Corporate Tax Payments Plunge 25% Even as Profits Boom

Happy Monday! Congress is back in session this week, but the economic focus will be on the Federal Reserve, which is poised to raise interest rates on Wednesday. At least that's what investors expect, even though the Fed tends to shy away from making moves just before elections.

Here's what we're watching while waiting for the Fed's decision.

Corporate Tax Payments Plunge 25% Even as Profits Boom

Corporate profits may be soaring to new highs, but corporate tax payments are plunging thanks in large part to the breaks Republicans included in their One Big Beautiful Bill Act last year.

Politico's Brian Faler reports that tech companies pouring money into building out AI infrastructure are taking advantage of the tax incentives for business investments passed as part of the GOP's 2025 bill.

That's taken a big bite out of tax receipts. The Congressional Budget Office, in its Monthly Budget Review released last week, said that corporate tax receipts over the first 11 months of the fiscal year fell by $96 billion, or 25%, going from $390 billion over the same period in fiscal 2025 to $294 billion so far this year.

"The 2025 reconciliation act allows corporations to take larger deductions for certain investments, thereby reducing some payments and offsetting the increases in those receipts that otherwise would have been expected, given the rise in corporate income," CBO said.

Faler notes that the big drop this year follows a 15% decrease in corporate tax payments last year. "That's fueling complaints those investment breaks are providing a windfall for the tech world, and giving a bad deal to taxpayers as Google, Microsoft and others would be spending oodles of cash on AI regardless of the tax incentives," he writes.

The companies are benefiting from Republican changes, including expanded breaks for research and development, immediate expensing of investments and the loosening of a Biden-era minimum tax. Meta, the parent company of Facebook and Instagram, said in April that $8 billion of the $26.8 billion in net income it reported for the first quarter of 2026 - the most profitable quarter in its history - resulted from a one-time tax benefit due to changes in the One Big Beautiful Bill Act.

Faler adds that the AI buildout and GOP tax bill aren't the only factors behind the drop in corporate tax payments, and that an AI boom could still turn out to generate additional revenue for the Treasury in the future. But AI investments might have benefited federal tax receipts without the new tax breaks.

"A perennial question with tax incentives is whether they are pushing people to do something the government wants them to do, and which they wouldn't have done otherwise - or whether they're simply giving people money for things they were going to do anyway," Faler writes. In this case, it looks like the latter, Matt Gardner, a senior fellow at the liberal Institute on Taxation and Economic Policy, tells Politico. Companies would have poured money into artificial intelligence even without the tax breaks.

"They're going to do it either way," Gardner said. "That they're getting generous tax breaks for doing so is just icing on the cake for them."

But it's not so sweet for the U.S. government right now.

Number of the Day: 5%

The yield on the 10-year Treasury note topped 5% in trading on Monday, briefly reaching 5.01%, the highest level since October 2023. The rate eased modestly later in the day as bond buyers emerged, closing at 4.99%.

Bond yields have been moving higher lately, with the 10-year yield roughly a full percentage point higher than before the start of the Iran war. Monday's spike comes ahead of the next meeting of the Federal Open Market Committee on Tuesday and Wednesday of this week, and expectations are running high that the Federal Reserve will raise its own benchmark rate amid growing concerns about persistently above-target inflation, surging energy prices due to the war and a flood of corporate debt issuance related to the massive infrastructure buildout for artificial intelligence.

The spike also comes soon after Treasury Secretary Scott Bessent dared investors to resist his efforts to intervene in the currency and bond markets, with one of his goals being to rein in interest rates as a means of providing relief to consumers facing an affordability crunch. ("I am the house now," he said in comments last week. "You can bet against me if you want.") But as Alan Rappeport of The New York Times put it Monday, "Sometimes the house doesn't win."

Referred to as the "affordability" yield, since it serves as a benchmark for all kinds of consumer credit rates, including mortgages, credit cards and car loans, the 10-year rate is a key measure for investors. If the rate moves solidly above 5%, investors could downgrade their profit outlooks as the higher cost of borrowing ripples through the economy, pressuring the bull market in equities.

Some analysts think higher rates are coming. Zach Griffiths, head of investment-grade and macro strategy at research firm CreditSights, said the yield on the 10-year could hit 5.5%. "There are a lot of underlying factors that make for a sustained selloff in rates as the path of least resistance for now," he said, per Bloomberg.

The House and Senate Return for a Bit of Pre-Election Action

With 50 days to go until Election Day, the House and Senate return to the Capitol today for a final stretch in session before lawmakers return to the campaign trail. The House is only in this week, while the Senate is slated to be in for three weeks - though that could still change.

While Congress tries to address a few agenda items, including data centers, crypto regulations and Russia sanctions, Democrats are highlighting what it is not doing before the elections: "It is inexcusable that the House is out until November and our three weeks in the Senate will be used on issues that do not crack the top 20 top issues for Americans," Sen. Brian Schatz wrote on X last week. "Nothing on gasoline. Nothing on the war. Nothing on AI. Nothing for farmers. Nothing for hospitals. A debacle."

House Democratic Leader Hakeem Jeffries called on lawmakers to stay in town until they tackle growing concerns about the potential threat to humanity posed by AI. "Congress should not leave town until something is done decisively to protect the safety and the well-being of the American people in the face of growing concerns being raised by experts within the artificial intelligence industry itself," he said. "Republicans have completely abandoned their responsibility to legislate and engage in public policy efforts in a responsible fashion in the area of artificial intelligence."

Whatever lawmakers do or don't do, the key near-term economic development this week is likely to come from the Federal Reserve, which is expected to raise its benchmark interest rate on Wednesday.

States Sue to Block Trump Immigration Rule

A coalition of cities and states sued the Trump administration on Monday to block an impending rule change that would make it easier to deny visas and green cards to immigrants based on their historical or potential use of public benefits.

The new rule, which was announced in July, is scheduled to take effect on Friday, September 18. It is intended to discourage immigrants from using public welfare programs, including food aid and healthcare, and to punish those who do. Among other things, the new rule expands the definition of public aid to include various temporary assistance programs, as well as state and federal assistance for higher education.

The effort to halt the new rule involves two similar but separate lawsuits, one backed by a coalition of cities led by New York City Mayor Zohran Mamdani that includes Chicago, San Francisco and Seattle. The second suit is backed by a group of states led by New York Attorney General Letitia James that includes 22 states and the District of Columbia.

The lawsuits argue that by changing the "public charge" rule, the Trump administration is violating precedent by expanding the definition of public assistance, as well as the relevant time frame for its use.

Hoping to block: In a statement, Mamdani said the new rule would use fear to slash the assistance programs that have helped keep immigrants healthy and properly nourished. "New Yorkers will be afraid to see a doctor or ask for help they are legally entitled to," he said. "That fear will not stop at the families that the federal government is targeting. Families who remain fully eligible for benefits will feel a chilling effect, and all New Yorkers will pay for it."

At a press conference, Mamdani said the rule could push 4 million people nationwide to unenroll from their healthcare programs. "Nothing about this rule will reduce waste or keep Americans safer or improve New Yorkers' lives," he said. "It is simply a vehicle for confusion and a vehicle for cruelty."

New York City Corporation Counsel Steve Banks emphasized the violation of precedent. "This new rule sweeps away more than a century of settled law to unlawfully broaden the definition of 'public charge' in a way that Congress never intended," he said in a statement.

Appearing at the press conference alongside Mamdani, James underlined the point. "This public charge rule goes back to 1822, where Congress basically said that it only applies to individuals who cannot support themselves, not individuals who apply every now and then for public assistance because they fall on hard times," she said.

Fiscal News Roundup

• Trump Says $5,000 Dividend Checks Will 'Happen 100 Percent' – USA Today
• Corporate Tax Payments Plunge as AI Feasts on New Incentives – Politico
• 10-Year Treasury Yield Hits 5%, Critical Threshold for US Economy and Markets – CNN
• Bond Market Rebukes Bessent by Sending Borrowing Costs Ever Higher – New York Times
• EPA Eliminates Rule That Limits Planet-Warming Greenhouse Gas Emissions From Power Plants – Associated Press
• US Health Officials Move Quickly to Deploy Medical AI Despite Concerns – New York Times
• Tech Companies Must Be Primarily Responsible for AI Safety, Mike Johnson Says – Politico
• Trump Says a Smart President Is All That's Needed to Rein In AI – New York Times
• Researchers Probe How Democrats Could Win Working-Class Voters – Semafor
• New York City Leads Lawsuit Against Trump's 'Public Charge' Immigration Rule – Politico
• McConnell Returns to the Senate for the First Time Since His June Hospitalization – Associated Press
• Oil Executives Say the Great Fuel Crisis Is Here – Wall Street Journal
• Kennedy Center Says It's on the Brink of Bankruptcy, Might Close as Early as Tuesday – NPR
• Donald Trump Jr.'s Bahamas Wedding Was Secretly Bankrolled by Russian Oligarch Close to Putin – ProPublica

Views and Analysis

• This Energy Shock Is Shredding Central Banks' Rates Playbook – Jonthan Levin, Bloomberg
• Raising Interest Rates Will Curb Inflation and Maintain Fed Credibility – Washington Post Editorial Board
• Warsh and the Fed Need Clarity More Than Certainty – Bloomberg Editorial Board
• 5% Interest Rates Are a Troubling Sign of the Road Ahead – Committee for a Responsible Federal Budget
• Pre-Election Agenda May Prove Too Ambitious for Congress – Niels Lesniewski, Roll Call
• Convention Puts GOP's Reality on Display: Midterm Policy Agenda Is Skimpy – Mia McCarthy, Politico
• PAC Spending Reveals: Republicans Are Screwed in the Midterms – David Dayen, American Prospect
• Safety Net Spending Has Surged. Where's the Money Going? – Washington Post Editorial Board
• Trump's Push to Cut Federal Jobs Lacks a Goal and a Vision – Justin Fox, Bloomberg
• The Property-Tax Revolution – Annie Lowrey, The Atlantic
• The Biggest Obstacle to Universal Child Care: Babies – Kendra Hurley, The Atlantic
• It's Not Just Trump Who's Dumb About Economics-It's the GOP Generally – Michael Tomasky, New Republic
• One Senator's Plea for Tariff Breaks – Wall Street Journal Editorial Board
• Vance's Childcare Plan Pits Parents Against Each Other – Mary Ellen Klas, Bloomberg
• A Generation of Kids Suffer as Trump Destabilizes Immigrant Families – Claudia Boyd-Barrett, KFF Health News
• The Group that Struggles the Most in American Health Care – Drew Altman, KFF