Who wins from Trump’s tax cuts? Workers? Investors? How about “all of the above”?
Democrats are enjoying an “I told you so” moment. As corporations like Cisco announce big stock buybacks, Sen. Chuck Schumer’s (D-N.Y.) prediction that corporations would use their winnings from the tax bill to reward shareholders and not workers appears prescient.
On the other hand, the Senate Minority Leader’s claim that AT&T’s $1,000 bonuses to employees was “the exception, not the rule” turned out to be wrong. In fact, more than 4 million workers have been awarded bonuses or pay hikes by hundreds of big and small companies across the country.
Importantly, as any number of surveys suggest, there’s more to come. Companies are gearing up to expand plant and equipment at a rate not seen in years. This is the most important dividend from the corporate tax cuts: America is again attracting capital that will lead to more jobs, higher productivity and increased worker pay. Everyone benefits.
Even before the GOP tax bill was written, Democrats slammed it for giving too much to big corporations and the wealthy, and not enough to Middle America. They have never acknowledged the link established by every credible economist between business capital investment and wage hikes.
Nor have they acknowledged the ties between business optimism and spending. They have also denied that U.S. corporations were at a disadvantage compared to their global counterparts due to a high tax rate and because of our uniquely punitive approach to taxing profits earned overseas.
What Trump’s tax bill does is level the playing field for our companies and also allow U.S. firms to repatriate cash held overseas with a one-time lower tax. Numerous companies, like Cisco and Apple, have jumped to take advantage of that opportunity, and are hauling in tens of billions of dollars that had previously been stashed outside the country.
Many have committed to spend some of that money in new investments and worker bonuses; some have also announced that they would increase their stock buybacks.
Share repurchases are controversial since that money flows to investors, who tend to be wealthier than most Americans. Opponents of the tax cuts warned we would see a repeat of 2004, when the U.S. gave companies a similar chance to bring home money earned overseas and the bulk of the repatriated funds went into stock buybacks. They say that outcome did nothing for the economy or for workers.
Those critics are crowing over reports that, in the past three months, according to the Wall Street Journal, companies have plowed $200 billion into their own shares, more than twice the rate of the year earlier. Cisco, Amgen and Alphabet are among those that have taken advantage of the new opportunity to repatriate substantial cash holdings from overseas, and all are spending a portion of those funds buying in stock.
But what Trump’s critics aren’t saying is that the pick-up in share buybacks actually follows a marked downturn in such activity last year, which through the first three quarters saw the lowest level of repurchases in five years.
Because the economy was stuck in slow-growth mode during the Obama years, many companies turned to buying their own stock as the best way to boost per-share earnings.
A year ago, the Federal Reserve reported that companies retired a net $2.2 trillion in stock values over the last five years of Obama’s presidency. That’s how pessimistic managements were about their business prospects; they had nowhere else to go.
Weak demand and uncertainty caused by a regulation-happy White House put a lid on capital investment, causing cautious companies to plow their cash flow back into their stocks. Because interest rates were so low, managements also were able to borrow in order to buy up shares.
Things have changed. Corporate investment, which had been dormant during the Obama years, has picked up, boosted by what The New York Times has called the “Trump effect”: soaring optimism among business managers.
Post-election, small business confidence jumped to all-time highs, and most recently, the National Federation of Independent Business reportedthat a record number of managers in that group agreed that “Now is a Good Time to Expand.”
It’s not just small firms. A survey of manufacturing businesses from the Federal Reserve Bank of Philadelphia, which forecasts future capital expenditures, climbed to 40.4 last month, up more than 60 percent from the year before and the highest reading since 1984.
Other similar indicators from other groups like the National Association of Manufacturers buttress the case that capital spending is turning higher. Spending on plant and equipment drives productivity gains, which all but disappeared during the Obama era, and leads to higher wages.
In the three months after Trump became president, capital spending outpaced buybacks for the first time in years.
Most likely, the bump in share buybacks will prove temporary, resulting from the one-time repatriation opportunity. Stock prices are high, which will discourage repurchases and higher interest rates will reduce the appeal. More lasting will be the upturn in capital spending, which will lead to higher wages.
That’s what Republicans promised, and to the consternation of Democrats hopeful of a “blue wave” come November, it looks to be coming true.
Published on The Hill