
· Affordable Care Act Extension – Insurance premiums are supported by the government for 3 million people in the US. This leads to lower health insurance premiums. If not extended these 3 million Americans could have lost their health insurance.
So where should we see differences?
· Energy Inflation Levels: The act aims to decrease inflation through reduced energy costs. But the main reason we see high energy prices is fossil fuel energy is engrained in our way of living. For years, investment in fossil fuel energy has been too low. Most renewable energy sources take years to come online, are weather dependent, or have little storage capacity. We still need some investment in fossil fuels. Otherwise, a lack of supply will lead to even higher prices. This counts on the world maintaining its current consumption. In a recession or depression, demand would drop for everything and so prices would drop too. My main point is the ESG movement has proven we need the replacement integrated into society. We can’t move from fossil fuels to renewables overnight. Energy inflation levels in fossil fuel energy sources could remain high.
· US Global Trade: The US is protecting itself at the end of Globalization. Like the CHIPS act, the US is aiming to produce everything it would need within the country and not rely on others. We’ve seen how relying on Russian energy went for most of Europe. Most of the world also relied on cheap labour from China for manufacturing. It appears that manufacturing leaving China will hurt them more than the US at the current time. The entire Chinese stock market is being driven by the US-China trade war and zero-COVID. Any smaller supply chains built by the US will also be powered by cleaner energy.
· Energy Prices: Comparing the price of US natural gas and European natural gas shows the energy security the US has. This is especially with its shale industry funding cheap energy in the country for decades. Clean energy will be encouraged with tax credit savings. Examples include a 30% tax credit savings on families installing solar panels. Also, $7500 in tax credits for new electric vehicles and $4000 for used electric vehicles.
· Wealth Gaps: The US has seen periods of high internal conflict over the last few years. This is due to politics and neither side wants to lose. This will make the election in 2024 important. One key feature of this split is wealth gaps. The rich keep getting richer, and the majority of the population suffers because of this. The Inflation Reduction Act works to address some of this tension by having the rich pay their due in taxes.
· Cost-of-Living Crisis: Healthcare is an absolute necessity in life. Giving more people access to affordable healthcare is vital. Cheaper recurring costs will increase the amount of money left for people to live from. In the face of inflation, reducing the cost of living for those with medical needs is a good policy.
Other important sources of information about the energy transition worth exploring:
· Odd Lots Podcast episode with Jigar Shah – Director of the Loan Office at The Department of Energy.
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