Higher energy taxes in the Inflation Reduction Act will increase inflation, not decrease it

The so-called Inflation Reduction Act is one of the greatest examples of deceptive marketing around today. Not only will the legislation fail to reduce inflation, it will further increase prices.

Inflation is fundamentally a problem of too much money chasing too few goods and services. It was hardly a surprise: In the last two years, the government has spent, borrowed, and printed trillions of dollars while also hamstringing production in the economy. As just one example, people were frequently paid more to stay home on government welfare than to go to work, infusing cash while reducing economic output. Even after the trillions spent on COVID-19, the federal government spent trillions more, including President Joe Biden’s American Rescue Plan. The result was a vast increase in the amount of money in circulation without comparable growth in the size of the real economy. All that extra money bids up the price of goods and services, a phenomenon we call inflation.

Unfortunately, this latest piece of legislation in Washington does nothing to solve the problem. It does not reduce the amount of money in circulation. Worse, it reduces the quantity of goods and services through measures like higher energy taxes and excessive regulation.

People often underestimate just how much energy affects the price of services that we receive and the goods that we buy. Before an item can be placed on a store shelf, it had to be transported there, whether on a train, a ship, a plane, a truck, or even all of these. Energy is used not just in transportation and manufacturing but also in supplying services.

More than 60% of electricity in the U.S. comes from coal, oil, and natural gas. Additional taxes on those fuel sources under this new legislation will drive up electricity prices, which will trickle down into higher prices elsewhere in the economy. Yet this legislation is marketed as providing relief to consumers — a bald-faced lie.

Meanwhile, natural gas is not only a widely used fuel for both energy production and home use but it is also used in the manufacturing of countless chemicals that go into making other products. Additional taxes on natural gas will make all these more expensive. Once again, the marketing around this legislation is not merely misleading, but exactly opposite its actual effects.

The higher prices that stem from these tax increases on energy will ultimately decrease the goods and services that consumers can afford. As fewer goods and services are traded, the economy contracts. In June, sky-high energy prices proved a surefire way to decrease consumer purchases. Gasoline consumption in July fell to levels below where it was two years prior — during the pandemic when there were mandatory lockdowns, causing people to drastically cut back their driving.

As if the energy taxes were not bad enough, the legislation provides for 87,000 new IRS agents. We’re told they’re intended to hound tax-cheating billionaires, but this is just more deceptive marketing. There are fewer than 3,000 billionaires in the country, and they already face high audit rates. The new army of agents will allow the IRS to perform an additional 1.2 million audits a year, far exceeding the number of billionaires supposedly in the crosshairs. The claims about only going after those making more than $400,000 a year are also dubious because when Congress had the chance to enshrine that into the statute, it was voted down by Democrats strictly on party lines.

» READ MORE: The Inflation Reduction Act won’t reduce inflation

The expansion of the IRS will target the middle class. Unlike the claims of going after tax cheats, the massively expanded IRS will prey upon people who are overwhelmed by a 10 million-word tax code. In one experiment, when 46 different tax professionals were given the same family’s tax return to file, they produced 46 different estimates for what the family either owed or was entitled to in a refund.

Even if the IRS expansion is successful in raising billions of dollars from the already squeezed middle and working classes, that money does not magically disappear from the economy; the government will simply spend it. The amount of currency in circulation has not been reduced, it has merely changed hands. In other words, there is still no reduction in inflation.

The more one digs into the Inflation Reduction Act, the bigger the lies become. Perhaps a single line from the 1940s film Pinocchio best sums up the marketing of this tax-and-spend boondoggle: “A lie keeps growing and growing until it’s as plain as the nose on your face.”

E.J. Antoni is a research fellow for regional economics at the Heritage Foundation’s Center for Data Analysis and a senior fellow at Committee to Unleash Prosperity. He hails from the Philadelphia suburbs.