The tax proposals in the recently enacted Inflation Reduction Act of 2022 are, overall, unfriendly to business and investing, and a couple of those are also ill-conceived, according to Wharton accounting professor Jennifer Blouin. “The tax components are all increases on the business sector, so I don’t think it’s necessarily good news for investment in the short term or potentially in the long run,” she said recently on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the full podcast above.)
Blouin picked on the proposal to levy a 1% excise tax on corporate share buybacks — she blamed legislators for misunderstanding why companies repurchase stock. “For the life of me, I fail to understand why Congress views stock buybacks or repurchases as a bad thing relative to a dividend, which in both cases are distribution of funds from corporations to the shareholders,” she said. “These distributions are made because the company is essentially saying, ‘Hey, we have this excess cash, and we don’t have a great thing to do with it, so we’re going to pass it back to our investors so that they can invest.’ For whatever reason, Congress thinks that stock buybacks are a bad thing and they’re going to impose this 1% excise tax.”
In some cases, share buybacks are efforts to maintain stock compensation for employees, but that is thankfully exempted from the new tax, Blouin said. “What [the excise tax] seems to really be attacking is distribution of excess funds.” She noted that the tax could cover a whole host of transactions, including redemptions in the case of SPACs (special purpose acquisition vehicles) and M&A activity. “All in all, I just don’t think it’s a terribly well-designed tax that will necessarily raise a lot of revenue because the firm could just pay a dividend instead.”
Blouin also faulted the Act’s proposal to levy a 15% minimum tax on corporations that report more than $1 billion in book profits or in their financial statements, which tend to be higher than what they declare as taxable income. “I do not think this is a good idea,” she said. “We’re introducing just an enormous amount of complexity into the system.”
“I fail to understand why Congress views stock buybacks or repurchases as a bad thing relative to a dividend, which in both cases are distribution of funds from corporations to the shareholders.” — Jennifer Blouin
Here again, she pointed to a conceptual misunderstanding of why corporations declare their book profits the way they do. “The earnings and the financial statements are something to reflect whether or not you should make an investment in this company; it’s not to reflect policies that we set by the government to help incentivize investment,” she said. Although the Act clarified that it would not penalize companies opting for bonus depreciation to claim tax deductions on their capital investments, it would end up hurting investment appetites, she warned.
“They certainly, in the long run, are trying to disincentivize companies [from putting] their best foot forward in their financial statements,” Blouin continued. As companies recast their financial statements around the new tax, they might “just put a whole lot more words in the body of the footnotes, which again makes it tougher for the average retail investor to wade through and understand what’s going on,” she added.
Bolstering the IRS
One feature of the Act that Blouin rated as “good news” was the $80 billion allocation to the Internal Revenue Service over 10 years to help it modernize its systems and to recruit more staff. She said that with the tax collection gap at about $441 billion, “our IRS should be provided the best tools to combat tax avoidance and lack of payment.”
Blouin was amused by a statement from Treasury secretary Janet Yellen that the IRS would not use the new funding to target taxpayers with income of less than $400,000 annually. “I can’t help but be a little bit tongue in cheek here … if a taxpayer isn’t reporting their income, then how do you know they have more than or less than $400,000? There’s a little bit of management of the public perception about where these enforcement dollars are going to go.” She said the shortfall in tax payments is primarily from small businesses run by self-employed individuals, and not from the corporate sector.