Unpacking the Impact of TCJA, IRA, and CHIPS on the U.S. Economy

 Today, we're examining the differences between the broad incentives provided by the Tax Cuts and Jobs Act and the targeted approach of the Inflation Reduction Act and the CHIPS and Science Act. 

 Alex Muresianu, Senior Policy Analyst at the Tax Foundation, joins Kyle Hulehan to explore these policies' intentions, tangible effects on specific sectors, and impact on the broader U.S. economy.

  Links: 

 https://taxfoundation.org/research/all/federal/supply-side-economics-industrial-policy/ 

Transcript

Kyle Hulehan: 0:00

Are we at a crossroads in tax and economic policy? Or have we been here before? Today we're examining the difference between the broad incentives provided by the tax cuts and jobs act with the targeted approach of the inflation reduction act and the chips and science act. We'll explore these policies. Intentions they're tangible effects on specific sectors. And what they signify for the broader us economy. Hello and welcome to the deduction, a tax foundation podcast. I'm your host, Kyle Holahan. And today we are joined by Alex Muresianu, a senior policy analyst here at the tax foundation. Alex, how are you doing today?

Alex Muresianu: 0:36

Doing well, Kyle? How are you?

Kyle Hulehan: 0:37

I'm good. Alex, we go way back. We go way back because we were both interns at the tax foundation all the way back in 2018. And do you remember me, Alex? Do you remember

Alex Muresianu: 0:49

A little bit. I had to be reminded when you joined back, but you know.

Kyle Hulehan: 0:52

Yeah, no, I mean, fair enough. Fair enough. I wasn't memorable at all. And you know what was memorable, though? I will say this is Alex is the only intern in maybe in the history of the world to get a pay raise. I've never heard of this before. What did you do? Who did you blackmail? And how did you accomplish this?

Alex Muresianu: 1:13

you know, that's that's a long story for another day. but I appreciate that uh, that I don't know. It was a good fit. It was a good fit. That's all I can say. yeah, so I've, I've been, been here a bit.

Kyle Hulehan: 1:24

Yeah, no, it's okay. We've been here for a while now. and it's good that we're back here on the podcast today. And I'm excited to have you here, but that's, that's enough with the pleasantries. We have serious business to talk about here. and Alex, you have your latest industrial policy paper. So as we dive in here, could you maybe summarize the main provisions and goals of the CHIPS Act? And the IRA Inflation Reduction Act and the Tax Cuts and Jobs Act for us here.

Alex Muresianu: 1:55

So the idea of this project is to compare the sort of more traditional, orthodox or conventional approach to growing the economy as represented by the Tax Cuts and Jobs Act and compare it with this sort of new idea or new old idea repackaged idea of industrial policy as represented by the CHIPS Act and the Inflation Reduction Act. and so the Tax Cuts and Jobs Act, I mean, it's was a huge restructuring of the tax code across the board. but the sort of main provisions focused on the corporate side are, on the business side, are reducing the corporate tax rate. from 35 percent to 21%, some, accelerated deductions for, investment in equipment, a, limitation in the deductibility of interest, that's a tax increase, to offset some of the revenue costs. there are a few sort of smaller tax changes as well, introducing the amortization of research and development. expenses starting in 2022 as another sort of pay for revenue raiser, but big picture is mostly about the corporate rate reduction, as far as the sort of supply side growth impact of the law, with the chips act, or I guess the chips and science act, includes this sort of some, some broader provisions related to, to, to, federal, federal research money. but focusing on the sort of CHIPS component, it has both an investment tax credit, for semiconductor investment, as well as some, direct grants for similar purposes. and the Inflation Reduction Act has a plethora of, green energy credits. as well as, a few tax increases, like a tax on, on stock buybacks and the book minimum tax, which, is complicated, and if you want to know how complicated it is, just ask the Treasury Department how complicated it is, but bottom line, it's, it's meant to, it's a sort of separate system, of, of corporate income tax, as well, so big picture, that's, Those are the, those sort of three bills, and we look at sort of chips in the IRA, because they're passed about a month, within a month of each other, as one big package, in the paper.

Kyle Hulehan: 4:13

Thank you for breaking that down for us. So I have one quick follow up just to kind of clarify things for the listener. What do you mean exactly when you say supply side? Like, what does that specifically mean? That was one thing that stood out from what you said that I just want people to clearly understand.

Alex Muresianu: 4:28

When politicians talk about growing the economy, they might be talking about one of, of two things. Sometimes it's about people spending money. we, it, it, we're, we're gonna put money in back in people's pockets and they're gonna go out and spend it at businesses, and this will, circulate and multiply and that, and that will grow the economy. That's a demand side, view of the economy. And then there is a. supply side view, which is about growing productive capacity. So we're going to invest in, say, new computers or new software, build new buildings, to, facilitate, more productive economic activity, building a new factory, a new office building, new tractors or, or something on a, on a farm, or that would be capital, physical stuff, or you could think about a supply side reform involving, bringing in more, more immigrants or, or improving education, skills, the labor force, those would also be supply side policies. But the point is it's about growing, like, productive, like, productive capacity as opposed to just increasing spending. and so both the, Tax Cuts and Jobs Act and IRA and CHIPS are both conceptually, or the sort of goals are At least, at some degree, both focused on the supply side, and supply side growth. now, how they approach that and how they conceptualize how to best do that, they differ, but that's a sort of core commonality.

Kyle Hulehan: 6:08

And that that leads in perfectly here. So what are the The key economic philosophies, driving the design and implementation behind, the TCGA IRA and chips.

Alex Muresianu: 6:20

So, TCJA basically, by lowering the corporate rate as well as Accelerated depreciation for, capital investment in equipment. the idea there is to basically lower the cost of investing or increase the returns to Capital investment across the economy. So for investment in a multitude of sectors, you will benefit from a lower corporate rate and better tax treatment of equipment. If you're a retailer looking to expand your operations, you will benefit from a lower rate. If you're a manufacturer looking to build new factories, you're going to benefit if you're a, tech company doing, some, major R& D projects, you're going to, you're going to benefit from a lower corporate rate, you're going to have more incentive to invest. And the idea with these broad investment tax changes is that they sort of change investment decisions on the margin. So if there's, companies think about, risks and rewards. We don't know if this investment is going to work or not. We need to expect a certain payoff. And when you lower taxes on that, The required payoff is going to be slightly lower, for companies to make that investment decision. See, so there's all these little marginal projects that companies are considering and changing these, tax provisions a little bit, will change all these project decisions across the economy. and so the idea is that, basically, we're not saying that, particular sectors or, or, industries or firms are need to be moved in one particular way. It's this sort of broad changes, lead to a sort of spread of decentralized, decisions across the economy to invest for in America. This sort of CHIPS IRA perspective is more focused on really concentrated support on major, on a couple of major industries. now part of this, and we'll get into this later as well, is that there are a lot of other, like, non growth policy considerations that have gone into the IRA and CHIPS. But. At least focusing on the sort of growth argument side, it's that these industries have, in the case of chips, semiconductors, and in the case of the IRA, renewable energy, and electric vehicles, That these sort of sectors have unique growth potential, and will lead to sort of more productivity improvements than just the, across the board improvements in tax treatment. That it's better to focus a lot on these particular industries rather than broad changes that incentivize economic actors across the economy.

Kyle Hulehan: 9:09

So I think to try and like make this very clear for listeners I have this analogy that I want to kind of toss at you that I think applies to this, which is TCJA. It's kind of like a large discount store where there's like a, a wide sale on all items. There's, everything's for sale. It always is this way. And this broad approach increases spending across all the departments. Everything, is is is available at a lower price. And so people are investing and buying and as a result, the whole store is kind of boosted in sales and activity. And on the other hand, you have, the chips and IRA and they're kind of like a specialty store or a boutique store and they offer exclusive discounts on select merchandise and they're focused in these. Specific areas, and they have, certain incentives for just these particular products and and they, they grow things or the sales grow maybe at the store in particular area, but not the whole store. All departments aren't lifted up. Is that kind of grasping what you're talking about here with these, these two ideas?

Track 1: 10:16

Yeah, I think that's, I think that's a pretty good analogy, or I guess, if, if it's, TJJ impacts, the whole department store, and whereas, chips and IRA are just the shoes or something, or just the, athletic apparel or, or something,

Kyle Hulehan: 10:32

Or this mall, not that anybody goes to malls anymore, but this was a mall, this is just the one popular store at the mall and the rest of the mall might still be empty, but there's just one place people are going. Is that, is that kind of it?

Alex Muresianu: 10:44

I think that's, I think that's a good way, a good way to put it.

Kyle Hulehan: 10:46

I'm wondering here as, We're kind of breaking down the philosophy of this, and when you're doing that, you kind of are always curious about, well, then what's the history? What's the precedent? And is there any notable historical precedents here that have influenced the design of TCJA, the Inflation Reduction Act, the CHIPS Act? And what were those outcomes?

Alex Muresianu: 11:07

I think almost the problem is that there's, too much historical precedent, or there's, too many possible case studies, now for the sort of general theory, the sort of broadly increasing investment idea, There is very long academic literature of the responsiveness of investment to tax changes and how, investment leads to increased, productivity and growth and wages. As, over time, I think there's a lot of evidence for that now with the sort of more idiosyncratic approach of industrial policy where you're focused on trying to drive investment in a particular industry, There are a lot of examples of people doing that as well, but it's very hard to isolate. So the promise of industrial policy is not just that, when you really focus on getting investment into one industry or, a sector or something very specific. It's not only that that sector will grow, but that the economy will grow faster as a whole because you have shifted resources over to this one, place. And so I guess bringing back the analogy, it's that, having a sale in the shoe, section of the department store, will not only grow shoe sales, but will raise overall sales. So there's so many examples of different, countries people stretch back to the, early 19th or late 18th century. the sort of early stages of the Industrial Revolution to argue about the merits of, protecting infant industries. There's a lot of examples of this sort of failure of these efforts to have focused support for one industry leading to growth overall. This has failed many times in Latin America, East Asia, sort of Japan and South Korea and Taiwan often get brought up as sort of positive case studies, but it's tough to say. whether their sort of government support for specific industries was this sort of deciding factor in their growth as opposed to a more general move towards, open markets. and there are also a lot of less appealing examples of industrial policy in East Asia. but focusing back in on the United States, there's a lot of different, question. So, like, the example I always think of is that, South Korea in the 1960s is not very comparable to the United States today. South Korea was coming out of, first, being under the sort of Japanese imperial boot in World War II and then, experiencing the, Korean War on top of that. It's a very different situation, than, a lower income economy in an developing country versus the United States today, which is a very rich country. Anyways, in the United States, we've had a few efforts related to, energy, and supporting sort of energy industry, or renew fuels. And most of those have not gone particularly well. Ethanol subsidies, for instance, are infamous as a not particularly effective, way to, have not been particularly effective either as an energy source or as a, a way to reduce emissions. the solar tax credits have been helpful in developing solar technology, but the protections associated with them and there are a lot of protectionist aspects of the IRA subsidies as well, have not been particularly, effective in growing American solar manufacturing. in the steel industry, which is not exactly, something covered here, we've had this sort of problem where, we've. had a lot of sort of protectionism focused on trying to, keep the U. S. steel industry strong, but really it's just become dependent on these protections, and has not been as competitive in the global market, which is, has really held it back. and semiconductors are really a complex case because There was a lot of, initial defense investment that, spread the initial sort of development of the technology, but in the commercial space, wasn't really a government, led effort to lead the U. S. to dominate initially in semiconductors. That was the doing of private sort of entrepreneurs. and then later there was a panic about U. S. Falling behind in semiconductor production, and there was a government initiative called CEMATAC, which was in the 80s, late 80s, early 90s, to try and reinvigorate U. S. semiconductor, production, because we were, losing to, to Japan. but, And then U. S. semiconductor, like, cutting edge semiconductor production comes back in the U. S. so people sometimes try and credit that to, to Semitac, which is this public private research consortium. but, Semitac, focused, mostly on these sort of, memory chips. and the real comeback of the U. S. semiconductor industry in the, in the 90s was focused on, logic chips, which are different type. And so that's not really creditable to, to Sematech, which was focused on this other technology. so long story short, there's a lot of evidence to consider. but generally for the sort of targeted industrial policy approach, I think there's a lot of reason to be skeptical.

Kyle Hulehan: 16:13

Well, I think you were telling us before that there were so much to study and that there's so much history on this. And I think, I mean, you prove that point very well right there is like by showing us there's just a vast array policy, but I think when it comes down to it, it is really this simple thing of sometimes broader is just better. the rising tide lifts all boats But something, I want to know is like, based on this. initial data that's available. How are T. C. J. Chips and I. R. A. How have they begun to impact their respective, targeted goals?

Alex Muresianu: 16:48

the takeaway I think from both the sort of initial couple years of Tax Cuts and Jobs Act and the initial years of, of, or six quarters, because, CHIPS and IRA were both in the middle of 2022, the initial takeaway is that taxes matter, incentives matter and people respond to them, in the, It's important to say when you're evaluating a policy, you can't just look at the sort of, data points over time before and after. You should try and come up with some kind of counterfactual. Because the world, where, where were things going to go without this policy and where have they gone with it? And so, what I did in the paper is compare the growth in investment, after the TCGA and after IRA and CHIPS, compared that investment to the investment that the Congressional Budget Office, initially projected, before the policies were introduced. So to come up with some sort of relatively simple counterfactual, and following the Tax Cuts and Jobs Act, for the following. two years, you were expecting to see investment was supposed to slow and grow at about, 2. 4 percent on average. And after the Tax Cuts and Jobs Act, you see a big jump from, Around 2, 2. 4 percent to about 4. 3 percent, which is a pretty substantial, boost and there are some factors that were putting negative pressure on investment during that time period anyways, namely the trade war with China, the tariffs themselves increased cost, you had retaliatory tariff measures, and you had, just general business uncertainty as a result. But even despite those sort of other downward pressures, you still had a lot of overall investment growth. now with the IRA and CHIPS, now if you follow sort of economics news, you will see a lot of, advocates of the Inflation Reduction Act and CHIPS talk about the, Unprecedented boom in manufacturing structures investment. We've seen this massive growth numbers that, manufacturing structures investment is up, 50 percent on an annualized basis over the past six quarters. see, that's a huge number. It's a huge number, right? 50%. And it is. there is a lot of investment growth in manufacturing structures. But even now, with this huge growth, manufacturing structures is about 4%, a little bit less than 4%, of overall business investment. and if you compare, the forecasted business investment, before the IRA and CHIPS, to the actual, it's almost exactly the same. over that, those six quarters, fixed investment was supposed to grow by around 4%, Now, in reality, fixed investment overall has grown by 3. 9%, which I guess is lower, but I think realistically, I think that the real takeaway should be is basically the same, Now, there are some mitigating factors there as well. The CBO had predicted that the Fed was going to raise interest rates, but the Fed raised interest rates more than predicted, so that probably put some downward pressure on investment. On the other hand, you would expect a surge of energy investment as oil prices were going up at the time. but, ultimately, these results are very consistent with the, policies as they were designed, the, uh, Tax Cuts and Jobs Act is a broad tax policy meant to increase investment across the board, and it did that, and IRA and CHIPS were targeted at specific sectors and you have seen a move of investment towards those specific sectors, but overall investment hasn't moved very much. it's a pretty rudimentary counterfactual. There was a lot of uncertainty going on in 2022 and, other policy, moves like the Fed raising interest rates probably had some downward pressure on investment or some other things that had upward pressure on investment. So, Ultimately, I think that, that story is the one that's going to stick.

Kyle Hulehan: 20:30

I mean, that's really very surprising when you start talking about that, that, it's just, again, it's just only that specific area that you're talking about, those structures, they increased a lot, but everything else kind of remained the same. And it also goes back to, you know, talking about the. the store analogy is like the shoes are being sold, but everything else is the same. So, and the store is the same and nothing else has changed. It just brings up the question to me of what is the key indicator that, that we should be monitoring in the years to come for what is long term success and impact, of these policies for the U. S. economy.

Alex Muresianu: 21:07

Yeah, so I think, and I mean this, this gets into, some of the, the other policy goals of the, IRA and CHIP. So what were the challenges in trying to evaluate them? It's a, There are a lot of, a lot of policy goals that the Biden administration or, or advocates of these policies will bring up that, IRA. I mean, it's, it's really a climate law that's sort of the, the biggest component of it. It's, it's about reducing carbon emissions by subsidizing, more environmentally friendly technology. it's also supports where several provisions in there are meant to, support. General American manufacturing by requiring sort of things to be made in America. there are, focuses on regions, moving investment to, historically depressed areas, that are maybe de industrialized, you know, And then the, CHIPS Act, a big part of the justification for the CHIPS Act is the national security policy, about, given the, the concentration of, of semiconductor production capacity in Taiwan and concerns about, conflict with, with China related to the Taiwan Strait. and so, it's, possible that the sort of, grand supply side in the industrial policy supply side, big picture, if we support these industries, we're going to like grow the economy and we're going to become, a, a, a leader and this is a leader in these industries. And that's going to mean that our overall economy is going to grow faster. Um. that might end up not being true, but they might nonetheless be effective in their sort of odd idiosyncratic goals. now, especially with the sort of national security question, I don't think of myself as being, like, uniquely suited to determine, how many semiconductors we need to make to, effect some kind of change in that direction. but I think it's, I think it would, it's worth, Considering that these are different arguments and often they get lumped together that, It's that these policies that IRA and CHIPS are going to do all these things at once. They're going to solve climate change. They're going to, fix, they're going to be great for strategic competition with China, and they're going to be great for growing the economy as a whole. and I, I think about, my favorite example for how this doesn't necessarily make sense, to lump these goals together is the liberty ship program in, in World War II. Um, this is sort of a, a, personal hobby, fascination of mine. my great grandfather sailed on a Liberty ship. These mass produced, cargo ships, made during World War II to, supply, Britain and the Soviet Union. To provide, transportation capacity for, for US, military, materiel and supplies for our allies. and we needed to build these ships fast and we needed a lot of them. And by gum we made them fast and we got a lot of them. it's an ultimate, like the story of how quickly they were able to build, these ships from, start to finish, was incredible. And it's a classic tale of the importance of American industrial might in winning World War II. This is the ultimate successful, national security manufacturing story,

Kyle Hulehan: 24:15

This is like a success of a very specific industry. Is that, is that what you're saying?

Alex Muresianu: 24:20

It's successful at the national security policy goal. it's solving a national security need. That we needed a lot of shipping capacity really fast. what it wasn't was a transformative economic policy. After the war, we had all these ships. And We didn't really know what to do with them. They were not particularly suited for commercial market needs. They were, unreliable. They were built kind of shoddily so that we could build them faster. and, they weren't, suited for domestic cargo. And we didn't really take knowledge that we got from building ships, building the Liberty ships, and convert this into some sort of maritime driven, maritime shipbuilding construction economy after World War II. There's no, like, long lasting industry economic imprint of the Liberty ship. And that's fine. they did their job, and they did their job darn well. that doesn't mean they have to be some kind of transformative economic policy, for growing a shipbuilding industry. They weren't, and that's fine. and so I think that that's sort of worth keeping in mind when people talk about ships and, and the IRA, is that, it might make sense as a, as a sort of idiosyncratic policy for these other issues, but that doesn't necessarily mean that they're also gonna be great for the economy at large.

Kyle Hulehan: 25:42

makes sense. I think that's a really cool example. And it's really interesting that you're, you said your grandfather was, worked on Liberty ships. Great grandfather was on liberty ships. That's fascinating because you can see that not everything is intended, for the same thing or the same goal or, or to be used in the same way. And when you're making a liberty ship, we were doing that to try and win a war. But, if you're trying to lift the broader economy as a whole, maybe it doesn't make sense to invest everything or, or put all the deductions that everyone can get. In, in one area and to invest in one spot, it, it needs to be broader than that.

Alex Muresianu: 26:19

Yeah, I think that, you know, if you have a policy for a specific need, you should talk about that policy in terms of the specific need. But if you want to grow the economy broadly, you should think broadly.

Kyle Hulehan: 26:28

I, I think that summarizes this up really, really nicely. Alex, thank you for being on the show today. it's great to have you here reliving the intern days. is there anything that you would like to plug today before we wrap this up?

Alex Muresianu: 26:41

the new paper, of course coming out, you can find me on Twitter, At, A Hard to Spell. and uh, one correction from earlier. I did remember you from when you were an intern. I was, I was doing a joke at the beginning. I just wanted to correct the record there. I was just trying to, trying to make some fun,

Kyle Hulehan: 26:57

Well, no, no, no. I mean, it's certainly, it's a lot funnier if you don't remember me. I come on, like why, why should you? I mean, I didn't get the raise. You did. I was I was just a loud mouth in the corner. yeah. So, Alex, thank you for being on the show today. And please check out his article that will be available for you, right when this comes out.

Alex Muresianu: 27:14

Thank you.

Kyle Hulehan: 27:15

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