The impact of the Inflation Reduction Act on US stocks

Table of Contents

Introduction

The goal of this act

In order to reduce the impact of inflation on the US economy, raise more taxes to fight inflation. U.S. President Joe Biden sign a $430 billion “Inflation Reduction Act” on August 16, 2022.

The detail

Over the next 10 years, the bill is estimated to raise tax dollars from:

Prescription drug price reform to lower prices, including Medicare drug price negotiations for some drugs (from 10 by 2026 to more than 20 by 2029) and kickbacks for price-gouging drugmakers: $281 billion
An optional corporate minimum tax rate of 15% on companies with annual financial statement revenues in excess of $1 billion: $222 billion
Strengthen tax enforcement: $181 billion
1% excise tax on share buybacks: $74 billion
Excess business loss limit extended for 2 years – $53 billion

Use the funds collected above for the following scopes:

Addressing energy security and climate change: $391 billion
Deficit reduction: $238 billion
Affordable Care Act subsidy expansion continues for three years, originally expanded under the 2021 American Rescue Plan Act: $64 billion
Additional funding to modernize the IRS and strengthen tax enforcement: $80 billion

The impact on politics

As far as the United States is concerned, the bill proposed by the ruling Democratic Party is not the consensus of the whole people in the United States. The positive and negative opinions in the society are evenly divided, and no consensus has been formed. In the Senate, the vote was tied with 50 votes to 50 votes. In the end, the speaker and vice president He Jinli voted for it to pass.

Not only that, the passage of this bill has also raised the tension in the relationship between the United States and the European Union. French President Macron also personally went to Washington to express his opposition to US President Joe Biden; the main reason is that many companies will cancel their original investment in the EU and move their investment to United States.

The impact to US stock market

Impact regardless of industry

IRS

This bill will inject $80 billion to the Internal Revenue Service (IRS) to strengthen the IRS’s collection capacity and efficiency. In other words, it would strengthen the IRS’ ability to collect taxes, including, of course, personal income taxes.

A total of $124 billion could be brought to the United States over the next decade.

Corp. tax

The bill will propose a minimum corporate tax (Corporate Alternative Minimum Tax). Firstly, it proposes to levy 15% on large enterprises whose book profits exceed US$1 billion on average in three years, but through tax deductions and incentives, the real tax rate is lower than 21%. % minimum corporate tax.

It is estimated that there should be no more than 150 global companies affected by the 15% minimum corporate tax.

It is expected to bring more than $220 billion in tax revenue to the United States in the next ten years.

Repurchase

Since 1982, buying from corporate treasury stocks has clearly been a major contributor to the years of strength in U.S. stocks. Corporate treasury stocks hit a record $1 trillion in 2019, according to SEC data. According to Standard & Poor’s statistics, the total stock repurchase of S&P listed companies in the first three quarters of 2022 is about 281 billion, 210 billion US dollars, and 210 billion US dollars is about 10% lower than the same period last year.

A new tax regime of 1% on corporate treasury shares will come into effect in January 2023. Wall Street and the business community are mostly opposed to this sudden new fee. On the books, it will actually increase the cost of stock repurchases for companies and investors; but in practice, it is almost impossible to change the treasury stock policy implemented by the company. Because companies that implement treasury stocks are very long-term plans, the long-term impact is still not great. In fact, it will only reduce the earnings per share by 1% to 1.5% at most, and most of the companies that implement treasury stocks are large listed companies, which have the ability to minimize the impact.

This portion is expected to provide US tax revenues of $74 billion over a decade.

Impact to the industry

Clean energy, utilities, electric vehicles

$270 billion in legal climate action investments is brought under the federal tax code. The law extended the solar investment tax credit for 10 years and invested $30 billion in nuclear power as part of a total of $158 billion in clean energy investments.

It is also investing $13 billion in electric vehicle incentives, $14 billion in home energy efficiency upgrades, $22 billion in home energy supply improvements, and $37 billion in advanced manufacturing. $20 billion for climate-smart agriculture investments, more than $5 billion for modifying remediation program loans affected by USDA’s discriminatory effects, $5 billion for forest conservation and urban heat island reduction, and nearly $3 billion for Protection of coastal habitats.

One of the most typical corporate responses is Tesla.

Tesla therefore suspended its plan to produce electric car batteries in Germany, as it considered obtaining tax credits for the production of electric cars and batteries in the United States. Tesla directly shipped the battery production equipment from the Berlin plant in Germany back to the United States.

Manufacturing batteries in the United States could help Tesla qualify for tax credits in the inflation-cutting bill. If Tesla manufactures and assembles electric car batteries in the United States, the bill’s tax breaks will help offset more than one-third of the cost of electric car battery packs, and the bill will also provide new benefits for electric car buyers as long as the batteries meet procurement regulations. Tax incentive of $7,500 available.

Pharmaceuticals, biotechnology

The Reducing Inflation Act would allow the government’s health care program to directly negotiate the price of some drugs starting in 2026. At the same time, the pharmaceutical industry is also battling upward cost pressures from inflation and supply chain constraints.

The law also includes provisions limiting insulin costs to $35 a month and out-of-pocket drug costs for Medicare patients to $2,000.

Big U.S. drugmakers plan to increase the prices of more than 350 unique drugs sold in the U.S. starting in early January 2023, according to data analyzed by healthcare research firm 3 Axis Advisors.

According to data released by “46brooklyn”, pharmaceutical companies will increase the price of more than 1,400 drugs in 2022, setting a record since 2015. Drug prices rose a median of 4.9 percent from last year, compared with a mean of 6.4 percent.

Inflation Reduction Act — credit: edercasella.com

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