Just Taxes Blog by ITEP

The Tax Legislation Debated in Congress Would Reduce Inflation and Help Americans Deal with Rising Costs

The Tax Legislation Debated in Congress Would Reduce Inflation and Help Americans Deal with Rising Costs

July 19, 2022

Steve Wamhoff
Steve Wamhoff
Director of Federal Tax Policy

The Build Back Better Act that passed out of the House of Representatives in November would have made childcare, energy and health care more affordable for millions and would have extended the expansions of the Child Tax Credit that reduced child poverty dramatically. All of this would have been paid for by increasing taxes on very wealthy individuals and closing tax loopholes for profitable corporations.

West Virginia Sen. Joe Manchin, whose vote is needed to pass a bill without Republican support, claims the spending would worsen already-rising inflation. This concern never made any sense given that the new spending in the bill would be more than paid for.

Inflation is the increase in prices that results when the supply of things that people want to buy falls relative to the money people are willing and able to spend on them. This can happen because people have more money to spend than previously, or because something restricts supply (like a war involving oil-producing countries).

Reasonable people can and do debate which factor has contributed how much to the inflation we face today and how to address it. But even prominent economists who have been critical of the Democrats’ previous big spending package, the America Rescue Plan Act (ARPA), acknowledge the Build Back Better Act would not make inflation worse and in fact would help reduce long-term costs.

Former Treasury Secretary Lawrence Summers vocally criticized ARPA as inflationary, which other observers and economists disputed. But he has said several times that he supports the Build Back Better Act. Even a year ago, when the package as proposed by President Biden would have been trillions of dollars larger, Summers said:

“There’s no question that we need substantial increases in public investment, substantially more attention to sustainability and preserving the planet, substantially more focus on the needs of children, particularly children from lower-income and middle-class families. And that we need to take better care of our seniors. And so I think President Biden’s judgment, that this is the moment for a large-scale increase in public investment, is correct. I would have a number of questions and issues in the details, but the policy impulse is very much the correct one.”

In May, Summers tweeted, “It is perfectly reasonable to believe, as I do and @POTUS asserts, that we should raise taxes to reduce demand to contain inflation and that the increases should be as progressive as possible.”

Jason Furman, who was the chair of the Council of Economic Advisers under President Obama and is similarly hawkish on inflation, has also consistently supported the Build Back Better Act. As Furman pointed out this weekend on Face the Nation, Manchin, in his negotiations with Democratic leaders before Friday, demanded the bill raise no more than $1 trillion, with only half that amount used for new spending and the other half going towards deficit-reduction.

“The difference [between ARPA and BBBA] is that we’re talking about something exceedingly different then—now than then. That was $1.9 trillion of new spending. Now on the table was something like $500 billion of deficit reduction. It was a net reduction in the deficit. I think almost anyone, regardless of where they were on the political spectrum that was an expert on this topic, would agree that would lower inflation.”

On Friday, Manchin said he could not even support that deal because he was concerned about inflation, although he left open some vague possibility that he could change his mind after receiving data on inflation in July.

Opposing a fully paid-for spending bill because of inflation concerns does not make any sense. Opposing a deficit-reducing bill because of inflation is absurd. Removing money from the economy and reducing the amount of money that rich people have to spend would clearly counteract, rather than exacerbate, the rise in prices that Americans face today.

The tax increases that the president and Congressional Democrats negotiated for more than a year and that are included in the Build Back Better Act would have affected only those with incomes exceeding $400,000 (and in most cases incomes far higher than that). The tax increases would not affect the majority of Americans but would reduce spending by the rich, which would reduce inflation rather than make it worse.

Sen. Manchin already opposed several provisions in the House-passed BBBA that would have reduced the cost of living for millions of families, and he has now said he opposes a scaled back version that would address a climate catastrophe and pay for new spending with tax increases on corporations and the rich – tax increases that are wildly popular with voters and even popular in West Virginia. For him to claim that his opposition is rooted in a concern about inflation is simply not credible.



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