PM Perspective: Inflation Reduction Act

PM Perspective: Inflation Reduction Act

August 09, 2022

You may have heard that the ‘Inflation Reduction Act’ was recently passed by the Senate.  You may also be wondering what’s in it and what does it mean for me?  Here are some of the high-level provisions as noted by Forbes:

  • Creation of a 15% corporate minimum tax rate: Corporations with at least $1 billion in income will have a new tax rate of 15%. Taxes on individuals and households won’t be increased.
  • Prescription drug price reform: One of the most significant provisions of the Inflation Reduction Act would allow Medicare to negotiate the price of certain prescription drugs, potentially bringing down the price beneficiaries would pay for their medications. It would also require drug companies to offer customers a rebate for certain medications whose prices increase faster than the rate of inflation.
  • IRS tax enforcement: The IRS has been sounding the alarm for years on being underfunded and underperforming. The proposed legislation would invest $80 billion in the nation’s tax agency over the next 10 years.
  • Closure of the carried interest loophole: This well-known loophole in the tax code enables investment and private equity fund managers to pay a lower rate on their taxes. The proposed legislation closes this loophole starting in the 2023 tax year. This did NOT pass in the final bill.
  • Affordable Care Act (ACA) subsidy extension: Currently, medical insurance premiums under the ACA are subsidized by the federal government to lower premiums. These subsidies, which are scheduled to expire at the end of this year, would be extended through 2025. Approximately 3 million Americans could lose their health insurance if these subsidies aren’t extended, according to the U.S. Department of Health and Human Services.
  • Energy security and climate change investments: The bill includes numerous investments in climate protection, including tax rebates and credits for households to offset energy costs, investments in clean energy production and tax credits aimed at reducing carbon emissions.

Source: Forbes -

As you can see, there are quite a few items in here.

In your PM team’s opinion, the impact on inflation is questionable.

While the minimum corporate tax rate, drug price negotiation, IRS enforcement, and ACA subsidy extension could curtail additional spending and prove deflationary, climate change investments, which are a large portion of the bill are expansionary and potentially inflationary (our definition of inflation is ‘expansion of the money supply’).

In addition, the Congressional Budget Office’ (CBO) own projections signal a 0.1% +/- move in inflation over the next two years which is immaterial.

About the Author

Greg Silberman, CPA CFA CAIA CA(SA)´╗┐ provides support to The Pacific Financial Group Portfolio Management team. Connect with Greg on LinkedIn´╗┐.

Disclosure: The information provided herein is the opinion of The Pacific Financial Group (“TPFG”), a registered investment adviser, and may change without notice at the discretion of TPFG. Market Data is as of the time period noted and TPFG makes no warranties as to the accuracy of the information or any representations made or implied at any time given. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. The information is for informational purposes only and should not be relied on or deemed the provision of tax, legal, accounting, or investment advice. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss. There are no affiliations between TPFG and any company mentioned herein. Commentary provided by an unaffiliated company are the express opinion of the third party author. All information may be changed without notice.