Breaking Down the Inflation Reduction Act of 2022

Plus: How will new Medicare drug price negotiations work?

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Good afternoon. During weeks like these, with the heat index hovering in triple-digit territory, we remember that our nation’s capital was built atop an actual swamp.

Senate Democrats Pass Sweeping Climate, Drug Pricing, Taxation Package

An unpopular first-term president whose party narrowly controls the Senate found that the fate of a large part of his legislative agenda rested in the hands of the senior senator from Arizona.

For close watchers of congressional politics, the procedural parallels between last week’s Senate drama and July 2017 were hard not to notice. But unlike Republicans’ ill-fated attempt at Obamacare repeal under former President Donald Trump—which was given the decisive thumbs-down by the late Sen. John McCain after two other Republican senators, Susan Collins of Maine and Lisa Murkowski of Alaska, had also voted no—Democrats’ latest reconciliation package, dubbed the Inflation Reduction Act, is on its way to becoming law. The bill passed the upper chamber on a party-line vote Sunday afternoon following a last-minute amendment to its tax provisions at the behest of Arizona Sen. Kyrsten Sinema.

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  1. Avatar photo
    Peter S.

    Dems: The rich need to pay more taxes! Close the loopholes!
    Reps: Good point. We could, like, put a cap on SALT deductions that only the rich will exceed.
    Dems: Wait — we didn't mean OUR rich people.

    Never gets old. See also: the argument over whether cost-of-living is sufficiently uniform everywhere for a national minimum wage to make sense.

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    Ben Connelly

    Well-written! Good job, Price.

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    Norman Shatkin

    You know, upon further thought, I think it's possible that the reason the IRS considered "return of principal" to be an asset sale is because, in one sense, it is. If you bought my house, obviously the money you received would be funds from an asset sale. If I paid you over ten years in installments, that, too, would obviously be an asset sale. Since a PORTION of every payout from an MBS instrument is NOT interest but IS part of the principal payment, the IRS may have taken the view that this was similar to payment for the sale of a house.

    An MBS instrument, of course, isn't "a house," it's a collation of many mortgages, but the IRS may have taken the view that what you had purchased was an asset (as well as an interest bearing loan).

    What I DON'T understand is how the date of purchase has to do with that concept. You didn't buy a house with a purchase date, you bought a security which comprised MANY purchase dates It does seem to me that the IRS was out of line here. For one thing, even if part of what you were getting WAS an asset sale in the legal sense, it would be impossible to compute that amount for all of the houses packaged in that instrument. There isn't an accountant in the world who would even try to do it.

    All of my knowledge of this is 30-40 years old. Anyone who wants to weigh in who knows anything different, please do, But as I say, if this happened back in the 80s, it could just be that all of this wasn't understood yet.

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    Norman Shatkin

    You seem to be saying that the IRS deliberately makes the tax laws as arcane as possible. That bureaucracies can be awful to deal with in complicated situations is hardly news to anyone who spends, as I did on Tuesday, TWO FREAKING HOURS on hold for an insurance company trying to get a simple answer to a simple question. So first of all, let's not pretend that the IRS invented being hard to deal with, and that it's some kind of tyranny.

    Second of all, when was this dustup? I wrote a system for managing MBS payouts for a large brokerage back in the 1980s when they first appeared on the scene, and the funds received were two income streams which were net, at first, kept separate -- interest on the underlying mortgages and repayment of principal. If the IRS called them sales of a capital asset, I cannot imagine that would have passed muster with any accountant, but it's possible that in the early days the IRS didn't understand that. Another remote possibility is the entity handling the mortgages for you screwed up somehow. But one thing I do recall from that time is that nobody knew what to make of MBS securities for awhile -- there had never been anything like them. The issuing entity would send us a percentage, to six decimal places as I recall, showing what proportion of the money they were sending was interest and which was principal. By the late 1980s, this was old news but in the early years, so much.

    But finally, THE IRS DOESN'T WRITE THE FREAKING LAWS. CONGRESS DOES. The IRS just enforces them. And the laws are arcane because businesses are always pleading that they need some kind of shelter from regular taxation or they'll have to fire 10,000 employees and will tell the TV networks that anyone who voted to refuse them their pet tax shelter doesn't care about the workers who are now on unemployment. The IRS didn't dream up MBS securities, Wall Street did (and damn near killed the country in 2007-08 with them).

    Perhaps not in your case, but most of the belly-aching about how complicated the tax laws are is done by the same people who MADE THEM COMPLICATED so their little corner of the economy could get larger profits. Everybody from Jeff Bezos to Donald Trump has some reason to want a tax law written to cut them some slack, and they, of course, can easily afford the accountants who understand this stuff (and also how to cheat on it).

    Rave about it if you wish -- I certainly did when I was running two small businesses and had to have an accountant show me how to handle the paperwork -- but what makes the system a bitch to navigate is not the IRS. It's Congress, and their paymasters in the same corporations that put me on hold for two hours on Tuesday,

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  5. Joe

    I wonder how much better the bill could have been if , at least,10 Republican senators had helped. Not one voted for it.

    The bill reduces the deficit. What is the Republican strategy to reduce the deficit. We know tax cuts only raise the deficit. We know Mitch McConnel wants to reduce Social Security to reduce the deficit.

    The bill reduces healthcare costs. We pay literally twice as much for healthcare as other countries and have poorer healthcare outcomes. What is the Republican plan to reduce healthcare costs? Limit who gets healthcare? Healthcare savings accounts? Have you ever tried to get a price from a doctor before a procedure?

    The bill begins to address climate change. What is the Republican plan to address climate change. Build more walls if you have the money? Do we really want to leave this to our kids to fix?

    While this is a very good bill, can you image how good it could have been if Republicans really wanted to address these, very serious, issues?

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    Kevin M. James

    I appreciate the detail here on how the “negotiations” are meant to work, and how other countries have been approaching it.

    Looks like less of a King Canute situation than I might have feared. (By this I mean government thinking it can make expensive things cheaper simply by ordering it to be so...a very long and catastrophic catalog of such efforts to be found in history of course.) One can still bet on many unintended consequences, some of which will be significantly bad; it will thus help a great deal if Congress does its job by keeping an eye on things and making adjustments as we go along.

    (Yes, I’ve got a smirking skeptical look on my face too...but it could happen!)

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    1. Joe

      Right now drug companies can charge what ever they want and Medicare has to accept that price. That is pricing power. Medicare is one insurance company. It handles less than 20% of the US population. There are many insurance companies to negotiate drug prices.

      As you said, unintended things will happen and congress needs to stay vigilant, but Republicans need to help.

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    JohnM.

    I was hoping to read more detailed analyses of this bill's provisions with a relatively unbiased eye, and here it is. Looking forward to the next editions. Thanks, Mr. St. Clair. You did a fine job here.

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    Norman Shatkin

    I've been through an IRS audit -- in 1974, I think it was. Yeah, it's no picnic.

    However, the IRS has said that it will use the new money to target only the very wealthy, roughly defined as millionaires and up. My income topped out at around $135,000 in the 1990s, and I had an accountant do my taxes because they got seriously complicated -- I was running two small businesses at the same time. Part of that deal was if I was audited (which never happened), the accountant would submit to the grilling, not me. I don't remember what I paid him but it was quite affordable, whatever it was.

    I absolutely guarantee you that anyone whose income is anywhere near a million dollars has a similar deal. And as you say, big corporations have employees whose only function is to handle that stuff.

    Look, every time something that almost exclusively affects the wealthy gets proposed, we hear moans of sympathy for the "little guy" who's going to be hurt by this. It's a con game whereby big corporations and super-wealthy people try to convince you that they're just like you and me, and it's such a terrible burden to go through an audit. And if they convince you, they pocket money that YOU now have to provide through YOUR taxes It's estimated that the amount of tax cheating by the wealthy amounts to something like $500MM a year, which is on the same scale as the defense budget. YOU and I had to fund the national defense because tax cheats got away with sticking it to us.

    As Mr. Cooke how he feels about the fact that under Trump the recipients of earned income tax breaks (all of them poor by definition) were audited nearly as often as millionaires.

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      John Robert

      I've long contended that it is a sure and certain sign of tyranny when a citizen of at least average intelligence entirely willing in good faith to pay his taxes cannot determine his obligations to the government without paying for professional help or an annual subscription to tax preparation computer software. My one serious encounter with IRS arose from my not understanding how to report the monthly repayments of principal on some mortgage backed securities. The amounts were clearly reported on my 1099s as "repayment of principal", but IRS considered them "sales of a capital asset". Since I had not reported the "basis" and "acquisition date", the service deemed them "short term" sales taxable as "ordinary income" for the entire amount. About all i could understand of the 40 something page letter I received was the bottom line, "remit $26,000 within 20 days", considerably more than the payments I had received.

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      Bill Nelson

      So these tax experts who work for the millionaires will actually commit tax fraud? Wow.

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        Chuckgold

        They legally exploit tax loopholes, would be perhaps, a more accurate description. 🙃

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          Mike CS

          I understand what you’re saying, but I don’t think there are loopholes. There’s the IRC and some can afford CPAs who know how to interpret them favorably for their clients.

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        Mike CS

        I have often heard or seen the words tax evasion ,tax cheats or fraud used when—I think— they mean tax avoidance.

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          John Robert

          Far more often than not, that's exactly what the transactions are, legal tax minimization. Accurately labeling them, however, would not give the demagogues the desired effect of stimulating class resentment.

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    Rajeev

    I'm all for negotiating drug prices for Medicare as regular insurance companies do the same. Of course I understand the difference where the government has more power. It's a far preferable solution to overall price fixing of prescription drugs which would be a complete disaster.

    Medicare in practice really does operate like a lot of the largest insurers. But for the non-medicare eligible population, prescription drugs despite what they say are more affordable now than ever before.

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    Norman Shatkin

    What is "controversial" about the big increase in IRS funding (he said with tongue in cheek)? The IRS is a law enforcement agency. Who opposes more funding for law enforcement, especially in an area where lawbreaking is so rife it makes Chicago's West Side look like the third grade class at the Little Sisters of the Poor elementary school? (Please feel free to improve on that image if you wish.)

    Perhaps it has something to do with the fact that the IRS has said openly that it plans to use the money to go after millionaires, which reminds one of what Barry Goldwater said when asked why he was seeking votes among Southern segregationists -- "I'm hunting where the ducks are."

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      Rajeev

      I don't normally agree with Charles C W Cooke of National Review but I understand what he means when he describes the dilemma of getting more money from taxpayers. Audits aren't just a 3 hour event where you show records and you're done. They are timely, intimidating, and stressful no matter how well you know the tax code or keep records. If they were just targeting the big companies that can afford tax lawyers to handle it and not dent their profits then it would be ok.

      I've rarely seen someone who told me they got audited say it was a smooth process. It's more like when you take the stand in court as a witness that has done nothing wrong yet find yourself under intense fire from a lawyer. Just because you know you are innocent and aren't direct party to the court proceedings doesn't make it any less of an intimidating experience.

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