Shareholders Receive Major Benefits Thanks to New Tax Law

The new tax law has been the subject of an ongoing debate ever since it was passed at the end of last year. Those on the right have argued that the positive effects can already be seen in the rise of employee bonuses. Democrats, who opposed the tax reform measure, have criticized the bill based on a different short-term metric: stock buybacks, which benefit shareholders and corporate executives. The difference is significant, as the former has received more attention than the latter.

Defining Our Terms

First, it’s important to understand precisely what we mean by stock buybacks. This term refers to a corporate practice, whereby stocks are literally repurchased from shareholders. In buying back these stocks, corporations effectively limit their supply, thereby inflating the price of shares. As a result, even if profits stagnate, the cost of shares may continue to increase. It’s an alternative way of giving back money to investors. It is also very lucrative for higher-ups.

Who Benefits?

A paper published by the National Bureau of Economic Research (NBER) found that wealth disparity “went up sharply from 2007 to 2010.” Specifically, the paper concluded that 10 percent of shareholders owned 84 percent of available stocks. And according to William Lazonick, an economics professor at University of Massachusetts, the top 500 corporate executives received 82 percent of their income in the form of stock repurchases. This is the source of much controversy because when companies repurchase shares, they choose not to reinvest that money in employees or capital. Of course, conservatives take a very different view, arguing instead that stock buybacks offer indirect benefits to society as a whole.

Senator Crapo

That’s at least what Senator Mike Crapo – a Republican from Idaho – said: “Stock buybacks are attacked as though they are a bad thing but if you look at what ripples through the economy as a result of stock buybacks, you can see that there is a beneficial impact of those in a number of different ways.” As for the question of where companies should invest their money: “We can argue about whether that’s as good as using the money in some other way, like capital investments, or wage increases, or bonuses, or pension plan funding.” He continued, “My hope is that the resources that these companies have as a result of tax relief will be utilized for all of these purposes.”

Harbinger

It is perhaps unsurprising that big companies are using the corporate tax cut to reward shareholders and CEOs. That’s precisely what they said they’d do, leading up to the passing of the tax law. Robert Bradway, a higher-up at Amgen Inc., indicated that his company would continue to return money to shareholders: “[We’re] actively returning capital in the form of growing dividend and buyback and I’d expect us to continue that.” Other executives – at Coca Cola, Pfizer and Cisco – have echoed these sentiments. Referring to the tax cut, Kelly Kramer, a CFO of Cisco, said, “We’ll be able to get much more aggressive on the share buyback.”

Sales Pitch

And while those companies were advocating for share buy backs, the Trump administration and Congressional Republicans were selling the tax cut on totally different grounds, saying that the extra money would be used to invest in workers and capital. In fact, Kevin Hassett, an economic advisor at the White House, said the corporate tax cut would lead to more capital investment. With more capital investment, he argued, workers would become more productive. More productivity would mean higher value for workers. That value would return to the employees in the form of higher wages. He projected a rise of $4,000 per year, adding that it will take time for the benefits to be seen.

That’s the Way It Goes…

More recently, Hassett has prevaricated, arguing that stock buybacks are more or less part of the natural order of things: “And so with that money coming back, then right now we’re going to have an adjustment where you’ll see probably more dividends than share buybacks than wage increases because that’s cumulative past earnings.”