ANALYSIS

AUGUST 2022 Assessing the Macroeconomic

Consequences of the Inflation
Reduction Act of 2022
Prepared by

Mark Zandi
Mark.Zandi@moodys.com
Chief Economist
Introduction
Bernard Yaros
Bernard.Yarosjr@moodys.com
Assistant Director/Economist Lawmakers appear close to passing into law the Inflation Reduction Act
Chris Lafakis of 2022. The legislation is born out of the Build Back Better agenda that
Chris.Lafakis@moodys.com
Director President Biden proposed more than a year ago. It raises nearly $750
billion over the next decade through higher taxes on large corporations and
Contact Us wealthy individuals and lower Medicare prescription drug costs, to pay for
nearly $450 billion in tax breaks and additional government spending to
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Americans benefiting from the Affordable Care Act. The remaining more
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+1.866.275.3266 than $300 billion goes to reducing the federal government’s future budget
deficits. Broadly, the legislation will nudge the economy and inflation in
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MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 1
 Assessing the Macroeconomic
Consequences of the Inflation Reduction
Act of 2022
BY MARK ZANDI, BERNARD YAROS AND CHRIS LAFAKIS

L
awmakers appear close to passing into law the Inflation Reduction Act of 2022. The legislation is born
out of the Build Back Better agenda that President Biden proposed more than a year ago. It 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 (see Table 1). The remaining more than $300 billion
goes to reducing the federal government’s future budget deficits (see Chart 1). 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.

Table 1: Inflation Reduction Act of 2022

Static budget effect, calendar yr, $ bil

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2022-2027 2022-2031

Net budget effect 0.2 -27.2 -7.4 6.6 -1.2 -18.9 -42.3 -57.3 -73.2 -84.0 -29.1 -304.8

Investments 0.1 24.7 43.7 56.6 48.1 52.1 55.1 52.6 50.5 49.6 173.2 433.0
Climate and energy provisions 0.1 12.6 20.7 32.5 43.3 52.1 55.1 52.6 50.5 49.6 109.2 369.0
Extension of enhanced ACA premium
0.0 12.1 23.0 24.0 4.9 0.0 0.0 0.0 0.0 0.0 64.0 64.0
subsidies

Pay-fors 0.1 -52.0 -51.1 -50.0 -49.3 -71.1 -97.4 -109.8 -123.6 -133.6 -202.3 -737.8
15% corporate alternative minimum tax 0.0 -50.3 -47.4 -31.8 -26.8 -26.8 -29.0 -31.4 -33.7 -36.0 -156.2 -313.1
Prescription drug pricing reforms 0.0 -2.0 -3.0 -13.1 -12.1 -28.4 -47.6 -53.3 -61.5 -66.6 -30.2 -287.6
IRS funding to close the tax gap 0.1 1.6 0.8 -3.6 -9.1 -14.4 -19.3 -23.7 -26.9 -29.5 -10.2 -124.0
Carried interest loophole 0.0 -1.2 -1.6 -1.5 -1.4 -1.4 -1.4 -1.5 -1.5 -1.5 -5.7 -13.0

Sources: CBO, JCT, Moody’s Analytics

Inflation Reduction Act

The Inflation Reduction Act is a scaled back version of part of the Build Back Better agenda proposed by
Biden early in his administration. When the BBB was first proposed, it included fiscal support for the
MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 2
 Chart 1: Much to Like in the Inflation Reduction Act

Static budget effect, % of GDP

0.2

0.1

0.0

-0.1

-0.2
Net effect
-0.3

-0.4
22 23 24 25 26 27 28 29 30 31
Energy security and climate change Affordable Care Act extension 15% corporate minimum tax
Prescription drug pricing reform IRS tax enforcement Carried interest loophole

Sources: CBO, JCT, Moody’s Analytics

Moody’s Analytics Inflation Reduction Act, August 2022 1

nation’s infrastructure, a range of social programs, and climate change. In their entirety, these BBB invest-
ments would have cost nearly $4.5 trillion over a 10-year budget horizon, mostly paid for with tax increases
on large corporations and high-income, wealthy households. A version of the infrastructure legislation
became law last summer, and if the Inflation Reduction Act gets across the legislative finish line, Biden will
have gotten almost one-quarter of the BBB agenda that he had originally proposed to Congress into law.

Climate change
The bulk of the investments in the Inflation Reduction Act, costing an estimated $370 billion over 10 years,
are directed toward promoting clean energy and climate resilience. Two-thirds of this amount is in the form
of federal tax credits that extend, enhance or create incentives to produce electricity from clean energy
sources, invest in renewable energy technologies, and address climate change through carbon sequestra-
tion, renewable fuel production, and clean energy manufacturing. These tax expenditures will also lower the
cost to households and businesses of investing in energy efficiency and purchasing electric vehicles.

The other one-third of the legislation’s clean energy and climate investments represent appropriations by
the federal government. These include funds to support conservation practices that will help mitigate emis-
sions from agriculture and forestry. Grants, rebates and federal procurement will promote the adoption of
clean energy technologies, as well as energy efficiency improvements in housing. The legislation also in-
vests in the climate resilience of at-risk communities and addresses air pollution.

The climate policies in the Inflation Reduction Act will meaningfully reduce carbon emissions, and thus the
acute and chronic physical risks and economic losses resulting from climate change. Physical risks result
from inaction on addressing climate change and global temperature rise, which cause serious changes in the
physical world. Acute physical risks are natural disasters such as hurricanes, wildfires and floods, which are
occurring more frequently and with greater intensity because of rising temperatures. These disasters cause
large economic losses, only some of which are insured, pressuring governments to provide disaster relief.
Chronic physical risks are the fallout of rising temperatures over longer periods of time, often decades, and
include sea level rise caused in part by melting polar ice caps, and oppressive heat. Chronic physical risks
MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 3
 weigh on labor force productivity growth; have serious consequences for agriculture, tourism and other in-
dustries; and cause significant changes in global immigration.

We estimate the reduction in CO2 emissions due to provisions in the Inflation Reduction Act based on work
done by the REPEAT project. By 2050, we estimate emissions will be reduced by nearly 30% compared with
a scenario in which there is no additional policy changes to address climate change (see Chart 2). This is not
quite as much as would have occurred if the $555 billion in clean energy spending from the original BBB
proposal had become law, but it is substantial.

Chart 2: Lower Carbon Emissions Under the Inflation Reduction Act

U.S. CO2 emissions from fossil fuels, mil of metric tons

5,500

5,000

4,500

4,000

3,500

3,000

2,500

2,000
20 30 40 50 60 70 80 90 100
No additional action Build Back Better Inflation Reduction Act

Sources: EIA, REPEAT, Moody’s Analytics

Moody’s Analytics Inflation Reduction Act, August 2022 2

The Inflation Reduction Act also mitigates the economic cost of inaction. Compared with the scenario
where no additional climate change action is taken by government, real GDP is approximately 0.1% higher
a decade from now because of the Inflation Reduction Act, 0.6% higher by 2050, and 2.7% higher by 2100
(see Chart 3). The clear lesson is that upfront investments in addressing climate change reap substantial
long-term economic benefits.

Healthcare
The Inflation Reduction Act also extends enhancements to the Affordable Care Act provided in last year’s
pandemic relief package, the American Rescue Plan. The ARP expanded eligibility for the premium tax cred-
its to Americans with incomes above 400% of the federal poverty level to purchase health insurance on
ACA marketplaces. The law also increased the size of the premium subsidies, thereby reducing or eliminat-
ing out-of-pocket premiums for millions of ACA enrollees. Under current law, these enhancements to the
premium tax credits expire at the end of this year; the Inflation Reduction Act would extend them through
2025 at a 10-year cost of some $64 billion.

According to the Urban Institute, if the enhanced premium tax credits lapse as in current law, the number
of uninsured people will increase by more than 3 million, and these individuals will consume less healthcare
than if they remained insured, contributing to a more than $11 billion hit to spending on health services and
goods. Moreover, those who continue to buy insurance on the ACA marketplaces, typically with incomes of
MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 4
 Chart 3: The Economic Cost of Climate Inaction Is Severe

Real GDP, % reduction due to physical risk

0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
20 30 40 50 60 70 80 90 100
No additional action Build Back Better Inflation Reduction Act

Sources: Aon, NGFS, Moody’s Analytics

Moody’s Analytics Inflation Reduction Act, August 2022 3

between 150% and 400% of the federal poverty level, would see their insurance premiums more than dou-
ble, making it cost prohibitive for many.

Taxes on corporations and the wealthy

To pay for the investments in the Inflation Reduction Act, large corporations and wealthy, high-income
taxpayers will pay more taxes. Most significantly, some $313 billion over 10 years in revenues would come
from a new 15% minimum tax on book income for large companies that report large profits to investors but
have little or no taxable profits. There will also be stiffer tax enforcement by the Internal Revenue Service
to ensure greater taxpayer compliance at a time when the tax gap—the difference between the taxes owed
under law and revenue collected—is large and increasing. On net, stronger IRS enforcement will reduce the
cumulative deficit by $124 billion over 10 years. The legislation will also tax more carried interest that gen-
eral partners of investment funds receive for implementing investment management services as ordinary
income, raising $13 billion in additional revenue over 10 years.

The tax increases included in the Inflation Reduction Act will weigh on economic growth, all else being
equal, but the impact will be small. Though the tax increases being considered are the most meaningful
ones since the early 1990s, they are still modest from a historical perspective (see Chart 4).

The tax increases on large corporations will also not appreciably hurt economic growth. This conclusion is
supported by the experience with the large tax cuts corporations received under the Tax Cuts and Jobs Act
of 2017. This includes the reduction in the top marginal corporate tax rate from 35% to 21%. There is little
evidence that the TCJA led to a meaningful sustained increase in business investment, hiring or wages, or
prompted businesses to shift production to the U.S. from overseas as intended. Although it is difficult to
disentangle all that is going on in the economy to isolate the impacts of the TCJA, it is also difficult to con-
clude that the TCJA’s tax cuts have meaningfully supported a stronger economy. Therefore, the corporate
tax increases in the Inflation Reduction Act should not have an appreciable impact on the economy, espe-
cially given that the effective corporate tax rate has steadily declined for decades and is close to a record
low (see Chart 5).
MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 5
 Chart 4: Tax Increases Will Not Be Overly Burdensome on U.S. Economy

Avg annual revenue raised following 1-2 yrs after enactment, % of GDP

5
X-axis=major tax legislation since WWI
4
3
2
1
0

Sources: Romer & Romer, U.S. Treasury, Moody’s Analytics

Moody’s Analytics Inflation Reduction Act, August 2022 4

Chart 5: Effective Corporate Tax Rate Is Low and Has Steadily Fallen

Effective tax rate for domestic corporate businesses, %

50

45

40

35

30

25

20

15

10
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Sources: BEA, Moody’s Analytics

Moody’s Analytics Inflation Reduction Act, August 2022 5

Prescription drug savings
Besides higher taxes on large corporations and well-to-do households, the Inflation Reduction Act includes
several provisions that will, on net, reduce federal healthcare costs. Most notably, it allows Medicare to
negotiate lower prices for single-source prescription drugs—drugs only available as the original brand with-
out competing generic equivalents from other manufacturers—on which it spends the most. From 2026 to
2029, the number of important drugs subject to negotiations with Medicare would double from 10 to 20.

In addition, the legislation will require drug companies that raise prices for Medicare and private insurance
more quickly than the rate of inflation to pay rebates to the federal government to cover the difference. Other
prescription drug savings would come from repealing a Trump-era rule that will eliminate legal safe harbor
from a federal anti-kickback law for rebates paid by pharmaceutical manufacturers to health plans and phar-
MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 6
 macy benefit managers in Medicare Part D. Other smaller but meaningful changes to Medicare will include
capping annual out-of-pocket drug expenses for enrollees to $2,000; making vaccines free; and expanding eli-
gibility for the Low-Income Subsidy, which helps beneficiaries pay for prescription drugs. Taken together, these
policy changes will cumulatively reduce the nation’s budget deficits by $288 billion over the next decade.

Macroeconomic impact
As named, the Inflation Reduction Act will modestly reduce inflation over the 10-year budget hori-
zon. By the fourth quarter of 2031, the consumer price inflation index will be 0.33% lower because of the
legislation (see Table 2). This translates into a reduction in CPI inflation of 3.3 basis points per annum on

Table 2: Inflation and GDP Impact of the Inflation Reduction Act

Consumer Price Index (1982-84=100) Real GDP (2012$ bil)

Baseline Inflation Reduction Act % difference Baseline Inflation Reduction Act % difference

2022Q1 284.6 284.6 0.00 19,727.9 19,727.9 0.00

2022Q2 290.9 290.9 0.00 19,705.4 19,705.4 0.00
2022Q3 293.7 293.7 0.00 19,824.5 19,824.5 0.00
2022Q4 296.1 296.1 0.00 19,922.8 19,923.2 0.00
2023Q1 298.0 298.0 -0.00 20,007.7 20,009.3 0.01
2023Q2 299.7 299.7 -0.00 20,100.5 20,102.3 0.01
2023Q3 301.2 301.2 -0.01 20,220.9 20,220.3 -0.00
2023Q4 302.6 302.5 -0.01 20,355.0 20,349.2 -0.03
2024Q1 304.3 304.3 -0.01 20,505.6 20,493.6 -0.06
2024Q2 306.0 306.0 -0.01 20,651.7 20,634.2 -0.08
2024Q3 307.8 307.8 -0.01 20,794.8 20,774.5 -0.10
2024Q4 309.7 309.6 -0.01 20,934.6 20,916.8 -0.09
2025Q1 311.5 311.4 -0.02 21,066.0 21,055.0 -0.05
2025Q2 313.2 313.2 -0.02 21,203.5 21,201.0 -0.01
2025Q3 315.0 315.0 -0.02 21,342.2 21,346.7 0.02
2025Q4 316.8 316.7 -0.03 21,491.0 21,499.0 0.04
2026Q1 318.6 318.5 -0.04 21,640.2 21,648.2 0.04
2026Q2 320.4 320.3 -0.05 21,784.9 21,791.5 0.03
2026Q3 322.2 322.0 -0.06 21,926.9 21,932.3 0.02
2026Q4 324.0 323.7 -0.08 22,068.3 22,074.5 0.03
2027Q1 325.6 325.3 -0.09 22,206.9 22,216.4 0.04
2027Q2 327.3 327.0 -0.10 22,339.1 22,352.8 0.06
2027Q3 329.0 328.6 -0.12 22,477.7 22,495.6 0.08
2027Q4 330.8 330.3 -0.13 22,617.8 22,638.9 0.09
2028Q1 332.5 332.0 -0.15 22,754.9 22,778.4 0.10
2028Q2 334.3 333.7 -0.16 22,892.1 22,917.7 0.11
2028Q3 336.1 335.5 -0.18 23,030.3 23,058.2 0.12
2028Q4 337.9 337.2 -0.19 23,166.5 23,195.8 0.13
2029Q1 339.7 339.0 -0.20 23,299.3 23,329.9 0.13
2029Q2 341.5 340.7 -0.22 23,430.5 23,461.9 0.13
2029Q3 343.3 342.5 -0.23 23,560.7 23,592.7 0.14
2029Q4 345.2 344.3 -0.25 23,688.2 23,720.6 0.14
2030Q1 347.0 346.1 -0.26 23,812.8 23,845.9 0.14
2030Q2 348.9 348.0 -0.27 23,936.5 23,971.0 0.14
2030Q3 350.9 349.9 -0.28 24,059.9 24,096.4 0.15
2030Q4 352.8 351.7 -0.29 24,184.2 24,223.1 0.16
2031Q1 354.7 353.7 -0.30 24,309.0 24,350.5 0.17
2031Q2 356.7 355.6 -0.31 24,435.9 24,480.2 0.18
2031Q3 358.6 357.5 -0.32 24,565.2 24,611.9 0.19
2031Q4 360.6 359.4 -0.33 24,692.2 24,740.7 0.20

Sources: BLS, BEA, Moody’s Analytics

MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 7
 average over the period. Through the middle of this decade the impact of the legislation on inflation is
marginal, but it becomes more meaningful later in the decade.

The legislation weighs on inflation in several ways. Most immediately is through fiscal restraint, as the
budget deficit narrows largely because of the taxes on corporations, and results in slower growth. The
impact on inflation is small, however, as these growth effects are small. Moreover, large corporations will
attempt to pass through some of their higher tax bill to consumers in higher prices for their wares—this
will be difficult in competitive markets. The extension of the ACA premium tax credits is also important to
quickly reducing inflation, as health insurance costs will rise next year for millions of Americans without
the extension.

Weighing on inflation by mid-decade are the reforms to Medicare drug pricing, most importantly being
Medicare’s ability to negotiate drug prices with pharmaceutical companies. The climate change provisions
in the legislation become an increasing headwind to inflation later in the decade. The energy provisions in
the Inflation Reduction Act, for example, could reduce the typical American household’s spending on ener-
gy by an estimated more than $300 per year in today’s dollars. Lower property and casualty insurance rates
for businesses and homeowners and flood insurance for households due to the reduction in emissions and
physical risk also lean against inflation.

The Inflation Reduction Act will also add to real GDP over the 10-year horizon, although here too the impacts
will be small, adding an estimated 0.2% to the level of real GDP by the fourth quarter of 2031. This translates
into 2 basis points of growth per annum on average over the period. The impact on GDP is on the margin, even
a bit negative, through mid-decade, but turns meaningfully positive in the second half of the decade.

Conclusion
It appears increasingly likely that the Inflation Reduction Act will get through the budget reconciliation
process requiring all 50 Senate Democrats to vote for the legislation and become law. The legislation marks
a major breakthrough in an arduous series of more than yearlong negotiations between Senate Democrats
over passing some form of Biden’s Build Back Better agenda. Up until this past week the negotiations had
seemingly collapsed. Moody’s Analytics will likely incorporate its provisions into the August 2022 baseline
(most likely) forecast for the U.S. economy.

The Inflation Reduction Act is much smaller in scale and scope than the original Build Back Better agenda
from which it comes. Regardless, it will have a material beneficial economic impact. Most immediately
it provides financial help to millions of lower-income and elderly Americans with their health insurance
premiums and prescription drug costs. It is also the first meaningful effort by the federal government to
address climate change and its long-run corrosive economic effects. Moreover, all of this is more than paid
for and will thus reduce the government’s future budget deficits, which seems sure to soon become a more
pressing economic problem. While modest legislation, there is plenty to like in the Inflation Reduction Act.

MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 8
 About the Authors
Mark Zandi is chief economist of Moody’s Analytics, where he directs economic research. Moody’s Analytics, a subsidiary
of Moody’s Corp., is a leading provider of economic research, data and analytical tools. Dr. Zandi is a cofounder of
Economy.com, which Moody’s purchased in 2005.
Dr. Zandi is on the board of directors of MGIC, the nation’s largest private mortgage insurance company, and is the
lead director of Reinvestment Fund, one of the nation’s largest community development financial institutions, which
makes investments in underserved communities.
He is a trusted adviser to policymakers and an influential source of economic analysis for businesses, journalists and
the public. Dr. Zandi frequently testifies before Congress and conducts regular briefings on the economy for corporate
boards, trade associations, and policymakers at all levels. He is often quoted in national and global publications and
interviewed by major news media outlets, and is a frequent guest on CNBC, NPR, Meet the Press, CNN, and various
other national networks and news programs.
Dr. Zandi is the author of Paying the Price: Ending the Great Recession and Beginning a New American Century, which
provides an assessment of the monetary and fiscal policy response to the Great Recession. His other book, Financial
Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis, is described by the
New York Times as the “clearest guide” to the financial crisis.
Dr. Zandi earned his BS from the Wharton School at the University of Pennsylvania and his PhD at the University
of Pennsylvania.

Bernard Yaros is an assistant director and economist at Moody’s Analytics focused primarily on federal fiscal policy.
He is responsible for maintaining the Moody’s Analytics forecast models for federal government fiscal conditions and
presidential elections, as well as providing real-time economic analysis on fiscal policy developments coming out of
Capitol Hill. Besides fiscal policy, Bernard covers the District of Columbia and Puerto Rico and develops forecasts for
Switzerland.
Bernard holds an MSc in international trade, finance and development from the Barcelona Graduate School of Economics
and a BA in political economy from Williams College.

Chris Lafakis is a director at Moody’s Analytics. He oversees the Moody’s Analytics climate risk initiative, and is responsible
for climate modeling and scenario creation. He also has expertise in macroeconomics, energy economics, model
development and model validation.
Based in West Chester PA, he also contributes to Economic View. Mr. Lafakis has been quoted by media outlets including
The Wall Street Journal, CNBC, Bloomberg, and National Public Radio and often speaks at economic conferences and
events. Mr. Lafakis received his bachelor’s degree in economics from the Georgia Institute of Technology and his master’s
degree in economics from the University of Alabama.

MOODY’S ANALYTICS Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022 9
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