New Tax Law Benefiting Shareholders More Than Workers So Far

At least according to the metrics politicians have chosen.

WASHINGTON ― Since President Donald Trump signed the Republican tax bill in December, hundreds of retail companies have announced employee bonuses totaling more than $3 billion, which Republicans have said proves them right that the new law benefits regular Americans.

But so far, companies have thrown a lot more money at their shareholders than at their workers. According to several estimates, firms have announced roughly $200 billion worth of stock buybacks this year, inflating the value of company shares by reducing their supply.

“Stock buybacks are windfalls that drive up the value of investment portfolios for CEOs and high-flyers,” Sen. Ron Wyden (D-Ore.) said in a Senate floor speech this week. “And they’re coming in at a rate 30 times greater than worker bonuses — 30 to one! They’re on pace to double the amount from the first quarter of last year.”

Buybacks are controversial because they can represent a missed opportunity for a company to invest in its own productive capacity or its workers, and it just so happens that executive pay is usually tied to stock performance.

Nevertheless, Republicans told HuffPost that stock buybacks are broadly beneficial to the economy.

“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,” Sen. Mike Crapo (R-Idaho), chairman of the Senate Banking Committee, said Thursday.

“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,” Crapo said. “My hope is that the resources that these companies have as a result of tax relief will be utilized for all of these purposes.”

When companies buy their own shares, the money “gets reallocated through the economy in a more efficient manner,” Sen. Ron Johnson (R-Wis.) said. “There’s nothing wrong with that. That’s how capitalism works.”

But stock ownership is highly concentrated among the wealthiest Americans. The richest 10 percent of stock owners owned 84 percent of all stock in 2016, according a widely cited recent paper on household wealth and the Great Recession.

“I don’t disagree that there are probably people on the high end who own a lot of stock, but there are a lot more investors today than there were 20 years ago,” Sen. John Thune (R-S.D.) said.

Companies have increasingly plowed profits into stock buybacks over the past several decades because doing so lines corporate executives’ pockets, argues William Lazonick, a professor of economics at the University of Massachusetts Lowell. According to Lazonick’s analysis of the compensation of the 500 highest-paid executives, stock-based gains accounted for 82 percent of their pay in 2015.

People who are in the business of buying and selling shares are the ones who benefit from buybacks,” Lazonick said.

Democrats said during the tax debate last year that cutting corporate taxes would mainly benefit shareholders — after all, that’s what several corporate executives had said would happen. So when companies like Walmart and Home Depot started announcing bonuses because of the tax law earlier this year, Republicans seized on the news to say Democrats had been wrong.

The wave of bonus stories, which Republicans have touted in daily press releases, may have contributed to an uptick in the tax law’s popularity. According to a HuffPost/YouGov poll, people were twice as likely to have seen news stories about bonuses than buybacks.

Republicans have also pointed to a more direct consequence of the law: small increases to most workers’ paychecks. Since federal income tax is withheld from paychecks, lower tax rates mean less withholding, and therefore more take-home pay. (Though paycheck changes can depend on a variety of factors, including household size.)

But by trumpeting bonuses, Republicans are abandoning what had previously been their main argument for how lower taxes on companies would benefit workers. White House economic adviser Kevin Hassett argued in an October paper that a corporate tax cut would spur capital investment that would make workers more productive. That increased productivity would in turn make workers more valuable, eventually causing wages to rise by about $4,000 annually. Hassett has said the process would take several years.

Last week, Hassett said the surge in buybacks had been spurred mainly by the new law’s discount tax rate on repatriated foreign profits — cash that firms are now bringing home after having stashed it abroad to avoid the higher tax rate under previous law.

“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,” Hassett said.

Sen. Susan Collins (R-Maine), who wavered in her support of the tax bill partly because it was overly generous to corporations and the wealthy, told HuffPost in November that the purpose of the tax bill was to encourage job creation.

“It is not to encourage stock buybacks, which tend to enrich the executives of a firm,” Collins said. “So that would be disappointing if that was the case.”

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