Corporate earnings are at a 70-year high. Will the Inflation Reduction Law change that?


COVID-19. job losses; Market ups and downs. No matter. Corporate profits have been booming and there is no end in sight.

Case in point: new data released last week revealed another spike, with aggregate corporate profit margins improving to 15.5% in the second quarter from 14% in the first quarter. are now in its highest level since 1950. Similarly, after-tax gross corporate profits rose $175.2 billion in the second quarter and topped $3 trillion for the first time ever last quarter.

Will the party continue? Maybe. But maybe not if certain Democrats get their way.

In the face of inflation, companies have been adept at passing on rising labor and material costs (and then some) to consumers, but they could have a new factor to contend with soon in the recently signed Inflation Reduction Act (IRA). That is at least what many Democrats hope.

The new law includes a new minimum tax on corporations that have more than $1 billion in “accounting” profits, a measure of income reported on financial statements before things like tax credits and depreciation, and “this provision is one of many which is really going to help curb corporate speculation,” predicts Rakeen Mabud, chief economist at the left-leaning Groundwork Collaborative.

Adds Senate Finance Committee Chairman Ron Wyden (D-OR): “Large corporations posting record profits as families stretch their budgets will finally pay their fair share under the new minimum tax for billion-dollar businesses. “he told Yahoo Finance in a statement.

Just a first step?

The new rules take effect in 2023 and are projected to raise more than $200 billion over the next 10 years.

Democrats like Sen. Elizabeth Warren (D-MA) have long pushed plus direct taxes on corporate profits But the impact on IRA tax provisions appears to be a step in the right direction.

One idea behind the provision is that corporations will be more inclined toward business investments (and therefore less profit) if they face the prospect of paying larger taxes on those profits. “Companies that invest in their workers through higher wages and the like will see lower tax bills than they would be if they continue to reward wealthy shareholders,” says Wyden, who was the lead author of the bill.

Tax increases in some companies would, of course, also reduce profits directly, but a recent Bank of America note seemed to suggest the impact might be limited: just one percentage point on the S&P 500 company’s overall earnings, according to analysts at BOA.

The new law signed by President Biden on August 16 also includes a new 1% excise tax on share buybacks.

Mabud is a strong supporter of IRA tax provisions, but adds that “we really need a hands-on approach when it comes to fighting corporate profiteering, so a minimum tax is awesome and a first step, but it’s only a first. step. .” She points to more legislation, such as proposals for a windfall profits tax – as well as actions of regulatory and legal bodies.

Those Damn Oil Companies

Many profit-seeking Democrats say the oil business is the prime suspect when it comes to additional legislation.

It is clear why. According to Reuters, that ran the numbers, the top 5 energy producers posted record profits of nearly $60 billion in the second quarter. If you thought that would translate to more energy production, you’d be wrong. Investors were the real winners in the form of share buybacks and dividends.

The profit-taking by the industry, of course, comes only a few years after the same companies faced record losses when crude oil prices fell below zero. This year, energy companies have benefited from rapidly rising oil prices with their profit margins bolstered by an economic phenomenon known as asymmetric price transmission, or more colloquially, the idea that retail prices rise rapidly like a “rocket” but then they go down slowly like a feather.”

It has been developed as a textbook at the gas pump in 2022. Gas prices have been falling steadily for over two months now to catch up with crude oil prices that fell earlier. Biden and other Democrats have been quick to criticize the industry for the profits they have reaped in the meantime.

Will price increases continue?

Democratic lawmakers will almost certainly continue to press the issue in the coming months, including a Wyden proposal to go after oil profits directlybut few expect action on Capitol Hill before the midterm elections.

Meanwhile, the focus among corporate leaders seems to be on whether they will still be able to raise prices high enough to outpace inflation. How consumers will respond It’s been a hot topic for months.

collaborative grassroots work tracks hundreds of corporate earnings calls and has often portrayed CEOs not only as price gougers, but also as “showing off” their ability to raise prices faster than costs. The group recently highlighted calls from the Colgate-Palmolive Company (CL) boss Noel Wallace saying “we will continue to push prices”. H. B. Fuller (COMPLETE) The CEO said the company expected “considerable margin expansion” in the coming months.

WASHINGTON, DC - OCTOBER 26: (L-R) US Senators Elizabeth Warren (D-MA) and Ron Wyden (D-OR) talk to reporters about a corporate minimum tax plan at the US Capitol on October 26, 2021 in Washington, DC.  The senators detailed a plan that would impose a minimum 15% corporate tax on the declared income of large corporations and said it could help fund the Biden administration's social policy spending plan that Democrats are currently negotiating.  (Photo by Drew Angerer/Getty Images)

Senators Elizabeth Warren (D-MA) and Ron Wyden (D-OR) discuss a corporate minimum tax plan at the US Capitol in 2021. (Drew Angerer/Getty Images)MOREHIDE

Many economists have dismissed the idea that corporate speculation is a central factor in recent inflation, but it remains a focus for many Democrats. During an appearance on CNN’s State of the Union last Sunday while discussing inflation and monetary policy, Senator Warren made sure to take a moment to point out that “we still have these giant corporations that are involved in price gouging.” .

The question is: what more can the Democrats do about it?

Ben Werschkul is the Washington correspondent for Yahoo Finance.

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