Republican Tax Cuts Have Put $1 Trillion Back in Shareholders’ Wallets

Shareholders are winning — but workers are losing out.
  • Corporate share buybacks have exceeded $1 trillion in 2018 with over a week until the end of the year.
  • This shatters the previous record of $781 billion set in 2015.
  • The increase in buybacks seems to indicate that companies are using the cash from tax cuts to buy back shares rather than invest in workers.

Corporate share buybacks hit $1.1 trillion in 2018 with a week to go until Christmas, meaning that much of the benefit of the major tax breaks contained in the Tax Cuts and Jobs Act of 2017 appears to have gone to lining the pockets of shareholders. Of the $1.1 trillion in announced buybacks, about $800 billion have already been executed, leaving $300 billion worth of purchases left to be made.

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Record Spending on Buybacks Likely Means Gains for Workers Are Lower

The $1.1 trillion-and-counting means that 2018 will shatter the previous record of $781 billion set in 2018. When the bill was being debated, opponents argued that the corporate tax cut would lead to companies spending their windfalls to enrich shareholders rather than on workers, as its proponents claimed they would. In January, Sarah Huckabee Sanders claimed that more than 70 percent of the tax cuts would be returned to workers.

However, the record-shattering run of share buybacks would appear to indicate that companies have prioritized boosting their share price over raises, hiring or investment in infrastructure. Per the Bureau of Economic Analysis, spending on nonresidential fixed investment — a good gauge for new spending by businesses — did jump sharply to 11.5 percent in the first quarter, but it has fallen off sharply since. It was down to just 2.5 percent in the third quarter, which is a year-over-year decline of over 25 percent.

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That said, it might be a mistake to assume all of the share buybacks are motivated purely by having income freed up from paying corporate taxes. The swooning market might also be motivating CFOs to see their stock as undervalued and wanting to invest dollars there as a result. Traders interviewed by CNBC said that much of the buying is based on the belief that the current downtrend in stock prices is motivated by political factors that should resolve favorably and make the current price of shares a discount.

What Are Share Buybacks and Why Do Companies Use Them?

So why would a company buy its own stock? There are a few reasons, most of which have to do with simple supply and demand.

Essentially, a publicly-traded company is always going to try and spend money in ways that will boost value for shareholders in one way or another. Buying shares on the open market is one of the more direct ways to do this because it both increases the demand for shares on the open market — increasing demand — while simultaneously removing many shares from circulation — decreasing supply.

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Share buybacks are one of three basic ways a company can spend surplus cash on improving value. Dividends are one of the most direct as they’re just paying cash directly to shareholders, but they’re also taxable income. Share buybacks mean boosting value for shareholders in a way that won’t hit their tax bill until they sell their stock and have a capital gain. The third method is to reinvest it into the business, but that’s the least certain of the options. Although smart investments can mean growing the business and improving value over the long run, there’s no guarantee that those investments will produce the desired results.

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