What is the Inflation Reduction Act?

The Democrats are obviously pushing through this bill to advance their agenda prior in the November midterm elections in the hope of consolidating their support.

Given that inflation is the number one concern expressed by most American’s right now, they decided to call it the “Inflation Reduction Act”.

So how on Earth does one spin spending more money and increasing taxes will lead to reduced inflation?

This is my interpretation of how this is supposed to happen.

First off around half the money is to be spent on tax credits and incentives to try to expedite the clean energy agenda. Given that energy costs are a significant contributor to inflation, presumably this is meant to alleviate this pressure in the longer term, but I don’t see how this is meant to help in the 2022 to 2024 timeframe.

The 2nd chunk of money is apparently to place caps on drug prices and to repeal the drug rebate rule (which it is hoped would reduce Medicare Part D costs). I am not sure that capping costs will have the desired impact as these generally lead to shortages.

The 3rd leg of the strategy is to introduce a 15% minimum corporate tax rate and spend lots of money collecting taxes from folks that have not paid the IRS what they are owed. The idea is to use this money to offset the deficit incurred by the other two initiatives. Presumably the thinking is that this money is already owed, so it won’t negatively impact the economy. I don’t think it works like that.

Bottom line is I’m not buying that this will do anything but increase inflation, but perhaps I am overlooking something?

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87,000 new IRS agents. They are not just going after the 1%. Anyone who gets paid in tips is going to be asked to bend over for an examination, and given we know that the further one falls down the income spectrum the higher the percentage chance of a person being audited each year, I am highly dubious of the claim that the new bureaucratic resources will be focused on the wealthy- if for no better reason than civil servants always go for the low hanging fruit.

Apparently, they will be tracking small business accounts- any payment over $600 will be tracked. They’re going after SMEs, which only rarely fill the classification of being in the top 1% if we are only looking at income. CGT for small businesses is likely to be a particular target.

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The theory here is that in many cases the manufacturers sell the same drugs overseas at lower pricves than domestically, and they still make a healthy profit. So, on the face, the US govt could cap the prices and the companies would still produce the drugs, at least in the short term. The counter-argument is that the process of developing pharmaceutics has a very long cycle, and that the profits which the comopanies make ionntheir best selling products go back into new R&D, and that if hte companies don’t have that expected inflow of revenue, and the potential for high returns off new wonder drugs, then they will spend less on new R&D, and eventually progress stops. Counter-argument to that is that every other country in the world is a free rider on American Pharma R&D, and American consumers paying excess price in a monopolistic scheme.

There are other ways to alter the equations, by changing how long patents are good on new products, and so how soon some other company can produce generics.

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It’s a full-employment act for civil servants.

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The UK manages pharma research at a rate roughly comparable to America (per population) and they still use block negotiation for drug prices- although we lack Americans special genius for monetisation. Most of the cost reductions stem from taking much less costly drugs as a preference over marginally more efficacious drugs or drugs with considerably fewer side effects.

If one drug costs $5,000 a month and is 87% effective at getting rid of cancer, and another is $500 a month and is 81% effective, then there is a very good argument that the costs saved are better deployed saving more lives elsewhere- and who really cares if you lose you hair or vomit most food you eat? In the US, the insured won’t generally be offered the cheaper drug as an option because of the pharma targeting of doctors. In the UK, one won’t generally be offered the more expensive drug unless you are privately insured, can find a trial (which happens fairly frequently with new drugs, because NICE doesn’t trust Pharma’s own research) or are willing to go private and pay the costs yourself.

Both systems have their idiosyncrasies.

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