On Tuesday, U.S. President Joe Biden finally signed his sweeping tax, health, and climate bill into law. It is assumed that the new law will reduce the rate of inflation, increase support for citizens with incomes below $400,000, reduce drug and fuel prices for the population.
“With this law, the American people won, and the special interests lost,” Biden said in remarks before he signed the bill.
But are the measures taken sufficient to truly support the economy in difficult market conditions? Let’s find out!
Biden signs sweeping climate, health care, tax bill into law
The new law includes a $369 billion investment in climate and energy policies, $64 billion to extend a policy under the Affordable Care Act to reduce health insurance costs, and a 15% corporate minimum tax aimed at companies that earn more than $1 billion a year.
The $437 billion spending package is expected to raise $737 billion in revenue over the next decade, the biggest share coming from reductions in drug prices for Medicare recipients and tax hikes on corporations. Roughly $124 billion is expected to come from increased IRS enforcement, meaning tougher and more frequent audits for the wealthy. It’s projected to reduce the deficit by more than $300 billion over a decade.
Nevertheless, to get a deal done, Biden had to give up some of his favorite pieces of his original bill, including universal child care and tax cuts for the middle class.
From this, we can conclude that the new law is not aimed at supporting low-income Americans, but at increasing the tax costs of the rich and corporations.
Time will tell how effective this will be in fighting inflation.
How the new law could affect the financial markets
The markets reacted relatively calmly to Joe Biden’s signing of the law. Major stock indices like the Dow Jones, Nasdaq and SP500 remain stable on Wednesday, August 17. They showed only a slight decline of a few points at the beginning of the trading session.
Nevertheless, experts predict a significant impact of the new law on the markets. After all, the updated requirements primarily affect large corporations and investors with incomes above $400,000 a year. However, the effect may not come until 1-2 years from now.
So, companies that make more than $1 billion a year will now have to pay a minimum tax rate of 15% as well as 1% on stock buybacks. Those tax reforms, aimed mostly at the largest U.S. corporations like Google parent Alphabet, JPMorgan Chase and Facebook parent company Meta, will reduce the federal deficit by an estimated $300 billion over the next decade.
Just over 170 companies in the S&P 500 paid less than 15% in taxes last year, according to a new analysis by Credit Suisse. Of those corporations, less than half would likely see a tax hike in 2023 since the legislation allows companies to use adjusted earnings, which can be massaged in a number of ways, the analysis found.
While the new taxes ”are not generally positive for stocks,” a corporate minimum tax of 15% would be “significant” for only 40-50% of corporations in the top 100 indices.
“This legislation will finally make the biggest corporations start paying their fair share in taxes, and — as our nation’s top economists have confirmed — it will reduce inflationary pressures in our economy,” bill sponsor Rep. John Yarmuth, D-Ky., said after it passed the House.
This move is one of the tools to fight inflation in the United States. After all, additional taxation of corporations will raise billions of dollars in the budget and distribute them to fight rising energy prices, raise social standards and support the macroeconomy in the face of a rising Fed rate.
Summary
- President Biden is scheduled to sign the legislation into law Tuesday afternoon.
- Corporate business advocates have railed against the 15% corporate minimum tax in the Inflation Reduction Act.
- The 1% excise tax proposed on stock buybacks will not be enough to discourage companies from the practice, analysts added.
- This move is one of the tools to fight inflation in the United States.
