Al Root, Senior Writer at Barron's, joined Closing Bell to discuss the corporate tax hikes in the Inflation Reduction Act and what they could mean for the country's biggest companies.

Closing Bell

Inflation Reduction Act Includes Corporate Tax Hikes

Well the inflation reduction act is going to become law today in the sweeping bill passed along party lines includes corporate tax hikes that target the biggest US companies. So companies that make more than a billion dollars a year will have to pay a 15% minimum tax and 1% on stock buyback. While republicans and corporate America rail against these new rules, Wall Street analysts say that the impacts to the companies will be minimal. So joining me now is our root senior writer at Baron's Alice, good to see you, what kind of effects will this corporate tax hike have for the major players? It's good to see again, down on the stock exchange Kristin. And you know, so when you say it's a it's a small impact, it probably will between the buyback tax and the 15% minimum tax. The government plans to raise about 300 billion and that's over several years I think I'm not exactly sure how many years but you know CBO will score this. So you know, if you think in terms of total profits of the S. And P. 500 it's not that big a deal. But you know, to get joe Manchin in line, they did, you know, he was very clear that he wanted offsets to any spending. So that's you know, and that $300 billion in increased tax. Don't forget this bill contemplates 124 billion and increased I. R. S. Tax audit gains. So that means they're not just raising taxes, they're all coming for our tax loopholes as well. So what does this mean for the overall economy out for the average person looking at the economy right now wondering is it gonna get better? Is it gonna get worse? What does this mean for them? Well I'm going to be a little cynical. Right? So this is the inflation reduction act, right? I think I'd like a second career in naming legislation. Um You know I don't think it's gonna do much to reduce inflation right? You know how is it going to reduce inflation while there's money for like domestic energy exploration? Which is great and that's good. Um you know there's there's money, there's an electric vehicle purchase tax credits. You know that they've rejiggered. I'm not really sure how that does inflation. There's like $4 billion Western drought resiliency, not sure how that reduces inflation. So you know all in all this is like a $700 billion dollar bill uh and the spending is over several years and like that's like one years U. S. Defense budget. So if you are big if climate change is something core value to you uh electric vehicles, you know you're more interested in those, this helps you if you're sort of a regular consumer because you feel better about us policy regarding the climate, you know maybe your electric vehicle will be cheaper. Maybe that will speed the number of models that that come to you so you can choose your E. V. But beyond that um You know in terms of you know portfolio impacts from like higher tax rates or things like that. I think the impact is actually pretty small actually. I do want to go back um to what you mentioned about the name because I think that that is important too. And the biden administration now we know has gotten a lot of pushback says it wants to reduce inflation, but a lot of these bills have actually added to inflation. It's putting more money, more stimulus into the system. Is there a scenario that this so called inflation reduction act could actually increase inflation for consumers? So you know, it was interesting, I was talking to economists today um and he was saying that like you know, it's very difficult to, you know, we you know, this idea of you know, these trillions of dollars that the Federal reserve pumped into the economy over the past decade. Really unprecedented. Right? So it's difficult to know sort of the impact and what it's done on inflation and you know this, you know, these different theories of inflation, strictly speaking, this bill is supposed to increase revenue more than it increases spending. So the extent that you believe government deficits are inflationary, you know, this is like the realm of academics then you would say, Aha this bill will help but you know, what is what is national debt now is something in the range of 25 trillion? That's wrong. We have to Google it, you know this, this contemplates reducing that by 300 billion. So like sure it is a in that regard if the democrats want to stand up and say look we're being fiscally responsible, this will reduce inflation, they certainly will have their talking points. And then if republicans want to say like how does Western drought, resiliency impact inflation, they will certainly have their talking points. Um But you know, I'll be an optimist and I'll say that since it contemplates budget deficit reduction, it's a good thing. Okay so we'll take that, we'll take some good news alan certainly it is a big one for the biden administration. You had mentioned Mansion was a long holdout finally with the way that inflation has shaken shaken out here in the United States Mansion did eventually come around but also included in this is not just corporate taxes, corporate tax hikes, but taxes on buybacks as well. And we do know historically speaking stock buybacks do lead to higher stock prices because there is more demand and less shares actually outstanding. What effect could that have on the path forward for the stock market? Another comes uh professor, you know, used to tell me whatever you tax you get less of. So probably you will, you know it's 1% tacked. So you will probably get a little less buybacks. Companies will shift to dividends. Maybe they'll be So companies can do basically three things with their free cash flow, right? They can pay a dividend, they can buy back stock or they can invest in the future assuming that the economy is not growing any faster. You know, they can't just therefore, there's, you know, in aggregate for the S&P 500, there's there's no better investment. That means they would tilt maybe the dividends or tilt maybe to keeping more cash on their own balance sheet. That would be worse for stocks, you know, if they're just holding cash and not returning it to shareholders. But then then again, like the amount of impact you got to put in this 1% you know, we're talking about this, you know, the different revenues, like the 1% buyback feet, it's like the lowest revenue generator contemplated by Congress in the bill. Like the minimum minimum tax is a much bigger deal. So it definitely will have an impact. Again, I just think it'll be small. In fact, over the last three years, I think the russell 3000 have bought back $2.5 trillion of stock that would be like a $25 billion inflow to the government. Interesting. That is a helpful fact. But I know a lot of companies actually the start of the pandemic, they did get a lot of pushback right for buying back stock instead of shoring up their balance sheet and the pandemic hit And they were not in a good place. And of course we did see a lot of layoffs here just a little over two years ago. So perhaps that has something to do with this buyback tax, small tax, as you've noted in this actual bill. We are gonna be taking the bill live, the bill signing live for all of our viewers out quickly in 30 seconds before I have to let you go, what are some of the companies that this might impact most both the corporate tax hike and of course the buyback tax hike? Uh you put me on the spot there 30 seconds. So high free cash flow generators, consistent buyers of their own stock. Those are the big tech names will stick with the big tech name. You can always basically answer apple. It's like being in sunday school answering jesus apple is the answer to every question about a company in the S and P 500. Um so those are the companies that are impacted, you know, companies you know with complicated tax structures um like like maybe an amazon, you know, we all remember some of those stories from back in the day about amazon or maybe General Electric not paying cash taxes in the US, those could be impacted. Um It will be the thing about it is every time you do something, someone reacts. So you know, they want to make money from taxing buybacks, will, that will shift cash into other areas. So it's very difficult to say exactly who's affected, but just go with the big free cash flow producer. So that's the Microsoft apples googles of the world. And we do see technology names underperforming today. Al, in the wake of the signing of this very bill here in just about an hour or so, Al Ruud, Baron, senior writer. Al thank you as always.