Responding to the NYT’s Stock Buybacks Analysis

August 15, 2018

A recent New York Times editorial examines the latest data on stock buybacks as evidence that the Tax Cuts and Jobs Act’s corporate tax rate cut isn’t working as intended. Instead of increasing business investment and boosting wages, they argue, the law has only helped the wealthy via an increase in stock buybacks in recent quarters.

It’s worth remembering that the increase in stock buybacks isn’t surprising nor a sign that the TCJA won’t increase domestic investment. The immediate reduction in the corporate income tax rate will deliver higher returns to business owners on investments that have already been made. There is no reason why companies wouldn’t choose to return these higher-than-expected returns to shareholders.

However, the lower rate will also provide a higher return on new investments. To the extent that the TCJA makes new investments viable, we’ll see an increase in the capital stock, higher productivity growth, and higher wages compared to what would’ve happened without the new tax law. This effect isn’t crowded out by stock buybacks.

Part of the rationale for GOP lawmakers behind cutting the corporate rate was to boost wages for lower- and middle-income taxpayers. Research shows that labor does shoulder a significant portion of the corporate tax, so the rate cut ought to lead to higher wages for workers. But that won’t happen overnight and it won’t be as obvious as a one-time bonus or a one-time boost in 401k contributions. As we’ve written before, it will take time—probably years—for the corporate rate reduction from 35 percent to 21 percent to show up in worker pay.

In a recent analysis, we simulated what this would mean for individuals’ incomes over a ten-year period. Using the Tax Foundation’s Taxes and Growth model, we looked at the after-tax income changes by income group created by a five-point reduction in the corporate rate. The table below focuses specifically on the share of the corporate tax going to capital and labor over time. Initially, in 2019, a large portion of the benefits flow toward capital, representing the windfall gain to existing capital investments. But as years go by, labor begins to receive an increased portion as new investment goes into place and productivity drives up wages.

Dynamic Distributional Analysis of A 5-Percentage Point Reduction in the Corporate Income Tax Rate
Source: Tax Foundation Taxes and Growth Model, April 2018
  2019 2022 2025 2028
Total Size of Corporate Tax Cut (% of after-tax income) 0.6% 0.7% 0.9% 0.8%
Share to Capital 92.3% 75.0% 64.4% 55.4%
Share to Labor 18.7% 51.9% 73.9% 104.4%
Total Impact on Income as a % of Initial Corporate Tax Cut 111.0% 126.9% 138.4% 159.8%

The exact timing of this effect is unclear, but most economists will tell you that workers are unlikely to get an immediate boost in wages from a corporate rate reduction while owners of capital will.

Even as new macroeconomic data comes out, it will take years of data gathering and analysis before we can begin to calculate with any precision how the TCJA impacted the economy.

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