Green Pork and a Middle-Class Tax Hike
– By Howard Sierer –
After stoking today’s 9.1% inflation with trillions of dollars of unneeded COVID spending, Congressional Democrats are planning a last hurrah before reverting to a minority status after this fall’s elections. They are enacting $438 billion in new spending with $790 billion in new taxes over ten years. And they have the gall to call it the Inflation Reduction Act of 2022.
The headlines are all the bill’s sponsors want you to read: progress on climate change, lower prescription drug prices, inflation reduction, and lowering the national debt, all in one package. Sounds too good to be true, and like most such nonsense from Congress, each of these touted outcomes is unlikely if not a bald-faced lie.
Contrary to its deliberately misleading title, this monstrosity will actually feed inflation in the next few years by spending billions more than it takes in taxes until 2027. The Penn Wharton budget model predicts that the bill’s impact on inflation over ten years will be “statistically indistinguishable from zero.” Even Sen. Bernie Sanders agrees the bill is misnamed and “will, in fact, have a minimal impact on inflation.”
We’re fed misleading statements about how taxes will be raised only for large corporations and the wealthy. But Congress’ own Joint Committee on Taxation reports that the bill will actually increase average tax rates for all income levels despite Pres. Biden’s pledge not to increase taxes on Americans earning less than $400,000 annually.
The bill proposes a new tax on corporate stock buybacks. Sounds good for us individual tax payers until we recognize that corporations don’t pay taxes, people do. Noted capitalist Pres. Obama in his 2015 Economic Report of the President explained that higher effective marginal rates for businesses will tend to reduce their level of investment, reducing the capital available for each worker’s use and lowering productivity, wages and output.
Economists have long debated who pays what share of corporate taxes: shareholders, customers paying higher prices, or employees with lower wages. We’re all consumers and many of us own stocks in IRAs and pension plans, so even if we don’t work for a directly affected company, we’ll all be paying for Democrats’ $790 billion in new taxes.
Turn now to the bill’s spending side. Won’t the bill’s $369 billion in climate and energy spending reduce greenhouse gas emissions? Very little, as it turns out.
The National Academy of Sciences explained that a similar spending blowout in 2013 was a “poor tool for reducing greenhouse gases and achieving climate-change objectives.” Why? Alternative energy is not replacement energy.
Our intuition leads us to believe that every watt of green energy replaces a watt of fossil fuel energy. But in this case, our intuition is wrong. In a National Bureau of Economic Research analysis, Princeton economists Jose-Luis Cruz and Esteban Rossi-Hansberg conclude that green-energy subsidies mostly just facilitate increases in total energy consumption rather than displace fossil fuel energy. They show that subsidies’ impact on carbon dioxide and temperatures is “minuscule.”
Fossil fuels accounted for 82% of global energy consumption last year, down from 85% in 2016. But that doesn’t mean fossil fuels are being replaced. Instead, total energy consumption is growing, increasing a dramatic 5.8% last year, the biggest increase ever. While renewable energy increased 2.6%, coal energy increased 5.7% thanks primarily to China and India. Energy demand will grow worldwide inexorably as citizens in developing nations want all the benefits that energy brings them.
So, what does our $369 billion in green energy spending get us? Using the U.N.’s climate model, the bill’s climate spending will buy an undetectable one or two one-hundredths of a degree F drop in world temperatures by the year 2100 coupled with a massive wealth transfer from taxpayers to green energy companies and investors.
The 725-page bill is larded with green pork. Most of its tax credits are increased fivefold if union labor is employed; projects without union labor will be uneconomical. The base tax credit for solar and wind systems is set at $5.2 per megawatt hour but using union labor and U.S.-made steel jumps the subsidy to $28.60 per megawatt hour. The bill also increases renewable energy tax credits by an additional 10% to 20% for projects located in “environmental justice” communities, that is states and cities governed by Democrats.
Who pays for all this political pork directed at unions and Democratic political strongholds? All the rest of us.
Democrats are touting the bill’s $288 billion in Medicare savings by allowing the government to set prescription drug prices. Such savings are a double-edged sword: near term savings will result in dramatic drops in new drug research and development and far fewer new drugs in the future.
In their research paper “The Evidence Base on the Impact of Price Controls on Medical Innovation,” Tomas Philipson and Troy Durie find that pharmaceutical research would drop by $663 billion over the next 17 years resulting in 135 fewer drugs. This in turn is likely to cause a loss of 331 million life-years, 31 times the number of life-years lost to COVID.
The research consultancy Vital Transformation estimates that if government drug price controls had been in effect for the last ten years, only six of 110 drugs approved during that time would be available today. A recent and timely example of the lifesaving capacity of our free-market pharmaceutical industry: the COVID vaccines developed and tested in only a few months. Would we even have them today if the government was in charge?
As in the famous Fram automobile oil filter ads of years past, drug companies justifiably can say “pay me now or pay later.”
Taxing corporations, tackling climate change and lowering prescription drug costs sound good and play well in media headlines. But recognizing that we pay the higher taxes and today’s Medicare savings choke the flow of new drugs that might save our lives or our children’s lives in the future casts a different light on Democrat’s latest “government knows best” spending blowout. Don’t fall for a near-term spending increase and a wishful-thinking deficit reduction five years away.
There’s no such thing as a free lunch. As Mark Twain famously said, “When Congress is in session, no American is safe.” I would add, especially when Democrats are in power.
