Senate Majority Leader Chuck Schumer (D-NY) speaks during a press conference on the Cut Inflation Act outside the U.S. Capitol August 4, 2022 in Washington, DC.
Drew Anger | Getty Images
Business advocacy groups have lobbied against the 15% minimum tax rate for large corporations just passed by Congress as part of the Cut Inflation Act, saying it was a “terrible policy” that would reduce economic growth and make America “poorer”.
Wall Street analysts, however, say the legislation will not significantly affect corporate profits or future investments.
Companies that earn more than $1 billion a year will now have to pay a minimum tax rate of 15% as well as 1% on share buybacks. These tax reforms, which primarily target America’s largest corporations like Alphabet, Google’s parent company JPMorgan Chase and Facebook’s parent company Meta, will reduce the federal deficit by about $300 billion over the next decade.
While the new taxes aren’t “generally positive for stocks,” the 15% minimum corporate tax won’t be “material,” Wells Fargo analysts wrote in an Aug. 9 research note that called the new “modest” taxes.
Just over 170 S&P 500 companies paid less than 15% in taxes last year, according to new analysis from Credit Suisse. Of those companies, less than half would likely see a tax hike for 2023 since the legislation allows companies to use adjusted profits, which can be massaged in a number of ways, the analysis found.
“In general, the impacts could be somewhat minimal overall and, at this point, difficult to really understand,” Ron Graziano, accounting strategist at Credit Suisse, said in an interview. “Will some companies be more affected than others? Probably, yes. Overall impacts are not important for large companies.”
Senate Democrats passed the 51-50 bill on Aug. 7 without a single Republican “yes,” and Vice President Kamala Harris did not vote in a tie. The House approved it 220-207 on Friday; President Joe Biden is expected to sign it on Tuesday.
“This legislation will finally make the biggest corporations pay their fair share of taxes and, as our nation’s top economists have confirmed, it will reduce inflationary pressures in our economy,” the bill’s sponsor said. Rep. John Yarmuth, D-Ky., said after he passed the House.
House Minority Leader Kevin McCarthy, R-Calif., meanwhile accused Democrats on Twitter Friday of blocking a “700-page bill that raises your taxes and doubles the size of the IRS.” “.
“In 87 days, the Democrats will have only themselves to blame…” McCarthy said, referring to the upcoming midterm reviews in November.
Catherine Schultz, vice president of tax and tax policy at Business Roundtable, called the 15% minimum corporate tax “terrible policy.”
“What it’s really doing is picking winners and losers within the tax system,” Schultz said, and added that companies with the most equity compensation will suffer substantial effects.
“Companies aren’t stagnant, they’re dynamic, and they make different investment decisions every day,” Schultz said. The minimum tax “could affect how businesses determine how they will make certain investments in the future.”
“Companies may not be as willing to take some risk in their investment, if it looks like it might increase their tax bill,” Schultz said.
The National Association of Manufacturers “remains strongly opposed to the IRA,” President and CEO Jay Timmons said in a statement. statement. “It raises taxes on manufacturers in America, undermining our competitiveness as we face economic headwinds such as supply chain disruptions and the highest inflation rate in decades,” a- he declared.
Akash Chougule, lobbyist at Americans for Prosperity, founded by the Koch family, said “Americans are worse off” while some are “lining their pockets” and lawmakers claim victory. “At the end of the day, it’s the same old story – hundreds of billions of dollars in tax hikes and corporate welfare are being sold as the solution to our most pressing crisis,” he said. declared.
Neil Bradley, Executive Vice President and Chief Policy Officer of the United States Chamber of Commerce, says minimum tax would make America “poorer” and reduce “future economic growth”. He added that the 1% excise tax on stock buybacks will “distort the efficient movement of capital” and “diminish the value of Americans’ retirement savings.”
A volunteer holds a sign during a press conference on the climate crisis and the Cut Inflation Act at the US Capitol in Washington, DC on August 12, 2022.
Kevin Lamarque | Reuters
S&P 500 companies repurchased a record $881.7 billion of their own stock last year as record low interest rates pushed up corporate earnings and valuations. The practice, however, only benefits investors if the company reduces its outstanding shares, which increases earnings per share. Often, however, buyouts are used to increase executive compensation.
Analysts at the Washington-based Cowen Research Group disputed the industry’s claims, predicting the 1% excise tax won’t change redemption behavior.
Credit Suisse agrees that the tax is not high enough to influence capital deployment decisions – “particularly for companies with strong balance sheets and attractive valuations”.
Graziano said time will tell when it comes to the law’s overall impacts.
“Any tax is complicated. It’s a new type of tax based on adjusted financial income. It’s the first time it’s been done,” he said. “The way they play out could be very different than expected. It’s nothing new, it happens all the time with all the tax provisions.”
David French, senior vice president of government relations for the National Retail Federation, said that while raising taxes in a declining economy is a “concern”, a minimum tax is fairer and “better than raising tax rate”.
“Retailers are generally unaffected by the new corporate minimum tax proposal, as most retail businesses are already paying effective rates well above 15%,” French said in a statement to CNBC. .