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

COVID-19. Job Losses; Market ups and downs. No matter. Corporate profits have been booming and there’s 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. They are now at their highest level since 1950. Gross corporate profits after tax, likewise, jumped by $175.2 billion in the second quarter and topped $3 trillion for the first time in history last quarter.

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

In the face of inflation, companies have been adept at passing along rising labor and material costs (and then some) to consumers, but 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 over $1 billion in the “book” profits – a measure of income reported on financial statements before things like tax credits and depreciations – and “this provision is one of many that’s really going to help curb corporate profiteering,” predicts Rakeen Mabud, the chief economist at the left-leaning Groundwork Collaborative.

Adds Senate Finance Committee chairman Ron Wyden (D-OR): “Big corporations posting record profits when families are stretching their budgets are finally going to pay their fair share under the new minimum tax for billion-dollar companies,” he told Yahoo Finance in a statement.

Only a First Step?

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

Democrats like Sen. Elizabeth Warren (D-MA) has long pushed for more direct taxes on corporate profits But impact on the IRA’s tax provisions seems to be a step in the right direction.

One idea behind the provision is that corporations will be more inclined towards business investments (and thus less profit) if they face the chance of bigger tax bills on those earnings. “Companies that invest in their workers through higher wages and the like will see lower tax bills than they otherwise would if they continue to reward wealthy shareholders,” says Wyden, who was the main author of the bill.

The tax increases on some companies would also of course cut into profits directly but a recent note from Bank of America seemed to suggest the impact could be limited— just a 1 percentage point hit to overall S&P 500 company earnings, according to BOA analysts.

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

Mabud is a strong supporter of the IRA’s tax provisions, but adds “we need really an all-hands-on-deck approach when it comes to fighting corporate profiteering so a minimum tax is amazing and a first step, but it’s only a first step .” She points towards further legislation – such as proposals for a windfall profits tax – as well as actions from regulatory and legal agencies.

Those Darn Oil Companies

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

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

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

It has played out in textbook fashion at the gas pump in 2022. Gas prices have been dropping steadily for over two months now to catch up with crude oil prices that dropped earlier. Biden and other Democrats have been quick to criticize the industry for the profits they have reaped in that interim.

Will the Price Hikes Continue?

Democratic lawmakers are all but certain to continue to press on the issue in the months ahead including a Wyden proposal to go after oil profits directlybut few expect action on Capitol Hill ahead of the midterm elections.

In the meantime, the focus among corporate leaders seems to be whether they will continue to be able to raise prices enough to outpace inflation. How consumers will respond has been a hot topic for months now.

The Groundwork Collaborative tracks hundreds of corporate earnings calls and often has described the CEOs as not just price gouging, but also “bragging” about their ability to raise prices faster than costs. The group recently highlighted calls from Colgate-Palmolive Company (CL) head Noel Wallace saying “we will continue to be pushing pricing.” HB Fuller’s (FUL) CEO said the company expected “sizable margin expansion” in the months ahead.

Sens. 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)

Many economists have discounted the idea that corporate profiteering is a central driver of recent inflation, but it nevertheless remains a focus for many Democrats. During an appearance on CNN’s State of the Union last Sunday while discussing inflation and monetary policy, Sen. Warren made sure to take a moment to note “we still have these giant corporations that are engaging in price gouging.”

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

Ben Werschkul is a Washington correspondent for Yahoo Finance.

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