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Tuesday, February 27, 2018

Surprise! Companies Use Tax Cuts to Buy Back Stock!

When Republicans sold the giant tax cut for corporations they promised that all the money would go to workers in the form of raises. I predicted that the tax savings would be almost exclusively used to buy back stock and pay dividends to investors. Guess who was right?
Almost 100 American corporations have trumpeted [plans to buy back shares] in the past month. American companies have announced more than $178 billion in planned buybacks — the largest amount unveiled in a single quarter, according to Birinyi Associates, a market research firm.
A small number of companies have announced plans to increase wages or pay bonuses, with bonuses being preferred because they have no lasting effect -- they're a one-time publicity stunt to make Donald Trump look good.

In effect, bonuses are just donations to Republican political campaigns.

Money going to workers is dwarfed by stock buybacks:
S&P 500 companies have devoted about $5.6 billion to bonuses and wage hikes because of the tax law, according to research from academics Rick Wartzman and William Lazonick as well as the Academic-Industry Research Network. The group added up commitments from the 50 companies in the S&P 500 that had announced plans to reward workers through February 15.
And it's just the beginning:
Bank of America recently predicted that S&P 500 companies will use repatriated foreign profits to buy back about $450 billion of stock.
CEOs are judged by the performance of the company's stock, not by the company's performance in the marketplace (they're not the same). CEOs are more frequently compensated by receiving additional stock rather than higher salaries because salaries are taxed at higher rates.

Investing in capital equipment, raising wages and increasing production aren't rewarded by the stock market. Stock prices increase most when there are rumors of acquisitions and moves to reduce expenses (i.e., firing workers). Companies that raise wages are hammered by the market, as witnessed by American Airlines' plan to raise pilots' wages last year.

Thus, the incentives for American companies are perverse and destructive. Even worse, companies whose products mostly waste people's time -- Facebook and Apple -- have sky-high stock prices, while stock prices of companies in sectors that people need to survive -- food, transportation, housing -- are moribund.

The stock market simply does not reflect the real economy, and it's insane that CEOs are compensated based on rumors and fantasy.

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