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Prices at the same Valero gas station in Selma from May 2020 and March 20 of this year should just how much prices have risen for consumers. Photos by Gabriel Dillard.

published on October 3, 2022 - 2:15 PM
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In August, President Joe Biden signed the Inflation Reduction Act (IRA), a sweeping $750 billion law supporting his agenda on health care, taxes and the environment.

It includes the nation’s largest climate investment of $430 billion to reduce carbon emissions and allows Medicare to negotiate the prices of certain prescription drugs. It also extends expiring health care subsidies into 2025.

According to the Congressional Budget Office, the IRA will save more than $124 billion over 10 years by collecting taxes owed by wealthy people and large corporations.

Opponents of the new law say it will not only target wealthy taxpayers but the middle class as well.

Other provisions include a 15% tax rate on corporations with at least $1 billion in income, a 1% excise tax on stock buybacks by corporations and an $80 billion investment in the Internal Revenue Agency over the next 10 years.

Rep. Jim Costa’s office released a report that shows the IRA will help nearly 25,000 thousand people in his district with health insurance coverage through the Affordable Care Act, saving them an average of $895 in premiums starting next year.

For the estimated 5,700 Medicare beneficiaries receiving insulin in Costa’s district, the IRA will cap monthly copayments for insulin products at $35 per month.

“I am proud to share that the Inflation Reduction Act will slash health care costs and ensure seniors and those with disabilities across my district can afford the medications they need to survive,” Costa said in a new release.  

 

Doesn’t address the problem

The IRA passed with zero Republican support in Congress.

The name suggests Biden’s new law will help stop U.S. inflation, but experts and critics are not expecting it to lower costs for consumers.

Bassim Michael is president and founder of Fresno-based Michael & Company, CPA, which specializes in servicing health care providers throughout the country. He said provisions in the bill don’t directly address inflation.

Michael said raising the tax rate for the nation’s largest corporations could lead them to raise their prices to make up costs.

However, Michael does believe lowering the price of prescription drugs will help fight inflation in health care.

Michael said that the government’s response of handing out loans to businesses because of the Covid-19 pandemic is a contributing factor to current U.S. inflation.

“With all the money circulating, and without the same amount of goods and services available because of supply chain issues, the amount of goods shrunk, which is why we have inflation,” Michael said.

A factor that people overlook when it comes to inflation, Michael said, is the amount of available labor force.

While U.S. unemployment levels appear low, many people have been out of work for so long that they get taken out of unemployment calculations. Michael said the current labor participation rate is lower than the last US recession. The current labor participation rate is 62%, compared to 66% in 2008.

If the federal government really did want to stop inflation, he said, they would stop giving out free money. Michael said the government was just giving money to any health care provider that applied for federal loans, such as the Paycheck Protection Program or the CARES Act, even if they didn’t need it.

He does support extra funding for the IRS, as it is important for them to be able to hire enough people to enforce the law. Many people don’t follow the law, which is not fair to taxpayers playing by the rules, he said.

“Individuals and businesses should expect more enforcement from the IRS, so I advise in keeping better records to protect your deductions and show substantiations to prove that you’re spending money for the right purposes,” Michael said.

 

In come the higher income taxes

The tax code changes are mostly aimed at corporations, with households making $400,000 or less annually not seeing a noticeable change in the amount of taxes they will pay.

An analysis from the Tax Policy Center shows that the average taxes of middle-income households would fall by $100.

The biggest increases in taxes will come from the minimum tax on the financial statement income of a handful of corporations that pay little or no corporate income tax, and the tax on companies that buy back stock from shareholders.

Dr. Ahmad Borazan, an associate professor at Fresno State’s Craig School of Business, doesn’t expect the IRA will lower prices for consumers immediately, but it will have positive effects in the long run.

Borazan said consumers will see lower prices in the measures that tackle rising health care costs and prescription drugs, which he said are long overdue.

Borazan said the IRA will apply to about 150 of the world’s largest companies, with 50 of those companies not paying any income tax in 2020.

Borazan referenced a 2014 Harvard Business Review article, “Profits Without Prosperity,” saying that from 2003 through 2012, 449 companies publicly listed in the S&P 500 index used 54% of their earnings, or a total $2.4 trillion, to buy back their own stock — inflating the value.

Borazan said only 9% goes into productive investments such as purchases of machines and equipment.

“Given all of these facts, I don’t see significant tax burdens passed on to customers unless these wealthy, mega-corporations want to keep funding the stock buyback scheme, which has no productivity effect,” Borazan said.

 

Looking at tax history

Historically speaking, the highest U.S. corporate tax rates in the last century were during the 1950s and ‘60s. Borazan said that during the ‘50s the tax rate was 90% for the top income brackets for individuals.

According to the Economic Policy Institute, the corporate tax rate for most of the ‘50s and ‘60s leveled at about 52%.

“If you look at investment growth and GDP growth in the ‘50s and ‘60s, it was spectacular,” Borazan said.

Borazan said that the last economic report did not show the decline in inflation we would have wanted to see, especially with the decline in fuel costs and supply-chain bottlenecks.

A positive sign is that prices in the Producer Price Index peaked in July and started declining, Borazan said.

“Given that inflation is not going down, it is possible the federal reserve will increase interest rates possibly by 1% this month, which would cause contraction in demand inevitably. It would lead to slowdown in economic growth but how far we go into recession will depend on if inflation goes fast down enough that the fed does not need hike interest rates further,” Borazan said.

The Fed did indeed raise interest rates the week of Sept. 23 — by 0.75%.


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