The Inflation Reduction Act: Here's What You Should Know & How to Prepare
Have you heard about The Inflation Reduction Act? It has recently passed the House and the Senate, and was signed into law by President Biden. This bill will come into effect quickly, which is why it is an excellent opportunity to share a little bit about what this means and some things you can do to prepare for the Inflation Reduction Act.
Do you remember the Build Back Better Tax Plan?
Before we jump into this current tax bill, I want to give some context on whether this stems from a much larger Build Back Better Tax Plan that had been rolled out a long way back. The Inflation Reduction Act is radically different from what had been originally proposed. You might remember before; there was talk about raising the top tax bracket. There were also talks about capital gains and dividends being raised to those in the top tax bracket, removing the step-up in basis for inherited property, and setting a higher corporate tax rate. None of that has taken place in the Inflation Reduction Act.
What is coming in the Inflation Reduction Act?
Essentially, this bill is designed to keep incentivizing green energy initiatives. The total spend is significantly less than the original 2.2 trillion. The new bill includes some spending today, along with increased taxes that they hope will offset the spending moving forward.
As far as what it entails, there are key components to the individual. The first is on the spending side of it and as it relates to clean energy, such as receiving credits for solar. The second is a rebate for vehicles. For new electric vehicles, a $7,500 rebate has been extended. Affordable Care Act (ACA) Premium subsidies have also been extended. Lastly, the plan includes investing $80 billion into the IRS to help enforce taxation. As you may know, the IRS has been very understaffed for the last couple of years. What they're trying to accomplish here is spending a little more to ramp that up so that additional enforcement is in place.
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As far as taxation, they're hoping to make up for this spending on the corporate tax side of the equation. First off, there is a 15% corporate minimum corporate tax on companies that meet specific thresholds, almost similar to an AMT tax on individuals. Additionally, the most significant tax is on stock buyback at a tax rate of 1%. On the surface, this could have a considerable impact on your portfolio. However, this will not necessarily directly impact your personal taxes, and companies may likely consider dividends as opposed to buybacks if they fit into the company's long-term strategies.
How Changes to Corporate Taxes May Impact Investors
Companies will use stock buybacks as a way to return value to their shareholders. As you might imagine, that can have an impact on the stock market and your portfolio. Of course, this is optional, and generally speaking, there are two ways that companies can offer value back to their shareholders. One is buybacks, but the other is through dividends. Although this is a big part of the Inflation Reduction Act, at the end of the day, these companies likely are going to pivot. So, some companies may consider paying their shareholders a higher dividend than ongoing buybacks. This, of course, is a big decision on the company's side and will not happen in every case. Generally, when a company implements a dividend, they want to stick to it because if they start reducing their dividends in the future, the market may see this as a sign of challenges and create a negative impact on their stock price. Ideally, this shift from buybacks to dividends creates a similar effect to providing value back to the shareholder.
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Will The Inflation Reduction Act Actually Reduce Inflation?
With the word inflation in the title of this new bill, you might wonder whether this will reduce inflation. I don't believe that this particular bill will have much of an impact on inflation in the grand scheme of things. The general consensus is that there may not be a significant impact on inflation. If there is, it will take some time for these changes to carry through and impact the inflation rate. From my perspective, in this bill, we are spending early and then taxing later. So, based on changes that were rolled out, I think corporations will pivot a little bit and maybe not see these taxes directly at the end of the day. Plus, with early spending and later taxation, even if these changes help to tame inflation, it will create a very delayed fuse. The concept that taxes can reduce inflation is often misunderstood. Generally, a tax is applied only for those dollars to be spent elsewhere. The money does not simply go away but rather is transferred to another program or subsidy. Due to this, higher taxes typically do not impact inflation as the money supply remains the same.
We hope this clarifies the impacts, or lack thereof, of the Inflation Reduction Act on you as an individual. You will likely hear politicians suggesting this is either the best bill for the economy or the worst policy possible, depending on which side of the aisle they are on. In our view, this is mostly political theater, and in the bigger picture, the impacts on individuals are quite minimal. As always, if you have any questions about how this may affect you specifically, please reach out to our team below.