Macroeconomic Effects of the Inflation Reduction Act
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H.R. 5376, previously known as the Build Back Better Act, has been revamped and renamed the Inflation Reduction Act of 2022 and is currently being considered by the Senate Finance Committee. The new version of H.R. 5376 would enact a 15 percent minimum corporate tax on book income, close the carried interest loophole, increase IRS funding, enact prescription drug pricing reform, make new investments in clean energy, extend health care subsidies, and reduce deficits. The Joint Committee on Taxation (JCT)1 provides estimates of the tax provisions in the Inflation Reduction Act. JCT estimates that the 15 percent minimum corporate tax on book income will raise $313 billion, closing the carried interest loophole will raise $13 billion, the provisions on investments in clean energy reduce revenues by $258 billion. The Congressional Budget Office (CBO, 2022) estimates that the net effect of the revenue provisions and the spending provisions is a reduction in deficits by roughly $300 billion from 2022 to 2031 (after including net effects of increased IRS outlays and enforcement). In this paper, we analyze the macroeconomic effects of the Inflation Reduction Act assuming that the revenue and spending provisions are permanent.
The analysis is performed in the context of an extended version of the Diamond-Zodrow (DZ) dynamic, overlapping generations, computable general equilibrium (CGE) model of the U.S. economy. The basic model is designed to examine both the short run and the long run macroeconomic effects of fiscal policy changes.
The paper proceeds as follows. In the following section, we describe the features of the fiscal plan that we analyze. Section III provides a brief description of our computable general equilibrium model. The simulation results are reported in Section IV. The final section summarizes the results and offers some caveats.
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