What You Need to Know about the New Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022 is one of the most revolutionary bills that encompasses everything from climate, health care, and economic package. On August 7th, senate Democrats were able to pass this bill in a 50/50 tie while Vice President Kamala Harris did the tie breaking vote in favor for the Inflation Reduction Act. This spending bill is said to tackle various areas like climate change and the high cost of prescription drugs. The controversy behind this bill stems from Democratic and Republican legislators believing the bill will have drastic outcomes. The Democrats argue that the bill will work on reducing the current economic concern regarding inflation while Republicans believe this new spending bill will only increase and make inflation higher. President Joe Biden is in favor for this new bill believing that “this bill is far from perfect. It’s a compromise. But it’s often how progress is made” (Biden). So, what exactly does this bill include and how do others interpret the potential effects that this bill might have?

Summary: The Inflation Reduction Act of 2022

Senate Democrats published a one-page summary including the different sections that this spending bill will tackle regarding the economy, climate change, and healthcare: “The Inflation Reduction Act of 2022 will make a historic down payment on deficit reduction to fight inflation, invest in domestic energy production and manufacturing, and reduce carbon emissions by roughly 40 percent by 2030” (Senate Democrats). Looking closer at the Topline Estimates on the summary page, the total deficit reduction is around $300 billion while the total investments is around $433 billion, and the total revenue raised is $739 billion.

For many, these numbers might not mean much considering the economic terms that are being used. However, it is important to understand these terms to fully encapsulate what the bill is achieving regarding the total spending. Total deficit reduction is “the process of reducing the amount by which a government’s spending is more than the money it receives in taxes” (Cambridge). Total Investment refers to the “investment spending of the entire economy, including expenditures by general government, non-financial corporations, financial corporations, households and non-profit institutions” (OECD). Government revenue refers to the “government finance by means of participating in the distribution of the social products, which is the financial resources for ensuring the government to function” (Stats.gov). Looking at the total revenue raised in regard to the definition of government revenue, there is a clear understanding that the bill hopes to raise their revenue by $738 billion through this bill. Looking at the bill in terms of what exactly is being invested and supported, the bill tackles climate change by investing in energy and climate reform, making it the largest federal clean energy investment in U.S. history. It also looks closely on transportation and electricity generation by investing money in renewable energy infrastructure such as solar panels. The changes that we might see in the future is having tax credits for people that switch to cleaner energy sources, subsidies that help with the rising health insurances, and senior citizens will be the most impacted by “the $2,000 annual cap on out-of-pocket prescriptions drugs for people insured by Medicare” (Kim).

The Impact

The main question regarding the bill is how exactly it will help bring down inflation. Considering that the bill is called the “Inflation Reduction Act”, many have researched the economic trends and the effects that the bill will have on the economy. The idea of inflation is complicated but to put it in the simplest terms, inflation happens when there is an increase in prices. This can happen through several factors, but the three main causes are demand-pull, cost-push, and built-in inflation. However, the bill predicts many ways that it can make an impact regarding inflation as well as other parts of the bill such as climate change.

For example, the Democrats believe this bill would “lower greenhouse gas emissions by 40%, based on 2005 levels, by the end of the decade” (Shivaram). In order to lower the cost of prescription drugs, a portion of the bill speaks on the idea of making prescription drugs more affordable by including ways to negotiate the prices of certain expensive drugs however, there are some limits like it will not take into effect right away. Now for the economic part of the bill, it creates a 15% minimum tax for corporations making $1 billion or more in income. There were many parts that were cut from the economic section like tax loopholes.

While the supporters of this bill believe that these reforms will help with the increased inflation problem in the United States, others say that “because there are several provisions to encourage spending in the bill, the net impact on inflation is unclear” (Kim). However, this also might promote the production of certain goods, mostly in the climate change section where renewable energy is being invested in. The idea of supply and demand is one of the three main reasons inflation occurs and if there is more supply than demand, this could help lower the costs of renewable energy over time. The timeline for these changes is unknown. The bill will not curb inflation right away, but it could have dramatic impacts in the following year. This is where the controversy comes in because while some believe that this bill will help reduce the effects of inflation, others disagree and do not expect any significant changes throughout the following years.

How to Help

While this bill directly impacts citizens, it is important to understand the many ways that you as an individual can positively gain from this new spending bill. Considering the mass amount of the bill focuses on climate change and the healthcare system, looking at ways in which you can help the environment while also helping yourself is the best way to take advantage of this bill.

1. Look at different options for renewable sources that you can implement in your lifestyle whether that be by investing in solar panels or electric cars. While this might be a stretch for some of the younger folks that currently do not have the means of doing this themselves, speak and inform your parents or guardians about what this new bill can provide by switching to renewable sources.

2. If the first option is not viable, look into ways that you can reduce your carbon emission. “Recycle, Reuse, and Reduce” is a classic statement but it applies to your everyday life when helping minimize the effects of climate change.

3. Whether this bill can affect you negatively or positively, it is a great way to start thinking about how the economy affects your daily, monthly, and yearly spending. Remember to always research economic trends and how inflation might be causing you to spend more money than usual. Understanding the economy is a great way to know how to save and spend your personal money in a healthy way.

Works Cited

“Deficit.” DEFICIT | Definition in the Cambridge English Dictionary, https://dictionary.cambridge.org/us/dictionary/english/deficit.

OECD (2015), “Government investment spending”, in Government at a Glance 2015, OECD Publishing, Paris.

Shivaram, Deepa. “Democrats Passed a Major Climate, Health and Tax Bill. Here's What's in It.” NPR, NPR, 7 Aug. 2022, https://www.npr.org/2022/08/07/1116190180/democrats-are-set-to-pass-a-major-climate-health-and-tax-bill-heres-whats-in-it.

Democrats, Senate. “Summary: The Inflation Reduction Act of 2022 - Senate.” Summary: Inflation Reduction Act of 2022, 7 Aug. 2022, https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf.

Fernando, Jason. “What Is Inflation?” Investopedia, Investopedia, 11 Aug. 2022, https://www.investopedia.com/terms/i/inflation.asp.

“Government Finance.” Government Revenue Refers to the Revenue of the Government Finance by Means of Participating in the Distribution of the Socia, http://www.stats.gov.cn/tjsj/ndsj/yb2004-c/html/8ie.htm.

Kim, Juliana. “What the Inflation Reduction Act Does and Doesn't Do about Rising Prices.” NPR, NPR, 11 Aug. 2022, https://www.npr.org/2022/08/11/1116229743/inflation-reduction-act-questions-answered.