Washington is raising the tax burden on businesses, but the stock market doesn’t seem concerned, and for good reason. While individual companies will be affected, these measures have little impact on total corporate earnings.
The inflation relief bill, passed by the Senate on Sunday and awaiting approval from the House of Representatives, provides for a minimum tax rate of 15 percent for companies with an average adjusted operating profit of at least $1 billion over the past three years. It also includes a 1% tax on share buybacks.
The new minimum tax rate might sound scary, but it’s not. According to Citigroup C +1.20%, most companies in the S&P 500 SPX -0.42% have average operating income sufficient to pay a 15% tax, but all but about 50 of these companies have paid effectively a flat rate of 15% or more.
These 50 companies recently contributed about 15% to the S&P 500’s total earnings per share. Citi estimates a 15% tax would save about 0.4% of the index’s total earnings per share.
The buyback tax won’t be a big burden either. In 2021, S&P 500 companies repurchased roughly $620 billion more shares than they issued — a number that matters because, other things being equal, fewer shares outstanding increase earnings per share.
A 1% tax was imposed on this net buyback, totaling $6.2 billion. That was 0.35% of the index’s total revenue of $1.76 trillion last year.
Despite all the talk of raising corporate taxes in recent years, the new tax policy appears to be a piece of cake for the market so far. Christopher Harvey, chief U.S. equity strategist at Wells Fargo WFC, wrote: “Given the relatively small scope of the new tax … we don’t think the impact on the market will be significant.”
The market agrees. The S&P 500 was down less than 1% for the week even though the bill passed the Senate and could be approved in the House. Market participants will be more concerned about whether the recent rally in stocks will reverse when inflation data for July is released on Wednesday. Rapid CPI growth will fuel expectations that the Fed will continue to accelerate rate hikes to keep prices in check.
That’s the broader market, but investors in individual companies should still be aware of the new tax policy. Individual companies, especially select companies in the utilities and technology sectors, will be hit quite hard.
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