Skip to main content
logo
  • Investment Strategies

    Investment Options

    • Alternatives
    • Beta Strategies
    • Equities
    • Fixed Income
    • Global Liquidity
    • Multi-Asset Solutions

    Capabilities & Solutions

    • ETFs
    • Pension Strategy & Analytics
    • Global Insurance Solutions
    • Outsourced CIO
    • Sustainable Investing
  • Insights

    Market Insights

    • Market Insights Overview
    • Eye on the Market
    • Guide to the Markets
    • Guide to Alternatives
    • Market Updates
    • Guide to China

    Portfolio Insights

    • Portfolio Insights Overview
    • Alternatives
    • Asset Class Views
    • Currency
    • Equity
    • ETF Perspectives
    • Fixed Income
    • Long-Term Capital Market Assumptions
    • Sustainable Investing
    • Strategic Investment Advisory Group

    Retirement Insights

    • Retirement Insights Overview
    • Essential Elements of a Sound Retirement System
    • Building Better Retirement Portfolios
  • Resources
    • Center for Investment Excellence Podcasts
    • Insights App
    • Library
    • Webcasts
    • Multimedia
    • NEW Morgan Institutional
  • About us
    • Corporate and Social Responsibility
  • Contact Us
  • English
  • Role
  • Country
  • Morgan Institutional
    Search
    Search
    Menu
    You are about to leave the site Close
    J.P. Morgan Asset Management’s website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan Asset Management isn’t responsible for (and doesn't provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan Asset Management name.
    CONTINUE Go Back
    1. How will the Inflation Reduction Act impact the economy?

    • LinkedIn Twitter Facebook Line

    How will the Inflation Reduction Act impact the economy?

    08/17/2022

    Meera Pandit

    The Inflation Reduction Act advances key climate goals on the Administration’s agenda while reducing the deficit over the next decade.

    Meera Pandit

    Global Market Strategist

    Listen to On the Minds of Investors

    08/17/2022

    Show Transcript Hide Transcript

    Meera Pandit:                 

    Hi, my name is Meera Pandit, global market strategist at J.P. Morgan Asset Management. Welcome to On the Minds of Investors. This week's topic, how will the Inflation Reduction Act impact the economy? This week, the Inflation Reduction Act, a legislative package that includes climate spending, prescription drug pricing reform, and tax reform was signed into law. The IRA represents a meaningful commitment to climate goals and should reduce the deficit over the next decade, but is unlikely to reduce inflation and will weigh on 2023 profits. The Inflation Reduction Act seeks to raise approximately $737 billion in revenue over the next 10 years through a 15% corporate minimum tax on companies earning over $1 billion in profits, a 1% tax on corporate stock buybacks, greater IRS enforcement, and allowing Medicare officials to negotiate directly on prescription drug costs. The IRA would spend 437 billion on climate investment and extended healthcare subsidies. From an economic standpoint, the Inflation Reduction Act would have the following impacts.

    Inflation. Despite the name, it may not have a measurable impact on reducing inflation, which is being driven higher by energy and food prices, rents, and consumer goods and services spending.

    Deficit. However, it should reduce the deficit by about 300 billion over the next decade, improving federal finances and leaving enough fiscal space to avoid reaching the debt ceiling until 2024.

    Growth. Although the IRA should help federal finances, substantially less fiscal stimulus ahead compared to 2020 and 2021 represents a fiscal drag to economic growth. Together, from a profits perspective, we estimate a 1% tax on share buybacks and a 15% corporate minimum tax would subtract 3% from S&P 500 earnings growth in 2023, with the corporate minimum tax accounting for 2.6 percentage points of the total 3% reduction.

    Fiscal policy outlook. With the passage of the Inflation Reduction Act and the bipartisan CHIPS and Sciences Act, a $280 billion spending package for semiconductors and science and technology research and development, the legislative agenda should be light until after the midterms. If the midterms result in a divided government, political gridlock is unlikely to yield more spending or additional tax reform on capital gains, estates, and the top marginal tax rates for individuals and corporations.

    Climate goals. This is the largest federal climate investment in history, which includes tax credits for clean energy and electric vehicles and targeted investments towards clean energy and technology projects. However, it should be considered an initial down payment towards the US's net zero carbon emissions goals, not comprehensive funding to achieve future climate targets. The Inflation Reduction Act advances key climate goals on the administration's agenda while reducing the deficit over the next decade. However, investors should be mindful of the continuing fiscal drag on economic growth and the headwind for corporate profits.

    This week, the Inflation Reduction Act (IRA), a legislative package that includes climate spending, prescription drug pricing reform, and tax reform, was signed into law. The IRA represents a meaningful commitment to climate goals and should reduce the deficit over the next decade but is unlikely to reduce inflation and will weigh on 2023 profits.

    The Inflation Reduction Act seeks to raise approximately $737 billion in revenue over ten years through a 15% corporate minimum tax on companies earning over $1 billion in profits, a 1% tax on stock buybacks, greater IRS enforcement, and allowing Medicare officials to negotiate directly on prescription drug costs. The IRA would spend $437 billion on climate investment and extended health care subsidies.

    From an economic standpoint, the Inflation Reduction Act should have the following impacts:

    • Inflation – Despite the name, it may not have a measurable impact on reducing inflation, which is being driven higher by energy and food prices, rents, and consumer goods and services spending. 
    • Deficit – However, it should reduce the deficit by about $300 billion over the next decade, improving federal finances and leaving enough fiscal space to avoid reaching the debt ceiling until 2024. 
    • Growth – Although it should help federal finances, substantially less fiscal stimulus ahead compared to 2020 and 2021 represents a fiscal drag to economic growth. 
    • Profits – Together, we estimate the 1% tax on share buybacks and the 15% corporate minimum tax would subtract 3% from S&P 500 earnings growth in 2023, with the corporate minimum tax accounting for 2.6 percentage points of the total 3% reduction.
    • Fiscal policy outlook – With the passage of the Inflation Reduction Act and the bi-partisan CHIPS and Science Act, a $280 billion spending package for semiconductors and science and technology research and development, the legislative agenda should be light until after the midterms. If the midterms result in divided government, political gridlock is unlikely to yield more spending or additional tax reform on capital gains, estates, or the top marginal tax rates for individuals or corporations.
    • Climate goals – This is the largest federal climate investment in history, which includes tax credits for clean energy and electric vehicles and targeted investment towards clean energy technology and projects. However, it should be considered an initial down payment towards the U.S.’s net zero carbon emissions goals, not comprehensive funding to achieve future climate targets. 

    The Inflation Reduction Act advances key climate goals on the Administration’s agenda while reducing the deficit over the next decade. However, investors should be mindful of the continuing fiscal drag on economic growth and the headwind for corporate profits from tax reform.

     

    Federal budget surplus/deficit

    % of GDP, 1990 – 2032, CBO Baseline Forecast

    A chart showing the federal budget surplus and deficit from 1990 to 2032..

    Source: BEA, CBO, U.S. Treasury Department, J.P. Morgan Asset Management. 
    Estimates are based on the Congressional Budget Office (CBO) May 2022 Update to the Budget and Economic Outlook and do not include recent legislation. Years shown are fiscal years. Text includes estimates from the U.S. Senate on the Inflation Reduction Act. Data are as of August 16, 2022.

    09h8222408043948

    EXPLORE MORE

    On the Minds of Investors

    What investment questions are on the minds of investors? Explore the questions investors ask frequently and find answers at J.P. Morgan Asset Management.

    Read more

    Guide to the Markets

    The J.P. Morgan Guide to the Markets illustrates a comprehensive array of market and economic histories, trends and statistics through clear charts and graphs.

    Read more

    Asset Class Views

    Get quarterly commentary and in-depth analysis on equities, fixed income and other asset classes, written by our senior investment teams.

    Read more
    • Legislative and Regulatory
    • Climate change
    J.P. Morgan Asset Management

    • About us
    • Investment stewardship
    • Privacy policy
    • Cookie policy
    • Binding corporate rules
    • Sitemap
    Opens LinkedIn site in new window
    J.P. Morgan

    • J.P. Morgan
    • JPMorgan Chase
    • Chase

    READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

    The value of investments may go down as well as up and investors may not get back the full amount invested.

    Copyright 2023 JPMorgan Chase & Co. All rights reserved.