The bulk of the $150bn the tax cut put into the hands of corporations in 2018 went into shareholder dividends and stock buy-backs, both of which line the pockets of the 10% of Americans who own 84% of the stocks.
Just 6% of the tax savings was spent on workers, according to Just Capital, a not-for-profit that tracks the Russell 1000 index.
In February 2018, The New York Times took notice of research then underway, reporting that “the nonprofit research group Just Capital will release one of the most detailed accountings to date: a ranking of companies on how much of their tax windfalls are going to workers, customers, communities and shareholders.”
The group’s initial findings suggest shareholders of 90 large corporations — including Home Depot, Pfizer and Capital One — are reaping far more of the benefits of the law than workers or consumers. Pay or benefit increases for workers account for 6 percent of the savings those companies report from the law, the group calculates, while job creation accounts for 22 percent. More than half of the money going directly to workers takes the form of one-time bonuses, as opposed to permanent raises or benefits.
By December 2018, the final Just Capital numbers (see chart at top) painted an even worse picture for corporate America and Secretary Mnuchin’s pathetic prediction that 80% of the corporate tax cut windfall would be delivered to its workers in the form of higher compensation:
Our analysis shows that, of the 145 companies that have so far announced their intentions, six percent of tax cut-related savings are being allocated to workers, more than half of which takes the form of one-time bonuses, as opposed to permanent raises or benefits. An additional 18 percent is allocated to job creation. And if we assume that all proceeds not already earmarked for other uses actually flow to management and shareholders in the form of stock buybacks or direct distributions, then 56 percent of corporate spending will go back to investors.
Steve Mnuchin’s corporate tax fraud should receive renewed attention in the wake of this week’s jaw-dropping report from the Center for Public Integrity titled, “The secret saga of Trump’s tax cuts.” The in-depth story doesn’t merely reveal the “flip-flops, falsehoods, fantasies – and a 10-minute meeting that locked in trillions of debt.” The CPI/Guardian project also vividly tells the tale of Brookings economist and longtime Republican tax policy expert Dana Trier. After joining the Trump administration to help birth the new tax plan, Trier was shocked by the proposals for gargantuan tax cuts for both corporations and one-owner businesses and partnerships. Said Trier, “I mean I thought to myself, ‘My God, I’m joining this administration? This is lunacy.’ … I never really did recover from that.”
That lunacy, the CPI made clear, was being pushed by Trump, Mnuchin, and their water carriers. Mnuchin could not—or would not—grasp the obvious. The 40% reduction in the corporate tax rate would increase after-tax profits, which would allow companies to increase dividends to shareholders, 85% of whom find themselves in the top 10%t of income earners in the nation. Higher profits boost share prices, which will be boosted further after companies buy back their own shares in the market. This reduces the number of outstanding shares and makes each share worth more. “Even without dividends, shareholders saw their share values increase, adding to their wealth,” Cary and Holmes explained. “And corporate CEOs’ compensation will go up too, because it typically is tied to share value.” But Mnuchin’s rule was so firmly encamped in his head that even overwhelming evidence to the contrary struggled to dislodge it: “Even tax analysts at Treasury couldn’t sway Mnuchin. He repeatedly ordered Treasury number crunchers to run tests on the proposed bills to see who would benefit, ‘and every time he found out the rich people were benefiting, he was just in a state of complete dismay,’ Trier said.”
As late as October 1, 2017—little more than two months before passage of the Tax Cuts and Jobs Act—the treasury secretary was still spouting inanities such as “As I’ve said all along, the objective of the president is that rich people don’t get tax cuts.” But when it came to the impact of corporate tax cuts, Mnuchin knew better. After all, the Treasury Department had been warning policymakers about it for years.
During the runup to the passage of the Republican Tax Cuts and Jobs Act in December 2017, a technical paper from the Treasury Department’s Office of Tax Analysis suddenly went missing. Why “Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology” alone among the office’s four-decade online archive of reports and analyses disappeared in September 2017 was never a mystery. The May 2012 update to a 2008 Bush administration assessment concluded that 82% of the benefits of a corporate tax cut would go to capital, and only 18% to labor. That forecast wasn’t just a damning indictment of the $1 trillion corporate tax cut from 35% to 21% at the heart of the GOP’s $1.5 trillion, 10-year plan. That assessment put Mnuchin in the position of trying to debunk the work of his own department. As he tried to explain to Chris Wallace on Fox News on Sept. 3, 2017, “The fact that the Treasury Department, I think it was eight or 10 years ago, put out a piece otherwise. I don’t believe in that. Our current economic team does not believe in that.”
The Trump economic team may not have believed that (or pretended not to believe that), but analysts at some leading economic think tanks do. As Howard Gleckman detailed in Forbes that same month:
The Congressional Budget Office and the congressional Joint Committee on Taxation figure workers pay about 25% of the corporate tax through lower wages. In 2015, the career staff at Treasury calculated the worker share at 19 percent.. The Tax Policy Center uses a middle-ground assumption of 20%. JCT, CBO, and TPC used to assign the full value of the corporate tax to shareholders and lenders but have tempered that view in recent years.
Just as important, throughout 2017 and into 2018, America’s business titans were already telling the public precisely what they would do with their expected tax cut windfall. Two months into the new tax regime, a survey by Morgan Stanley found that “only 13% of companies’ tax cut savings will go to pay raises, bonuses and employee benefits” while “43% will go to investors in the form of stock buybacks and dividends.” American companies, already sitting on mountains of cash, had already spent over $170 billion on stock buybacks in 2018 alone, the most ever that early in the year. As it turns out, Democrats had warned that these gigantic gains for gilded-class shareholders would come to pass. And it’s hardly the first time. For decades, Democrats have been proven right about what tax code changes would or wouldn’t do for the rich and for the economy overall.
Writing in The Washington Post in February 2018, Paul Waldman pointed out that the data so far confirmed Democrats’ warning that the GOP corporate tax cut was “a scam,” writing, “They charged that workers would see only a fraction of the benefits, and instead corporations would use most of their windfall for things like stock buybacks, which increase share prices and benefit the wealthy people who own the vast majority of stocks.”
The Oracle of Omaha, Warren Buffett, acknowledged as much. His Berkshire Hathaway company made $65 billion over its last fiscal year, a staggering $29 billion from the GOP tax cut alone. Apple, which had already plowed $30 billion into stock buybacks in 2017, poured another $100 billion into driving up shareholder value in 2018. And asThe New York Times reported in early 2018, they have plenty of company:
Almost 100 American corporations have trumpeted such plans 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.
Such purchases reduce a company’s total number of outstanding shares, giving each remaining share a slightly bigger piece of the profit pie.
Cisco said this month that in response to the tax package, it would bring back to the United States $67 billion of overseas cash, using $25 billion to finance additional share repurchases. Alphabet, the parent company of Google, authorized up to $8.6 billion in stock purchases. PepsiCo announced a fresh $15 billion in planned buybacks. Chip gear maker Applied Materials disclosed plans for a $6 billion program to buy shares. Late last month, home improvement retailer Lowe’s unveiled plans for $5 billion in purchases.
It’s no wonder that Howard Silverblatt, a senior analyst for S&P Dow Jones Indices, predicted, “I’m expecting buybacks to get to a record in 2018.” But if you took Team Trump’s word for it that workers would be getting a huge bump in pay and benefits thanks to the corporate tax rate reduction and incentives to repatriate overseas profits, you would be sorely disappointed. Wage hikes aren’t even in the top three areas in which America’s corporate titans planned to invest their haul:
In addition to benefiting investors, these maneuvers will end up boosting the pay of top executives because their compensation packages are often tied to the price of their companies’ stock. Finally, a small sliver of the money will find its way into paychecks of rank-and-file employees, but it won’t be a big boost and will probably come in the form of a temporary bonus, rather than a lasting raise.
Morgan Stanley analysts estimated that 43 percent of corporate tax savings would go to buybacks and dividends and nearly 19 percent would help pay for mergers and acquisitions. Just 17 percent would be used for capital investment, and even a smaller share, 13 percent, would go toward bonuses and raises.
Now, listening to Donald Trump, Treasury Secretary Mnuchin, House Speaker Paul Ryan, or Senate Majority Leader Mitch McConnell last fall, you would have had no idea that this scenario would come to pass. They boasted that households on average would see $4,000 more each year, a figure quickly rejected by fact-checkers and economists such as Lawrence Summers and Brad DeLong. But leave aside for the moment that American companies enjoyed historically low interest rates, high corporate profits, and an actual tax rate (after deductions and loopholes) of 18.6%, a figure largely in line with U.S. economic competitors. Throughout 2017, corporate America was crystal clear about what it planned to do with its Trump tax cut winnings.
Days before the tax cuts passed, Bloomberg in November 2017 reported that “major companies including Cisco Systems Inc., Pfizer Inc. and Coca-Cola Co. say they’ll turn over most gains from proposed corporate tax cuts to their shareholders, undercutting President Donald Trump’s promise that his plan will create jobs and boost wages for the middle class.” That doesn’t square with that Trump pledge that “our focus is on helping the folks who work in the mailrooms and the machine shops of America.”
Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.
Robert Bradway, chief executive of Amgen Inc., said in an Oct. 25 earnings call that the company has been “actively returning capital in the form of growing dividend and buyback and I’d expect us to continue that.” Executives including Coca-Cola CEO James Quincey, Pfizer Chief Financial Officer Frank D’Amelio and Cisco CFO Kelly Kramer have recently made similar statements.
“We’ll be able to get much more aggressive on the share buyback” after a tax cut, Kramer said in a Nov. 16 interview.
John Shin, a foreign exchange strategist at Bank of America Merrill Lynch, explained those unsurprising views, saying, “Companies are sitting on large amounts of cash. They’re not financially constrained. They’re still working for their shareholders, primarily.”
Shin should know. In the summer of 2017, he surveyed more than 300 major corporations regarding their plans for a tax overhaul. He and his colleagues looked specifically at the impact on the CEOs’ plans after a “tax holiday” that would allow them to bring back money held overseas at a low tax rate. (The bill called for a 10% rate for companies repatriating some or all of their shares of an estimated $2.8 trillion in offshore profits.) What did the Bank of America Merrill Lynch study find?
The No. 1 response? Pay down debt. The second most popular response was stock buybacks, where companies purchase some of their own shares to drive up the price. The third was mergers. Actual investments in new factories and more research were low on the list of plans for how to spend extra money.
But you don’t have to take corporate CEOs’ word for it that they will put their tax cut payday into the pockets of shareholders instead of workers. Just look at what they did the last time they had the chance. As The New York Times recalled:
After intense lobbying by big companies, Congress in 2004 passed the American Jobs Creation Act, which provided a one-time tax break for companies that wanted to repatriate their offshore profits. Companies brought home $312 billion at a rate of just 5.25 percent. Although the break was intended to spur investment and hiring, a plethora of studies showed that companies responded by spending billions buying back their shares, lifting their stock prices, and didn’t expand their American work forces.
Pfizer, for example, brought home $37 billion at the reduced rates — and shed 10,000 workers. Hewlett-Packard repatriated more than $14 billion, while eliminating more than 14,000 jobs.
So much for Trump’s “America First” promise last year that his tax plan would overwhelmingly benefit “the plumbers, the carpenters, the cops, the teachers, the truck drivers, the pipe fitters, the people that like me best.” After all, as The New York Times inconveniently pointed out at the time:
Mr. Trump might argue that it doesn’t much matter that the tax cuts will be a boon for investors because many Americans own stocks. The president has recently touted the rising value of 401(k) accounts as a benefit of the tax law. But roughly half of all families own no stock, and most people have holdings that are worth less than $5,000. Most stock holdings, a whopping 84 percent, are in the hands of people whose incomes put them in the top 10 percent of households.
This is why cutting corporate tax rates, like slashing capital gains tax rates, doesn’t drive more investment, but instead only increases the national debt and widens income inequality. And, adding insult to injury, many of the biggest beneficiaries of the U.S. corporate tax rate are foreigners.
As Democratic Sen. Chris Van Hollen summed it up days before its passage, the Republican Tax Cuts and Jobs Act is “a direct transfer of wealth from the American middle class to foreign investors.” Newsweek put the value of that transfer at roughly $520 billion:
If the plan passes through the Senate this month, foreigners will see more money than all middle-income households in the United States combined. That’s because foreign investors now own more than $6.5 trillion worth of U.S. equity and investment fund shares, and about 35 percent of all U.S. corporate stock, according to data from the Tax Policy Center. The GOP plan will lower corporate tax rates to 20 percent, benefiting foreign investors at the cost of at least $52 billion each year, or $520 billion over the next decade.
Fast-forwarding to the just-completed 2019 tax season, virtually everything critics of the Trump tax cuts warned about has come to pass. Far from paying for themselves, the GOP tax reductions are helping fuel a new explosion of red ink, with annual budget deficits forecast to return to the $1 trillion level. As predicted, the corporate tax cuts produced little change in business investment. Instead, precisely as most analysts cautioned, stock buybacks surged to record levels in 2018. This week, Apple announced it would buy back another $75 billion of its shares, with the windfall coming a year after the company purchased $100 billion of its stock. (One might even say that having your effective corporate tax rate reduced from 24% to 18% is “insanely great.”) As the The New York Times reported last week, “Profitable Giants Like Amazon Pay $0 in Corporate Taxes. Some Voters Are Sick of It.” All the while, as The Times summed up Tax Day 2019, “Business did what business does.”
And what business does with its tax breaks is almost like a law of nature. Think of it this way: The sun rises in the east and sets in the west. The force of gravity makes objects fall to earth at 32 feet per second squared. Tax cuts don’t pay for themselves. And big business doesn’t pass on its corporate tax cut windfalls to workers.
Now someone just needs to explain that to Donald Trump and Steve Mnuchin.
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