Workers who have for too long dealt with stagnant wages have seen some hope in the aftermath of a historic tax reform law. Yet Sen. Marco Rubio, R-Fla., echoed the concerns of many when he suggested that corporations “bought back shares, a few gave out bonuses; there’s no evidence whatsoever that the money’s been massively poured back into the American worker.”
Fortunately, Rubio misunderstands what stock buybacks and dividend payouts do for the economy—they do not take the place of wage growth, but are a natural byproduct of a healthy and growing economy.
Numerous misconceptions contribute to the dislike of stock buybacks. The first such misconception is the belief that the bonuses that millions of workers have received thus far as a result of tax reform are the sole benefit of the corporate tax cut to everyday Americans. While these bonuses provide meaningful extra income to American workers, they are just that: bonuses. The real benefit of corporate tax reform will come over time as businesses make capital investments that increase productivity. Productivity improvements are what lead to wage growth, as more productive workers can produce more of their product.
This leads to another misconception: that stock buybacks take the place of capital investments. Research continues to show that corporations only engage in stock buybacks when opportunities for productive capital investment are exhausted. There is no connection between increases in stock buybacks and decreases in economy-wide investment.
In the context of other corporate tax changes, the idea that businesses would engage in stock buybacks instead of making productive capital investments makes little sense. The temporary enactment of full expensing means that businesses will be able to immediately deduct the value of capital investments from the taxes for the next five years. Businesses are faced with a situation where they are flush with savings from the reduced corporate tax rate and capital investments are incentivized by current tax policy—if businesses did not put stock buybacks before capital investments beforehand, why would they begin doing so under these circumstances?
A third misconception is the belief that stock buybacks benefit no one but the businesses engaging in them and wealthy shareholders. A study by the Federal Reserve Board of Governors found that 52 percent of Americans owned stock either directly or through a mutual fund, retirement fund, or pension in 2016. The same study found that 60 percent of Americans hold a personal retirement account. For context, 56 percent of Americans paid personal income taxes in 2016.
Stock buybacks have the effect of raising the value of the stocks in question. Buybacks reduce the number of shares of a stock on the market, increasing the value of remaining shares. In a case such as this, where businesses across the market are likely to increase share buybacks, stock values can increase across the market.
The National Taxpayers Union Foundation estimated the impact of increased stock buybacks and dividend payouts as a result of cutting the corporate tax rate on the yield of different median portfolios. NTUF estimates that shareholder yield will increase from 4.32 percent to 4.95 percent post-tax reform. That is real value added directly to the pocket of the millions of Americans that hold stock.
The median stock and mutual fund account is valued at $73,300. NTUF estimates that the annual yield on this portfolio will increase approximately $465 from $3,167.86 to $3,620.80. The median retirement account is worth more, at approximately $113,000. Under NTUF’s estimates, the yield on this portfolio would increase $723, growing from $4,881.60 to $5,604.80. For the millions of Americans that benefit from these portfolios, many of which are retired seniors, such increases are a meaningful yearly benefit on top of income tax cuts.
Misconceptions abound about stock buybacks, which are generally just a tool businesses use to invest when they do not have productive capital investments left to make. They are also a tool which happens to have the added benefit of rewarding Americans who have invested in the stock market.
They’re not proof that corporate tax reform is failing to benefit the economy. They’re proof that it is succeeding.
Andrew Wilford (@PolicyWilford) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is an associate policy analyst at the National Taxpayers Union.
