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

COVID-19 Job Losses; Market Ups And Downs It Doesn’t Matter Corporate Profits Have Soared And There Is No End In Sight[FEMININEPertesd’emploi ;LeshautsetlesbasdumarchéPeuimporteLesbénéficesdesentreprisesontexploséetiln’yapasdefinenvue

Example: New Data released last week revealed another spike, with overall 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. Similarly, gross after-tax corporate profits jumped $175.2 billion in the second quarter and topped $3 trillion for the first time in history. in the last trimester.

Will the party continue? Maybe. But maybe not if some Democrats are successful.

In the face of inflation, businesses have been able to pass on rising labor and material costs (and more) to consumers, but may soon have a new factor to contend with in the Food Reduction Act. Inflation (IRA) recently signed. At least that’s what many Democrats hope.

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

Senate Finance Committee Chairman Ron Wyden (D-OR) adds, “Big corporations that post record profits as families stretch their budgets will finally pay their fair share under the new minimum corporate tax. billion,” he told Yahoo Finance in a statement.

Only a first step?

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

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

One idea behind the provision is that corporations will be more inclined to business investment (and therefore less profit) if they face the possibility of having higher tax bills on that income. “Companies that invest in their workers through higher wages and the like will see their tax bills go down if they continue to reward wealthy shareholders,” said Wyden, who was the lead author of the bill.

Tax increases on some companies would also directly reduce profits, but a recent note from Bank of America seems to suggest the impact could be limited – just 1 percentage point on overall profits for S&P 500 companies, analysts say. of the BOA.

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

Mabud is a strong supporter of IRA tax provisions, but adds “we really need a holistic approach when it comes to tackling corporate profits, so a minimum tax is amazing and a first step, but this is only a first step.” It points to other legislation – such as proposals for exceptional profits tax – as well as the actions of regulatory and judicial agencies.

Those damn oil companies

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

It’s clear why. According to Reuters, which ran the numbers, the top 5 energy producers made record profits of nearly $60 billion in the second quarter. If you thought this would result in more energy output, 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 just a few years after the same companies suffered 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 of ​​retail prices rising rapidly as a “rocket” but then slowly drop like a feather.”

It ran like a textbook at the gas pump in 2022. Gasoline prices down steadily for more than 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 made in the interim.

Will price increases continue?

Democratic lawmakers are almost certain to continue pushing the issue in the coming months, including a Wyden proposal to directly attack oil profitsbut few expect action on Capitol Hill before the midterm elections.

In the meantime, business leaders seem to be focused on their ability to keep raising prices enough to outpace inflation. How consumers will react has been a hot topic for months now.

Field collaboration tracks hundreds of business results calls and often described CEOs as not only price-gouging, but also “boastful” about their ability to raise prices faster than costs. The group recently highlighted calls from Colgate-Palmolive Company (CL) chief Noel Wallace, saying “we will continue to push prices.” HB Fuller (FUL) CEO said the company expects “significant margin increases” in the coming months.

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

Many economists have dismissed the idea that corporate profit is a central driver of recent inflation, but it remains a priority for many Democrats nonetheless. During an appearance on CNN’s State of the Union last Sunday as he discussed inflation and monetary policy, Senator Warren made sure to take a moment to note “we still have these giant corporations that engage in price gouging”.

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

Ben Werschkul is a Washington correspondent for Yahoo Finance.

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, instagram, Flipboard, LinkedIn, Youtubeand reddit.