Up to $200B tax increase on US corporations - Inflation Reduction Act

By Jeffrey Cohen, Investment Advisor Representative, Illinois
​US Advanced Computing Infrastructure, Inc.

We saw a few articles today about Q4 earnings. People say they will be disappointing. People are worried that companies are not earning as much now as they did a year or two ago.

Well, we have a different explanation for this concern over earnings.

This has the potential to be a very long BLOGpost or a formal article, so we will just 'cut to the chase' and share our methodology and high level findings very casually. We look for time to write this up more formally.

1. We read the law. Here is the text of H.R. 5376, and we attach the file below. I think it says that any firm that has $100M in profit on average over the past three years has to pay it (tax is on net income, as stated in financial statements, not tax accounting). It also applies to any company that earns $1B in any one year. It excludes sole proprietorships, REITS and other specialty investment firms.

2. We run our model and as part of it we produce a spreadsheet. It lists all firms that pass our data validation, and includes the firm's net income for the past year. One key data validation is that they are actively traded and another was they had to have an equity market capitalization of $100M or more. They also have to be US listed stocks, and we manually remove non-US companies that are US listed. Could be errors in the data provided by our premium market data services provider, and could be firms with positive net income > $100M that are worth less than $100M or don't trade very often. It also completely excludes privately held firms.

3. We removed stocks that have errors in their net income. We produce a value of '999,999,999' and then delete it. In total, there are 1,100 high liquid stocks that have $100M or more in net income this past year.

4. We sum (like in excel) the total net income of all the stocks with net income this year of $100M or more. The total earnings is $2.05 Trillion US Dollars.  The total is huge, and I am surprised by the net income of US corporations. If the Q3 2022 US GDP is $25,723 Billion US Dollars (Source: FRED GDP here), then 8% of our US GDP is earned by large US corporations, and that amount will now be taxed with an AMT of 15%. 

5. The Alternative Minimum Tax casts a wide net. Large, publicly traded US Corporations that are headquartered in the US report a net income of $2.05T, or 8% of our $25.7T economy. That seems reasonable. Their minimum tax will be $300B in 2023. We don't know how much they pay currently, so the incremental amount is up to $300B

6. Now, what did we miss with the $300B / year estimate?
a. Any companies that are owned by multinational corporations. The law could be read to reach in and take 15% of all of their global income, but let's assume it is 15% of the total net income (absent transfer pricing shenanigans), of the US business.
b. Any privately held business with $100M of net income or more.

A simple estimate of foreign owned firms (e.g., Honda, Samsung) and privately held businesses (Maritz, Cargill, and private equity owned firms) could add ~30% (+/- 50%) to this total. So, we add 30% to the $300B estimate and we hit $390B in potential corporate tax raised.

Finally, we know how much money the US Federal Government collects in Current Tax Receipts on Corporate Income. That amount is $340.6B per year. Source: FRED Taxes on corporate income, series B075RC1Q027SBEA found here.

So, we know that current taxes are $340.6B and AMT taxes will be $390B.

How to calculate the 'extra' tax revenue raised by the AMT?

This is where it gets complicated. What do we know vs. what have we heard as rumors?

Fact: 

• Firms are currently paying $340.6B in corporate taxes

Rumor:

• Some firms pay corporate tax < 15% of reported net income
• Some firms use transfer pricing to reduce their tax liabilities (only taxing the US portion of earnings)
• Some firms pay more than 15% of reported net income
• Some firms artificially increase their net income reporting, or manage those earnings, to boost equity market capitalization
• Some firms work to maximize their reported net income

Intuitive Sense:

• Some firms may work to lower their net income without reducing the value of their business.
• There will be firms that have not paid the 15% of net income, so there will be new corporate tax revenue raised.

So, by way of an intuitive guess, I would say that firms will take a harder look at their net income reported by their business, and this could overall reduce net income reported by US corporation, although that amount of reduction may not be significant.

Finally, we SWAG that the revenue raised by this Corporate AMT will be $200B / year in 2023, and is highly dependent on the top 50 most profitable corporations. If they take tax avoidance action, then the funds raised may be significantly lower.

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We published this article on Medium.
​https://medium.com/@chicagoquantum/up-to-200b-tax-increase-on-us-corporations-inflation-reduction-act-4f67d01d6514