Much of the Trump tax cuts intended to create jobs flowed instead into buybacks
I have a quibble with this phraseology. The corporate Trump tax cuts were intended, first and foremost, to bring the US corporate taxation system in line with our international competitors, thus decreasing the incentive in the tax code to outsource jobs internationally.
It’s true that some of the less-honest GOPers, including the POTUS, in their manic desire to sell the package, underemphasized the above and overemphasized the possibility for job creation domestically. But that does not alter the fact that the purpose of corporate tax reform and restructuring was to improve our international competitiveness, which from all signs it was successful in doing (and why Democrats supported a version of this same sort of reform during the Obama Admin.)
Since 2005, under the leadership of former Goldman Sachs trader and Wall Street superstar, Eddie Lampert, Sears had spent $6 billion in share buybacks. Why would a high paid brilliant executive do such a remarkably stupid thing?
Let’s agree that Lampert, with his in-depth knowledge of how to game the system, should go down in history with Jay Gould. However, let’s not pretend that Lampert is the rule, and not the exception to the rule. (I’m not claiming that corporate executives are angels who are never driven by personal gain; I am simply saying that Lampert is not a very good proxy, as most CEOs are able to align their fiduciary responsibilities with their own greed.)
A Roosevelt Institute study found that whereas firms once borrowed to invest and improve their long-term performance, they now borrow to enrich their investors in the short-run. That same study also saw that: “Before the 1970s, American corporations paid out 50% of profits to shareholders, while retaining the rest for investment. Now, shareholder payouts are over 100% of reported profits, because firms borrow in order to lift payouts even higher.”
I think it’s worth pointing out why this occurs. It’s more complicated than “enrich your investors.”
Investors invest to be enriched. Obviously. If you’re going to put your money at risk, you want to be compensated for taking on that risk. There are two primary ways market investors are enriched; the first is through dividends paid out by the company; the second is through the appreciation of shares.
If I’m an investor, I prefer the latter. Why is that? Well, dividends are less popular with investors for a couple of reasons, both having to do with our friends, the government.
- First, the government taxes dividends in the year they are paid. No if, ands, or buts about it; if I get $10K in dividends in a year, I’m paying 10K * my marginal rate on those shares.
- Now, compare that to taking my profits through capital appreciation on my shares. I’m going to get taxed on that appreciation, sure, but I don’t have to pay taxes on it until I sell my shares.
This gives me a great deal of control over how I am taxed. I might wait, for example, until I retire, when I pay a lower interest rate on those profits. I might donate those appreciated shares to charity, so nobody pays any taxes on them at all. I might sell them when I have other tax offsets, minimizing the impact of the taxation on my Adjusted Gross Income.
Bottom line is that shareholders prefer capital appreciation to dividends, because of the differences in the way the two are treated at tax time. And so shareholders are supportive of buybacks, because lowering the supply of shares in the face of constant demand does, in fact, goose the stock price.
However, as you point out, this is not necessarily the best for the average citizen, or the economy in general. Why? Well, the richer you are, the more money you can afford to stick into stocks and wait for capital appreciation, which could take some years to be realized.
Unfortunately, the average individual has difficulty taking advantage of capital appreciation. They might need to sell shares quickly to meet a financial need. So, the fact that the government disencents dividends and incents buybacks via the tax code becomes another factor which makes the rich richer.
The economy, and the average citizen, would be better served by rectifying this tax code discrepancy. My preferred method would be to not tax dividends at all, which makes stocks very attractive to the average person and would quickly increase the use of dividends and decrease buybacks, because they would no longer be considered as attractive as dividends.
Surely, anyone, with the slightest knowledge of most CEO’s personal values and the stock market, would know the danger of market manipulation if corporations, which are controlled by executives, were allowed to buyback executives’ shares. Indeed, it was once absolutely prohibited because of the opportunity for fraud. Previously, executives could sell on the open market, but never to their own Corporation.
I’d be all good with a “sell on the open market only” re-regulation.
So, by now any student of human nature has seen the problem. The executives are motivated to increase the short-term price of corporate shares on the day they exercise the option — and at the same time, or as soon as possible — have their corporation buy the shares from them for an immediate cash bonanza.
Yea……….but let’s not beat this horse too hard. We really shouldn’t be overly concerned with the fact that .00001% of the population has a special loophole. Even if they didn’t have a loophole, buybacks would still be incented by the tax code. And ultimately, share price over the long haul is determined by profit performance, not accounting games at the end of a quarter.
Yearly, we read the infuriating statistics of just how much the eye-popping CEO pay packages have surged this year over the last. The Economic Policy Institute (EPI) reported that in 2017, the average CEO pay of the 350 largest firms was $18.9 million — rising 17% over the previous year — while the average worker salary remained almost flat, rising a mere .3%.
That’s true, but juxtaposing those two factoids is misleading. The fact that CEO pay is growing at 17% is unrelated to the workers getting .3%. Put another way, you could pay all the execs 1M a year and it wouldn’t give the average worker as much as a penny.
You see, the Trump tax bill has unleashed an unprecedented wave of buybacks, and I worry that lax SEC rules and corporate oversight are giving executives yet another chance to cash out at investor expense.
I’m not seeing how it’s at “investor expense.” After all, it was the shareholders who agreed to the scheme in the first place. Please elucidate.
It’s another for them to use that decision as an opportunity to pocket some cash at the expense of the shareholders they have a duty to protect, the workers they employ, or the communities they serve.
Same comment. If an accounting trick causes a bump in stock price (which does not always occur; analysts are very quick to point out if good financial results are caused by growth or accounting tricks), everyone benefits.
However, shareholder value is applied in exactly the opposite way and as the main corporate goal. Shareholder value dictates that as shareholders are owners of the corporation, the corporation’s main purpose is to enrich shareholders by paying as much in dividends as possible, which also increases the stock price.
Well, if anyone wanted the dividends, that would be true. But when you tax the dividends…….
In fact, and this is the brilliance of the concept of a corporation, shareholders are not owners. Go ahead, buy a share in Apple Computers and try to get past reception at Cupertino waving it at the security guards. Then you’ll see how much of an owner a shareholder is.
Well, shareholders are the owners on paper. But I’m sure you and I would agree that the shareholders are unable to wield that power under current law, which badly needs reform.
This may explain the beginning rise in CEO compensation and the stagnation of worker salary as shown on the above graph.
Doubtful, but that’s an entirely different discussion.
Who are the shareholders? About 80 percent of all stocks are owned by the richest 10 percent of Americans.
Yep. Big problem. But I’ve already ranted about taxing dividends.
Indeed, a good percentage of these stocks will be held by hedge fund and pension fund money managers who want to make the most, the fastest, to earn large commissions for themselves.
Probably worth mentioning here that buybacks directly benefit public pensions, which 15 years ago were commonly viewed as the problem that would take down the economy someday. So, the buyback frenzy has acted positively for the working men and women who are or will someday be dependent on a traditional pension.
William Lazonick, an economics professor at the University of Massachusetts Lowell, recently told CNN Money, that buybacks worsen wealth inequality. “Stock buybacks have been a prime mode of both concentrating income among the richest households and eroding middle-class employment opportunities.”
Yea, see? Dividends good, buybacks bad. Stop incenting capital appreciation in the tax code.
U.S. Senator Bernie Sanders announced a bill this month, called the Stop Walmart Act, that would force big companies to better pay their lowest-earning workers before buybacks.
Yea, well, Bernie thinks that buybacks and low end pay are connected somehow. Not.