By Nir Kaissar / Bloomberg Opinion
The Inflation Reduction Act, Democrats’ tax, climate and health-care bill that Congress passed last week and was signed by President Biden on Tuesday, calls for a 15 percent minimum tax on big corporations. Critics say the minimum tax will ultimately be a tax on everyone because companies will raise prices and squeeze wages to compensate for higher tax bills. Don’t count on it.
The minimum tax will apply to companies with at least $1 billion in profits, which essentially means big, publicly traded corporations. It also means anyone can look at companies’ publicly available financial statements to determine which will be affected and to what extent. So that’s what I did. Specifically, to approximate the way the bill works, I looked for companies with an average adjusted income before tax of $1 billion or more during their previous three fiscal years (the adjustment is intended to exclude unusual, nonrecurring items that aren’t likely to affect future profits).
Not surprisingly, I found that the minimum tax will affect a relatively small number of companies. I counted 368 companies with incomes that high, and of those, 127 paid taxes at a rate less than 15 percent last year. All but a handful are among the biggest 500 U.S. companies by market value, and most are household names, notably technology titans Apple and Microsoft, electric-car maker Tesla, pharmaceutical companies Eli Lilly and Pfizer, and private equity powerhouse Blackstone.
They can also all afford to pay more in taxes. Even after accounting for the shortfall — that is, the difference between the taxes they paid last year and what they would have owed applying a 15 percent minimum tax — the vast majority would still have made well more than $1 billion in profits last year, and the rest are not far behind. In fact, the median shortfall as a percentage of adjusted pretax income was just 6.6 percent across all companies last year. So the minimum tax doesn’t appear to be much of a burden.
Still, just because companies can absorb higher taxes doesn’t mean they will. And with many Americans struggling to afford basic necessities amid the highest inflation in four decades, now would be a particularly bad time for companies to raise prices or pinch wages. But history doesn’t support the notion that higher corporate taxes necessarily lead to higher prices or lower wages.
There has been no correlation between inflation and the rate at which companies pay taxes, based on available data back to 1947. Federal tax receipts from companies as a percentage of pretax income has persistently declined during the past seven decades to 9 percent from a high of 48 percent in the early 1950s despite varying inflation environments along the way, as measured by year-over-year changes in the consumer price index. (For stats aficionados, the correlation is a negative 0.07.) In fact, during most of the brief periods when the tax rate rose, inflation either remained low or declined.
Nor has there been any relationship between the tax rate and annual wage growth back to 1979 (correlation here is a negative 0.08). Real wages have risen just 0.2 percent a year during the past four decades, even as the tax rate declined to 9 percent from 23 percent over the same time. And here again, during the brief periods when the tax rate rose, wage growth was either flat or higher than usual. In one such period from 1982 to 1987, real wages grew by 1.1 percent a year, more than five times the long-term growth rate during the full period.
Even if companies were to raise prices to offset higher taxes, it’s not likely to have much impact on everyday goods and services people need most. Companies in the energy, real estate and consumer staples sectors, which includes food, clothing and personal products, account for only 14 percent of all companies with a shortfall last year; just 18 in total. The two notable exceptions are utilities and health care, which collectively account for a third of companies with a shortfall, but that’s still just a fraction of all U.S. companies.
Consider that the aggregate shortfall last year would have been roughly $50 billion. When added to the $280 billion companies paid the federal government last year, tax receipts as a percentage of income across all companies would have risen 1 percentage point to 10 percent from 9 percent. Not only is that unlikely to have a meaningful impact on prices or wages, it’s also a very modest increase, particularly when weighed against the energy and health-care benefits the minimum tax will help pay for.
The public must often rely on sharp-penciled policy wonks to measure the impact of government initiatives like the Inflation Reduction Act. But when it comes to the corporate minimum tax, the impact on companies is there for all to see, even if it’s barely noticeable.
Nir Kaissar is a Bloomberg Opinion columnist covering markets. He is the founder of Unison Advisors, an asset management firm.