Blame Congress, not companies, for share buybacks

Blame Congress, not companies, for share buybacks
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Outrage over a slew of companies increasing share buybacks after the recently passed tax bill is misplaced. While it is insulting to be promised a deluge of job creation and wage increases only to see a tsunami of announced company share buybacks, consider who made it all possible: Congress.

If you are in the camp of blaming companies for increased share buybacks following significant reductions in corporate tax rates, consider this: Congress had it within its power to tie corporate tax cuts to actual job creation and wage growth, but it didn’t.

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It could have based each company’s tax rate on its rate of job creation and on each company’s rate of wage growth. Instead, it passed tax reform giving universal and unconditional corporate tax cuts with no connections to job or wage growth.

While some may find it emotionally satisfying to rail against companies, unless voter anger is directed at Congress and leads to ousting those who voted for this seriously flawed bill, nothing will change.

What makes it worse is that Congress should have seen this coming from a mile away. We’ve seen what happens to share buybacks when corporate tax rates decline — they increase. From 1999 to 2016, the effective corporate tax rate decreased from nearly 28 percent to 18.6 percent.

Before the tax bill was passed, 46 percent of companies surveyed by Bank of America Merrill Lynch said they would increase share buybacks. This compares to only 35 percent saying they would use the extra cash on capital expenditures.

Worse still, in an ominous sign that should have not been ignored, when the audience was asked during a Wall Street Journal CEO Council how many CEOs would use increased after-tax earnings to bolster investment, only a few hands were raised.

This prompted National Economic Council Director Gary Cohn to ask incredulously, “Why aren’t the other hands up?” No one should be surprised by the parade of announced share buybacks.

Adding insult to injury, not only are companies increasing share buybacks, some are firing Americans while pocketing significant tax-cut savings.

As I previously wrote in an op-ed for The Hill, Walmart and Carrier Corp. announced almost 10,000 job cuts while Walmart and Carrier’s parent corporation, United Technologies, may potentially pocket nearly $3 billion in tax savings — in one year.

But again, don’t blame these companies; blame Congress. They made it all possible. Why did Congress make such an egregious error? Because it wasn’t an error, it was intentional. Senator Lindsey Graham (R-S.C.) summed it up best when asked about not passing tax reform: “The financial contributions will stop.”

So, in the end, it was as always about money. It wasn't about getting a better return on taxpayer dollars. It was about future campaign donations.

There was, and still is, an alternative: An earned corporate tax cut (ECTC). Under an ECTC, only companies that increase hiring and wages would receive rate reductions.

Companies would be “scored” based on the number of jobs they create in America, the percentage increase in jobs, percentage of their jobs based in America, wages paid, wage growth and whether they offer company provided health-care insurance.

Earned Corporate Tax Cut Scorecard

This merit-based approach to corporate tax cuts could reduce the ballooning tax-bill-related deficits we are likely to see as April and May corporate tax revenues are reported. Under the ECTC system, only companies that increase hiring and wages would receive tax cuts.

It would allow greater tax cuts for the actual job creators by redistributing tax cuts currently being siphoned off by companies firing Americans or just not hiring. It would direct those funds to companies actually creating jobs in America.

It is one thing to chastise Congress, it is another to effect change in Congress. If you want to see corporate tax cuts tied to actual job creation and wage growth, get involved. Attend campaign events, town halls and other campaign events.

Ask those running for Congress this year, “Will you support tax cuts only for companies hiring more Americans and increasing wages, and not just tax cuts for companies giving one-time bonuses?”

While you are there, ask the media to discuss merit-based corporate tax cuts as opposed to the same old ineffective universal and unconditional tax cuts. You can make a difference one tweet, retweet, Facebook posting and vote at a time.

Chris Macke is the founder of Solutionomics, a think tank focused on developing solutions for a more efficient, merit-based corporate tax code. He has advised the U.S. Federal Reserve by providing market updates and implications of monetary policy changes on asset valuations and market distortions, and he's a contributor to the Fed Beige Book. Find him on Twitter: @solutionomics.