Corporate profits are at their highest level in 70 years. Will the Inflation Reduction Act change that?

COVID-19. job loss; Market rise and fall. Did not matter. Corporate profits have been booming and there is no end in sight.

Example: new data Released last week He revealed another rise, as corporate gross profit margins improved to 15.5% in the second quarter from 14% in the first quarter. They are now in its highest level since 1950. Similarly, total corporate profits after tax jumped by $175.2 billion in the second quarter and crossed $3 trillion for the first time in history in the last quarter.

Will the party continue? Can. But maybe not if some Democrats have their way.

In the face of inflation, companies have been adept at passing on increased labor and material costs (and some after that) to consumers, but they could have a new factor to be confronted soon in the Recently signed Inflation Reduction Act (IRA). That’s at least what many Democrats hope.

The new law includes a new minimum tax for corporations with more than $1 billion in “written” profit — a measure of income reported in financial statements before things like tax credits and depreciation — and “this provision is one of many helping reduce Corporate earnings,” predicts Rakin Mabod, chief economist at the left-leaning Groundwork Collaborative.

Ron Wyden, Chairman of the Senate Finance Committee (D-OR), adds: “Big companies that are posting record profits when families expand their budgets will finally pay their fair share under the new minimum tax for billion-dollar companies,” he told Yahoo Finance at a permit.

Just the first step?

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

Democrats such as Senator Elizabeth Warren (D-Mass.) have long lobbied More direct taxes on corporate profits But the impact on the IRA’s tax provisions appears to be a step in the right direction.

One of the ideas behind this ruling is that companies will be more inclined towards business investments (and thus lower profit) if they face a chance of larger tax bills on those profits. “Companies that invest in their workers through higher wages and the like will see lower tax bills than they would if they continued to reward wealthy shareholders,” says Wyden, who was the lead author of the bill.

Also, tax increases on some companies will, of course, lead to a direct reduction in profits, but a A recent note from Bank of America It appears to indicate that the impact could be limited — just one percentage point hit the S&P 500’s total earnings, according to BOA analysts.

The new law signed by President Biden on August 16 includes a new 1% selective tax on stock buybacks.

Mabod is a strong supporter of tax provisions in the IRA, but adds, “We really need a comprehensive approach when it comes to fighting corporate profits, so the minimum tax is amazing and a first step, but it’s just a first step.” proposals for windfall profit tax – As well as actions of regulatory and legal bodies.

Those darn oil companies

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

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

Of course, industry profit taking comes a few years after the same companies I faced record losses When crude oil prices fell below zero. This year, energy companies have benefited from the rapid rise in oil prices with their profit margins lining an economic phenomenon known as uneven price transmission — or more generally the idea that retail prices rise as fast as a “rocket” but then fall slowly like a feather.

It has been run in a gas pump textbook manner in 2022. Gas prices Decreased steadily for more than two months Now to catch up with crude oil prices that fell earlier. It was Biden and other Democrats quick to criticize industry for the profits they earned during that period.

Will prices continue to rise?

Democratic lawmakers are sure to continue to press on this issue in the coming months including Wyden’s suggestion to follow oil profits directlybut few people expect action on Capitol Hill before the midterm elections.

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

Cooperative basis Tracks hundreds of corporate earnings calls CEOs have often described not just price gouging, but also “bragging” about their ability to raise prices faster than costs. The group recently highlighted calls from Colgate-Palmolive (CL) President Noel Wallace said, “We will continue to pay prices.” H.B. Fuller (Full) The company’s CEO said the company expects “significant marginal expansion” in the coming months.

WASHINGTON, DC - OCTOBER 26: (LR) U.S. Senators Elizabeth Warren (D-Mass.) and Ron Wyden (D-OR) speak to reporters about a minimum corporate tax plan at the U.S. Capitol on October 26, 2021 in Washington, DC.  Senators have detailed a plan that would impose a minimum corporate tax of 15% on reported income for large corporations and say 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-Mass.) and Ron Wyden (Dim-Or) discuss a minimum corporate tax plan at the US Capitol in 2021 (Drew Angerer/Getty Images)

Many economists have dismissed the idea that corporate profit is the main driver of recent inflation, but it nonetheless remains the focus of many Democrats. Appearing at CNN’s State of the Union last Sunday while discussing inflation and monetary policy, Senator Warren made sure to take the time to point out “we still have these giant corporations engaging in price gouging.”

The question is: What more can Democrats do about it?

Ben Wershkull is the Yahoo Finance correspondent in Washington.

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