opinion | Reduce climate emissions and deficits? It may still be possible.

Sometimes miracles happen in Washington, too.

Less than a week ago, any tax-and-spending deal in Congress—let alone a brilliant one—seemed utterly impossible. But the new package announced on Wednesday is a step in the right direction on many of our pressing economic challenges.

While significantly less ambitious than its previous incarnation, Build Back Better, it will minimize losses (the most in more than a decade) rather than reduce it, and it will do so without the gimmicks built into the BBB that are massive. But through the efforts of the dog. Chuck Schumer, Senate Majority Leader, and Senator Joe Manchin III, Democrat of West Virginia, Congress is on the verge of passing historic legislation.

The bill will use tax increases to steer the economy toward lower inflation while addressing the pressing priorities of climate change and rapidly rising drug prices. In the process, the tax system will be improved by forcing profitable corporations to pay at least some taxes, while eliminating the infamous interest loophole (which has benefited me greatly).

How does this package attack inflation? Extreme inflation is primarily a function of too much demand relative to available supply. To bring down inflation, we need to curb demand (as distasteful as that may sound). The Federal Reserve plays a major role in this process by raising interest rates (as it did last week). This allows companies and individuals to borrow less and imposes a particularly strong downward draft on sectors such as housing, which is highly sensitive to rising rates.

But fiscal policy also affects prices. Until last week, Mr Manchin was arguing that higher taxes could drive up inflation. This is simply a misunderstanding of basic economics.

Higher taxes used to reduce the budget deficit are deflationary. They take money out of the economy, reducing demand, as the Schumer-Munchin package targets. The Committee for a Responsible Federal Budget called it “a welcome improvementA proposal that, with interest, could reduce the deficit by $100 billion annually by 2032.

While this is sufficient to produce only a slight deflation effect, it is a significant move in the right direction When very recent policy has pushed the wrong way.

Like any complex package, we need to understand the details, especially the many different pieces of climate packages, to make sure they are thoughtful and effective. (Many Covid relief bills were filled with useless provisions.) I’m particularly skeptical of the efficiency of government grant programs (of which the law has a small flotilla), tax incentives to divert behavior through the market. And the opposite of using punishment. forces.

But the good news is that the atmosphere of the new package is heavily inclined towards tax incentives. and preliminary analysis by Rhodium Group found it That climate provisions will bring the United States meaningfully closer to meeting our 2030 commitments under the Paris Agreement.

To be sure, the package is not perfect. Nearly two decades after Congress agreed to win approval of a prescription benefit plan to prevent Medicare from negotiating drug prices, this mistake would eventually be corrected—though only for a limited number of drugs and many more. Slowly over a decade.

And more importantly, the 15 percent corporate minimum tax is not the best way to ensure that companies pay their fair share. Many large companies do not pay tax due to tax deduction President Donald Trump’s 2017 Tax Law, Instead of the more desirable approach of eliminating them, the new bill would simplify a flat 15 percent tax on each large company’s own profits (known as book profits) rather than its profits as calculated using the tax code. takes the approach. This would both create distortions and make accounting practices more prone to manipulation by tampering with.

And most sadly, on the tax front, the Schumer-Munchin Agreement does not include a global tax agreement, which Treasury Secretary Janet Yellen called to reduce incentives for companies to lower their taxes by moving profits around the world. for the commendable talks with dozens of other countries.

Nor does it include some meritorious portions of the BBB, such as the extension of the child tax credit, although paying for them would have required a higher tax increase.

In Washington – as in life – we must not allow the perfect to be the enemy of the good, and this law abounds in the good. which consists of about $80 billion of new funding to the Internal Revenue Service for enforcement; For years, Republicans have tried starve the irs So that massive tax avoidance can continue largely unrestrained.

Incidentally, the same day the Schumer-Munchin Agreement was announced, the Congressional Budget Office issued its announcement. latest financial estimatesIt shows that, in the absence of sweeping legislative changes, the country’s deficit will be around $1 trillion annually and will soon start rising.

Making even the slightest dent in it while addressing the big challenges qualifies this law as one of the best packages I can remember Congress giving birth to.

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