The Truth

 

In January 2020, the U.S. Joint Economic Committee reported that: “Since the enactment of the tax cuts, growth of business investment has averaged just 3.5 percent, substantially below the 4.6 percent average growth of the previous seven quarters.  Although there was a slight bump in business investment in the first two quarters after the tax cuts took effect, it subsequently fell below its long-term trend and has contracted in the most recent quarters.”

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The Federal Reserve Bank of Cleveland reports that “business investment grew more slowly after the tax reform than before it…The average quarterly growth rate of business investment was 2.8 percent in 2018–2019, lower than the rates in 2016–2017 (4.0 percent), 2013–2017 (3.9 percent), or 2010–2017 (5.5 percent).  Even taking into account that other economic factors, such as changes in trade policy and a global economic slowdown, may have held investment down, these data suggest that the stimulus provided by the tax reform was not large.”

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This should come as no surprise because, even before the bill passed, it was pretty apparent companies weren’t planning to increase investment. 

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Major companies including Cisco, Pfizer, and even Coca-Cola made it clear that they would use any new windfall not for investment, but to buy back stocks — which would pass any gains to their shareholders, not employees.

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Hey, don’t blame them!  They were completely honest about their intentions from the start.  In fact, at a meeting of The Wall Street Journal CEO Council in November 2017, the CEOs in attendance were asked to raise their hands if they intended to use their new fortune for investment.  Gary Cohn, who at the time was Donald Trump’s top economic adviser, seemed perplexed that very few hands were raised.  “Why aren’t the other hands up?” he asked.

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The Federal Reserve Bank of Atlanta periodically surveys business executives.  According to the results of their survey after the tax bill passed, “roughly two-thirds of respondents indicated that tax reform hasn’t enticed them into changing their investment plans for 2018.”

The survey also asked the respondents about their investment plans for 2019: “The results were not statistically different from their 2018 response.  Roughly three-quarters of firms didn't plan to change their capital expenditure plans in 2019 as a result of the [tax cuts].” 

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​Then, what are businesses doing with all this newfound cash?  Well, instead of increasing wages or making investments, corporations have indeed bought back their own shares — which, again, only benefits shareholders and executives.

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Essentially, what happens in a stock buyback (a.k.a. share repurchase) is that a company buys back its shares from the marketplace with any accumulated cash they might have.  They do this, in part, to reduce the number of shares that are available on the open market, which ultimately increases the value of those shares (i.e., supply and demand).  Buybacks can also increase equity value, make a company look more financially sound, and allow a way for money to be returned to investors.

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According to the S&P Dow Jones, “In Q4 2018, S&P 500 stock buybacks, or share repurchases, set a fourth consecutive record of $223 billion.  This displaced the previous record of $203.8 billion, set during Q3 2018 and is a 62.8 percent increase from the $137 billion reported for Q4 2017.  For the year 2018, buybacks set an annual (and 12-month) record of $806.4 billion, up 55.3 percent from the prior year’s $519.4 billion, and up 36.9 percent from the prior annual record set in 2007, of $589.1 billion.”

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The following year, they reported that: “Buybacks for the full year 2019 were $728.7 billion.  Apple continued to lead, spending $22.1 billion — up from last quarter’s $17.6 billion, and ranking as the 3rd highest expenditure historically.”

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The National Bureau of Economic Research (NBER) reveals that “the average annual inflation-adjusted amount paid out through dividends and repurchases by public industrial firms is more than three times larger from 2000 to 2019 than from 1971 to 1999.”

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This buyback strategy is dubious, and we're being generous.  Companies do this for all of the reasons mentioned earlier, but executives in particular have millions of incentives to buy back stock.

According to Robert J. Jackson Jr., a former commissioner of the U.S. Securities and Exchange Commission appointed by Donald Trump, “There is clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay.  We give stock to corporate managers to convince them to create the kind of long-term value that benefits American companies and the workers and communities they serve.  Instead, what we are seeing is that executives are using buybacks as a chance to cash out their compensation at investor expense.”

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What’s really infuriating is that many of the companies that benefited mightily from the corporate tax cut (only to buy back shares) went crawling to the federal government for help during the Covid economic crisis — with their hand firmly out.

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After telling his investors, “I don’t think we’re ever going to lose money again” after their big tax cut, the chief executive of American Airlines gladly accepted a $5.48 billion loan from the U.S. Treasury.  This is on top of the $5.8 billion they had already received.