Mainly because this phenomenon is closely related to the centerpiece of the tax cut: the large reduction in the corporate rate, from 35 to 21 percent. Advocates of that cut argued that it would mostly benefit workers. The Trump administration made the outlandish claim that the tax cut for the “average” family would be $4,000 per year, which adds up to many multiples of the total cut itself.
Opponents, including yours truly, argued that the “incidence” of corporate tax cuts — who ultimately benefits from them — favors not wage earners but the owners of corporate capital, including shareholders. In many debates, I and others argued some version of this: “We’re not going to see wage hikes; we’re going to see share buybacks!”
So, if you look at the figure I attached to my tweet, you’ll notice that by this estimate, companies have spent $170 billion this year so far on buybacks and only $6 billion on wages/bonuses. Touché, right?!
Not really. It’s way too early to judge the wage impacts of the tax cut. The story told by the supply-siders goes like this: The tax cut boosts corporate profits and lowers the after-tax cost of investment; that leads to more investment in capital equipment; that makes firms more productive (the administration is depending on a huge boost to productivity of which I’m hugely skeptical); faster productivity trickles down to workers.
During the tax debate, I pointed out that there are a lot of weak links in that chain. Other than higher profits, none of the rest of the scenario has much empirical backing at all (e.g., there’s little correlation between corporate tax rates and corporate investment). But that’s not my argument today.
Today, I’m here to point out that the buyback piece of this was definitely not something I heard from advocates of the plan. That was my argument, not theirs! Yet, I’ve got folks like my CNBC pal Larry Kudlow claiming he’s not moving the goal posts at all by endorsing this outcome.
In essence, they’re adding another link to the chain. Share buybacks, more investment, etc. … But there’s no empirical relationship between share buybacks and the rest of the chain. To the contrary, the work of Bill Lazonick has stressed the transition from what he calls the “retain-and-reinvest” corporate model to “downsize-and-distribute.” “Under retain-and-reinvest, the corporation retains earnings and reinvests them in the productive capabilities embodied in its labor force. Under downsize-and-distribute, the corporation lays off experienced, and often more expensive, workers and distributes corporate cash to shareholders.”
In response to my initial tweet on this, tax analyst Scott Greenberg made the reasonable argument for supporters of the corporate cut. In his view, “the ‘trickle-down’ story probably does predict buybacks. After all, only part of a corporate tax cut goes to incentivizing new investment; the other portion is a windfall to old capital.”
I agree. But “old capital” ain’t paychecks. Unless the trickle-downers can provide evidence of the links in that chain — evidence that can’t possibly be in the data yet — then we’re left with nothing but upward redistribution. Remember, 84 percent of the value of the stock market is held by the wealthiest 10 percent of households.
In other words, at this point these buybacks are just a reminder that this tax cut favors wealth holders over paycheck earners. We knew that, but now, in these early days, we’re seeing it in action.