Inside a Financial Advisor’s $700 Billion Inflation Cut Act
Senate Democrats announced agreement on a $700 billion Inflation Cut Act that aims to reduce inflation by paying down the national debt, cutting energy costs and expanding health care coverage affordable for millions of Americans. This bill will need the support of all Democratic senators to pass the Senate. Let’s see what’s in the law, if it can reduce inflation, what you might get and who will pay for it. (Note: This is a developing story and we will continue to update the article as more information becomes available.)
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What does the Inflation Reduction Act contain?
The Cut Inflation Act is a slimmed down version of the $1.8 trillion Build Back Better Act that narrowly passed the House on November 19, 2021.
This would be the second part of President Biden’s infrastructure and social spending legislation. Combined with the bipartisan infrastructure law, the total investment would be around $1.9 trillion.
Whereas the bipartisan Infrastructure Act invests $1.2 trillion in overhauling the nation’s roads and bridges, electrical and water systems, and high-speed internet; the Cut Inflation Act would fund energy production and manufacturing, reduce carbon emissions, lower prescription prices and expand affordable health care coverage.
The bill won the support of Sen. Joe Manchin (DW.Va.), who had opposed the Build Back Better Act due to a price tag that was almost three times that of the Cutback Act of inflation.
“Rather than risk more inflation with trillions in new spending, this bill will reduce the inflation taxes Americans pay, reduce the cost of health insurance and prescription drugs, and ensure that our country is investing in the energy security and climate change solutions we need to remain a global superpower,” Manchin said in a press release.
According to a one-page summary from Senate Democrats, the Cut Inflation Act would generate $739 billion in revenue. Less than half ($313 billion) would come from a minimum corporate tax of 15%. Another $288 billion would come from prescription drug pricing reform. And $138 billion would be raised by applying the IRS tax and closing the carried interest loophole.
Senate Democrats also said the act would invest a total of $433 billion in energy security and climate change ($369 billion) and an expansion of the Affordable Care Act ($64 billion). The bill also seeks to reduce the deficit by more than $300 billion.
Will the Inflation Reduction Act reduce inflation?
Senate Democrats say the bill will reduce inflation, which is currently above 9%. One way to do this is to reduce budget deficits, which will therefore reduce demand in the economy. Some economic experts believe that budget deficits can increase inflation rates when the Federal Reserve pumps more money into the economy.
An early study of the Penn Wharton Fiscal Model (PWBM), however, shows “little confidence” that this approach will have an impact on inflation.
While the University of Pennsylvania research-based organization says the Cut Inflation Act would “reduce cumulative deficits by $248 billion” over a 10-year budget window, it would also “increase slightly inflation until 2024” and then decline thereafter.
Moody’s Analytics also agrees that the proposed legislation will do very little to reduce inflation in the near term, but will become “more meaningful later in the decade.”
The rating agency says the law would “modestly reduce inflation over the 10-year budget horizon,” with an “average reduction in CPI inflation of 3.3 basis points” per year.
Democrats also say the Cut Inflation Act will focus on increasing supply to help lower prices. And this would be done by reducing energy costs, subsidizing cleaner energy production and reducing carbon emissions.
Moody’s argues, however, that the provisions of the Climate Change Act could “become a growing headwind to inflation later in the decade.” The agency concludes that energy provisions “could reduce the energy expenditures of a typical American household by approximately more than $300 per year in today’s dollars.”
And that could be the biggest deterrent to inflation going forward.
“Lower rates for property and casualty insurance for businesses and homeowners and flood insurance for households due to reduced emissions and physical risks are also driving inflation,” Moody’s said in its report on the legislation.
What could you get from the Inflation Reduction Act?
Millions of Americans could benefit from reduced drug prescriptions, affordable medical coverage, and tax refunds and credits. Here is a breakdown of three main provisions:
Cheaper drug prescriptions. The proposed legislation would cap your out-of-pocket spending at $2,000 and limit drug price increases for Medicare and private insurance. For reference, in 2022 the catastrophic threshold that Medicare beneficiaries must pay out of pocket before most of their prescription costs are covered is $7,050.
Extension of affordable health coverage. Medical insurance premiums under the Affordable Care Act are due to expire at the end of 2022. The U.S. Department of Health and Human Services says these subsidies have enabled “14.5 million people to enroll in health insurance”. But, if Congress fails to extend this legislation, “about 3 million Americans could lose their health insurance.”
Tax rebates and credits for energy and climate change. The proposed legislation includes investments in energy security and climate change that would reduce energy costs, increase clean energy production and reduce carbon emissions by around 40% by 2030. This provision will also provide tax refunds. tax and credits to households to reduce their energy costs and incentivize ratepayers to help meet clean energy and carbon reduction goals.
How will the Inflation Reduction Act be funded?
Democrats estimate they could raise $739 billion through four key provisions of the Cut Inflation Act. These would take advantage of corporate and ultra-wealthy taxes, close tax loopholes and enforce the tax code. Although families earning less than $400,000 would see no tax hike and small businesses would also avoid new taxes. Here is a breakdown of the four layouts:
Impose a minimum corporate tax rate of 15% ($313 billion). The bill would impose a 15% tax rate on corporations making at least $1 billion in profits. In relation to the Build Back Better Act, the Committee for a Responsible Federal Budget said on November 18 that it could raise $320 billion.
Prescription Drug Price Reform ($288 billion). The Inflation Reduction Act would allow Medicare to negotiate drug prices, which the Congressional Budget Office estimates could save Medicare $101.8 billion. In addition, rebates for drugmakers raising prices faster than the rate of inflation could reduce the net federal deficit by an additional $100.7 billion over 10 years.
Application of the IRS tax ($124 billion). The provision would invest $80 billion in the tax agency over the next decade to strengthen tax law enforcement and narrow the growing gap between what taxpayers owe and what the agency collects. For reference, a 2021 study estimated that the richest 1% of Americans hid more than 20% of their income from the IRS and additional resources would help the agency collect an additional $175 billion from tax cheats in high income.
Closing the carried interest loophole ($14 billion). The Cut Inflation Act could boost revenue by removing the carried interest loophole, which currently allows investment funds that hold assets for more than three years to benefit from a tax reduction on long-term capital gains. In comparison to an earlier version of the Build Back Better Act, the House Ways and Means Committee introduced a proposal on September 13, 2021 that would extend the holding period for long-term capital gains from three to five years.
President Biden said the Cut Inflation Act will reduce health care costs for millions of Americans and is “the single most important investment we’ve ever made in our energy security.” The proposed legislation aims to reduce inflation by paying down the national debt, reducing energy costs and expanding affordable health care coverage. Before it can be signed into law, all Democratic senators must support the law to pass the Senate. It must then pass another vote in the House.
Tips for Beating Inflation
A financial advisor could help you create a financial plan to protect your retirement savings and investments against inflation, market volatility and other financial challenges. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now. If you’re having trouble keeping up with loan or credit card payments, you can take steps to protect your credit score and speak with your bank. directly to see if you can defer loan payments or waive certain fees. If you can afford it, investing in index funds during a recession is a safe option. But if you’re looking for a slightly more aggressive approach, check out some free investment classes to learn more. The post Inside the $700 Trillion Inflation Reduction Act first appeared on SmartAsset Blog.