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What the Inflation Reduction Act means for Wall Street and corporate profitability

Yahoo Finance's Rick Newman breaks down the tax provisions in the Democrats' climate and economic bill and what the bill passing could mean for markets.

Video Transcript

BRIAN CHEUNG: The Inflation Reduction Act, we've already discussed, it might, it might not reduce inflation in the long run.

RICK NEWMAN: No, we can just say it won't.

BRIAN CHEUNG: OK, well, I mean, we got that out of the way. How do you pay for it, right? Because the idea here is that 15% corporate minimum tax is also getting a lot of attention. And also, that 1% excise tax on buybacks also getting an amendment over the weekend.

RICK NEWMAN: Right, so let's put those two together because there have been-- taxes have been in, taxes have been out. So how much is this tax increase we're talking about anyway?

So when you add it up, it looks like it's about $42, $43 billion in new business taxes per year. I like to do it on a per year basis instead of for 10 years, because what do we-- what does it add up to every year for comparison. So about $43 billion in new business taxes per year.

Had Congress raised the corporate tax rate from 21% to 28%, which is what President Biden wanted, that would have been about $75 billion per year. So it's less than that. And if Congress had raised the corporate tax rate only to 25% that would have been about $50 billion. So it's less than that as well. This is not that big of a tax hit for the companies that will be paying.

BRIAN CHEUNG: Well, and I feel like this is an important conversation, because we've talked a lot about, you know, the drug pricing and maybe that's gonna be something that consumers will face. And we've talked about the inflationary components of it.

But again, with regards to the stock market, a lot of people might be wondering, OK, is this going to marginally increase the amount that companies are paying? Which as you've pointed out is a bit of a complicated picture because there's tax credits that are involved. So like net-net, do you think that this bill does a lot to move the needle on how much corporations are paying in tax right now?

RICK NEWMAN: Not much. And let's go-- let's talk about that global-- or that, it's not the global, sorry.

BRIAN CHEUNG: Right, it's separate.

RICK NEWMAN: It's the minimum book tax of 15%. Totally separate from what a global minimum would be, which we don't have yet.

BRIAN CHEUNG: And you all are still negotiating.

RICK NEWMAN: So another way to describe that is as a corporate alternative minimum tax. And tax experts really don't like a minimum book tax, because what this does is it just negates tax benefits that are already on the books. So in the tax code, there are incentives for US companies to invest here in the United States, to purchase equipment and things like that. That's the R&D tax credit, other tax credits.

And Congress is not taking those away, they're just saying, if you claim too much of these tax credits, we're gonna say, you're not gonna get all that benefit. We're gonna impose this other minimum. So you're imposing a new tax that negates tax credits that are already there.

I mean, it's sloppy. It's over-- it's overcomplicated. It's not clean. There was a corporate alternative minimum tax in the 1980s for a few years. Congress abolished it because it was inefficient, it was hard to enforce. And it's not hard to imagine that would happen again that we have this minimum book tax for a while and just turns out to be not that effective.

BRIAN CHEUNG: I mean, at the same time, though, do you feel like corporations are irked enough about this where they would try to, you know, get the lobbying effort on Capitol Hill to maybe get the House, which is gonna be handling this next to stop it? I mean, you know, you might look at the details, a 1% excise tax on stock buybacks, that's a huge story for corporates through the post-pandemic period to kind of boost the stock price again. You don't really hear that-- I'm not hearing a lot of companies coming out here and trying to hold this bill, though.

RICK NEWMAN: There's a reason for that. Because I think they can't say this outright, but I think the business lobby is breathing a sigh of relief because this could have been a lot worse. This is-- this is it. This is pretty much the maximum increase in business taxes we're gonna get under the first term, at least, of the Joe Biden administration, because it's extremely likely Republicans are going to take control of the House in the midterm elections. So Democrats won't be able to-- probably won't be able to pass any more tax increases.

So this is really not that bad. And if you don't believe me, look what stock market's doing. I mean, where is the big dip on, oh my God, this is gonna be a huge hit to corporate profits? There is none. There has been almost no reaction in the markets that you can actually attribute to concerns that this is going to affect corporate profitability.

I think what most people think is going to happen with the buyback tax is companies are just going to shift the dividends. You know, there are two ways to give money back to shareholders, either through stock buybacks or through dividend increases. And we're just going to see dividend hikes.

BRIAN CHEUNG: Yeah, and we just showed that chart earlier from S&P showing just how much buybacks have been used. Look at that, the blue line, right, compared to the purple line of dividends. Of course, dividends will--

RICK NEWMAN: That's what-- that blue line is gonna come down. And the purple line is gonna go up.

BRIAN CHEUNG: Well, its-- dividends are more of a recurring revenue stream, though, so maybe fewer companies will be able to do that. But yes, that point certainly sailing. Yahoo Finance's Rick Newman, thanks so much.

RICK NEWMAN: Thanks, Brian.

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