Assessing Democrats’ Reconciliation Bill: Does It Raise Middle-Class Taxes as the GOP Claims?

Assessing Democrats’ Reconciliation Bill: Does It Raise Middle-Class Taxes as the GOP Claims?

As Democrats wait for the results of the parliamentary review of their proposed reconciliation budget bill – and to learn whether Sen. Kyrsten Sinema (D-AZ) gives the plan a thumbs up or thumbs down – economists are busy analyzing how the legislative package would perform over the next 10 years. Here’s a roundup of what they’ve said:

Moody’s: Democrats’ Inflation Reduction Act would benefit the economy overall, analysts at Moody’s found, though the growth and inflation effects would be modest. The bill raises nearly $750 billion over the next decade through higher taxes on large corporations and wealthy individuals and lower Medicare prescription drug costs, to pay for nearly $450 billion in tax breaks and additional government spending to address climate change and pay for lower health insurance premiums for Americans benefiting from the Affordable Care Act,” the analysts wrote. “The remaining more than $300 billion goes to reducing the federal government’s future budget deficits. Broadly, the legislation will nudge the economy and inflation in the right direction, while meaningfully addressing climate change and reducing the government’s budget deficits.”

Penn Wharton Budget Model: Analysts at the Penn Wharton Budget Model also found relatively modest effects with respect to inflation, forecasting that the bill would raise inflation slightly for a few years before pushing it lower in later ones – though their results were “statistically indistinguishable from zero.” The bill would also lower the deficit while having virtually no effect on growth. “PWBM estimates that the Inflation Reduction Act would reduce non-interest cumulative deficits by $248 billion over the budget window with no impact on GDP in 2031,” the analysts wrote.

The Committee for a Responsible Federal Budget: According to the fiscal hawks at the CRFB, the deflationary effects of the bill are likely to be more important in the long run than Penn Wharton thinks. “Ultimately, we expect the IRA to very modestly reduce inflationary pressures in the near term while lowering the risk of persistent inflation over time and thus make it easier for the Federal Reserve to reduce inflation without causing a recession,” CRFB said.

Overall, the Democratic package “manages to push against inflation, reduce the deficit, and, once fully phased in, it would actually cut net spending, without raising net taxes,” CRFB’s Maya MacGuineas told The New York Times. “That is a pretty monumental improvement.”

The Tax Foundation: A new analysis from the conservative Tax Foundation finds that the Democratic bill would have little effect on inflation but would harm the economy in the long run, reducing economic output and wages by 0.1% over 10 years, while eliminating about 30,000 jobs that would have otherwise been created. “By reducing long-run economic growth, this bill may actually worsen inflation by constraining the productive capacity of the economy,” the analysts wrote.

The Joint Committee on Taxation: The nonpartisan Joint Committee on Taxation released an analysis last week that concluded that the bill would raise taxes on virtually all households, since the corporations would pass the new 15% minimum tax rate onto consumers. The conclusion has been hotly debated this week, with Republicans citing the analysis as proof that Democrats are attempting to create new tax burdens on middle-class families and Democrats saying the JCT analysis is both misleading and incomplete.

“[T]he only things their ‘Inflation Reduction Plan’ will reduce is American jobs, wages, after-tax incomes, energy affordability, and new lifesaving medicines,” Minority Leader Mitch McConnell (R-KY) said Tuesday. “Wow, what an accomplishment.”

A spokesperson for Senate Finance Committee Chairman Ron Wyden (D-OR) responded to the GOP charges, saying, “A family making less than $400,000 will not pay one penny in additional taxes under the Inflation Reduction Act. This is the same trickle down economic argument Republicans have been making for decades, and the American people don’t buy it.”

Appearing on Fox News Tuesday, Sen. Joe Manchin (D-WV), made a similar point. Responding to an interviewer’s assertion that the middle-class families would see a tax hike under the bill, Manchin said: “That’s wrong. That’s a lie. That is a pure, outright lie.”

In less heated language, analysts at the nonpartisan Tax Policy Center attempted to shed some light on the partisan dispute over the JCT analysis, while cautioning readers against accepting JCT’s conclusions too quickly. The assumptions baked into the JCT model may not hold in today’s economy, which diverges from standard economic models by featuring high levels of “rents, excess returns, or excess profits” – all of which would distort the effects of a corporate tax increase and likely reduce the impact felt by ordinary households. “[A] more careful look at how corporate taxes work today calls into question the estimated changes in federal taxes for middle- and lower-income households,” TPC’s William G. Gale and John Buhl concluded.