Stock buybacks one of the many benefits of tax reform

Stock buybacks one of the many benefits of tax reform
© Greg Nash

Tax reform is working. Three months into the year, the Tax Cuts and Jobs Act has resulted in higher take-home pay, pay raises, special bonuses, and increased matches, and employee benefits.

More than 90 percent of American wage earners have seen more take-home pay, while more than 300,000 jobs were added in February.  Unemployment is at a 17-year low and business optimism is up.

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Despite this success, the law continues to be criticized by Democrats as a handout to “the rich” and corporations. Most recently, the Left is pointing to the increase in stock buybacks as proof, arguing that buybacks are occurring at the expense of higher wages for employees and more investment in the economy.

 

This is not true. Stock buybacks are not a flaw of tax reform. Instead, they are one of the many ways that prove tax reform is working. Buybacks (along with dividend payments) contribute to a stronger stock market that increases wealth and strengthens retirement security for millions across the country including seniors and middle class American families.

When a corporation has profit they can either invest in their employees, invest in new equipment or factories, or send money to shareholders through buying stock or paying out dividends.

In this context, a buyback can be best thought of as a company investing in themselves. There is nothing sinister about this — a business will seek to allocate resources in the most economically productive way, and so will choose to purchase its own stock or pay out dividends when no productive investments are available and the business has excess capital. In fact, there is little evidence that companies buy back stock or pay dividends at the expense of new investment.

These benefits do not go to a few wealthy investors. Rather, the benefits are felt by millions directly and indirectly.

After a company buys its stock back, the money does not vanish. As noted by Doug Holtz Eakin, just 20 percent of corporate earnings are distributed to taxable entities. This means that the majority of the money goes to pension funds, retirement accounts, or is reinvested in the economy.

A healthy stock market benefits millions of Americans. Half of all American households own stock and almost 55 million Americans – or nearly 60 percent of working age Americans own a retirement account or 401(k).

Of this population, seniors overwhelmingly benefit, as they tend to be more invested in the stock market. According to IRS data 28 million American taxpayers received dividend income in 2015 (indicating that they owned stock), and 9.8 million of these were seniors. Because they are more invested in the market, these seniors received half of all payments.

Buybacks also help stabilize defined benefit pension plans by decreasing the unfunded liability of plans, which helps state and local governments.

The fact is buybacks result in more money for millions of Americans that invest in the stock market including seniors and increase the retirement security for millions more. Buyback levels were also low in 2017, indicating that companies may have been waiting until tax reform was signed into law. 

The tax reform bill helps families and individuals in other ways. Almost five million employees have received special tax reform bonuses.

Companies are also investing in their employees. For instance, Boeing has announced plans to spend at least $100 million on workforce development programs. Walt Disney plans to spend $50 million in employee educational programs, while Walmart has committed to provide expanded maternity and parental leave and a $5,000 allowance for adoption expenses.

Other companies are increasing employee retirement benefits, while utility companies are lowering their rates giving consumers cheaper energy prices.

Any way you look at it, tax reform is a success. The law has resulted in more take-home pay and higher wages for Americans. As evidenced by the increase in share buybacks and dividend payments, it has also resulted in a stronger stock market that is increasing the wealth and strengthening the retirement security of American families.

Alex Hendrie is the director of tax policy at Americans for Tax Reform, a nonprofit group working to support limited government.