WASHINGTON, February 8, 2018: When the GOP passed its tax cut package, which somewhat reformed the tax code last December, the party promised that the increase in corporate profits resulting from lowering the corporate tax rate from 35% to 21% would be shared with employees. They also said that the increased corporate profits would result in companies making large investments in key areas such as R&D, capital equipment upgrades. Yet Democrat opponents preferred to attack the additional potential for corporate share buybacks under the new package.
While acknowledging that possibility, the GOP emphasized the likelihood that the substantial internal investments that would result from the corporate portion of the tax cut would finally succeed in stimulating U.S. economic growth. That key economic component has remained stagnant since 2005, the last year that U.S. economic growth exceeded 3%.
Although much of this optimism has already been evident in corporate investment patterns, including the fact that hundreds of companies have paid thousands of dollars to millions of employees at this point in the New Year, the Democrats, obsessed by the thought of more corporate stock buyubacks, predictably have something else to say about the corporate tax cut.
Not one Democrat voted for the tax cut.
In an attempt to counter the fact that not one Democrat voted for the December tax cut legislation, Dems recently released a report stating that, since the first of this year, corporations have announced $97.2 billion in share buybacks. “This report shows that the first priority of multinational corporations receiving the biggest windfalls from the Republicans’ tax scam was to present … giveaways to their wealthy investors and senior executives,” said Oregon Democratic Sen. Ron Wyden, ranking member of the finance committee.
Wyden continued, claiming “No amount of flashy headlines will cover up Republicans’ choice to give the middle class less so corporations could get more.” The Democrats’ strategy here is quite apparent: Keep emphasizing corporate stock buybacks while ignoring the very real positive effects of the cuts on the wallets of the average American employee.
The GOP responded to the Democrats’ counterattack by noting that numerous companies have already announced as much as $179.5 billion in new domestic investment. That investment will grow the economy and increase the demand for workers. “Tax cuts are only going to help raise wages and create more good jobs,” House Speaker Paul Ryan said.
The primary purpose of the tax cut is to grow the economy.
While the GOP tax cut did reduce the tax rate for every American taxpayer, the middle class will really benefit from the new opportunities created by the economic growth that is already underway. Millions of college grads who, since 2009, have routinely taken lower level jobs for which they were overqualified, will now be able to find opportunities that take full advantage of their skills.
As for those workers, their incomes will rise.
That means the jobs they previously had will be available to the millions of discouraged workers who left the job market due to the lack of opportunity for the past decade. The positive result: a much needed, much desired paycheck for millions of Americans forced to seek government assistance because of the slow growth, opportunity starved economy that characterized the policies of the previous administration.
The $97.5 billion in buybacks are good for the economy and the middle class.
The reduced corporate tax rate is estimated to increase U.S. corporate profits by more than 20%. Corporations have a choice concerning what to do with the extra money. Many companies have already invested in their employees by raising starting wages for new workers and by giving bonuses to current employees.
Beyond that, corporations can either make investments in the economy, pay shareholders higher dividends or buy back a portion of their outstanding shares of stock. In real life, the corporations’ first choice is generally to make investments in plants, equipment upgrades and R&D in order to grow at a faster pace while staying ahead of their competitors.
But suppose a company finds it does not have any profitable investment opportunities? In addition, suppose the company owners (the stockholders) say that they, personally, have better investment opportunities outside the company. In that case, the corporation will pay larger dividends to stockholders. In turn, the stockholders take that increased dividend money and reinvest it back into the economy by purchasing stocks of other companies. This, too, will help grow the the U.S. economy.
Occasionally, usually for tax reasons, stockholders do not want a cash dividend. In that case, they would rather the corporation purchase some of its outstanding shares of stock and hold onto those shares. Corporate buybacks tend to increase the price of a share of stock by about the same amount as the dividend. There is no tax liability, at least until investors/stockholders finally choose to sell their shares.
Shareholders who sell their stock back to the company or on the open market do so because they see better investment opportunities elsewhere. For that reason, they sell their shares and then reinvest the proceeds into another company that needs new capital to expand. Either case results in new capital being created and going to growth-oriented firms that need the capital.
On a more individual level, that portion of the GOP tax cut aimed directly at the middle class will stimulate demand for goods and services. At the same time, the tax cuts aimed at corporations will stimulate supply. The result is that the economy will be able to grow with little inflationary pressure.
That’s exactly what the tax cut was meant to accomplish: grow the economy, keep prices stable and help the middle class. And that’s precisely what partisan opponents of the tax cut consistently fail to understand.