It’s time to get back into writing about political issues
and attempting to find common ground between Republicans and Democrats. The house is bought, moving is done, and we
are mostly settled into the new place.
So now there’s time to think and write again. Also, there’s some recent major legislation
that needs dissected and major mid-term elections to discuss.
Since we just recently “celebrated” Tax Day, I’ll start with
the Tax Cuts and Jobs Act. The bill
certainly cuts taxs, especially for big companies. Creating jobs – I don’t think so. Since President Reagan, Republicans have held
this notion that reducing corporate taxes will boost wages and create more jobs
– the “trickle-down” theory. The problem
is this theory has never actually worked on the broad basis that Republicans
keep claiming it will. A quick look at
the numbers coming out after the TCJA was passed prove the point.
Many of the largest companies in America have not expanded
production or boosted employee pay; they’ve engaged in massive stock buybacks. Essentially, the companies are repurchasing
their stock back from investors.
Obviously the investor who sells recognizes a gain from the sale and has
cash to invest elsewhere or spend.
However, the investor who holds onto the stock gains as well. After a massive buyback there are fewer
shares outstanding. That means important
measures such as shareholder equity and earnings per share go up. This makes the company look good. It also improves the dividends each share
earns. Same total dividend, just divided
into fewer pieces means each piece is bigger.
So who are the biggest shareholders that hold onto their
positions. Typically it’s the Board of
Directors and the so-called “C-Suite” (CEO, CFO, COO, etc); basically people
who are already wealthy. There will be
plenty of advisors who point out that everyone with an IRA , 401(k), or other
retirement account invested in mutual funds gets the same benefit. That’s a bit misleading. Yes, mutual funds get the same boost as other
shareholders. It’s just a matter of
scale that makes this such an elegant misdirection. I’ll use Wells Fargo as an example.
One of the largest institutional holders of Wells Fargo
(WFC) stock is The Vanguard Group (Vanguard).
Vanguard holds 6.55% of WFC stock.
As one of the largest mutual fund companies in the U.S., Vanguard has
hundreds of mutual funds. That 6.55% of
WFC shares held by Vanguard are held in dozens of different Vanguard mutual
funds, of which you, the retirement investor, may be invested in one. In all likelihood the WFC holdings represent
less than 5% of the entire fund.
Depending on the size of your retirement account, you may hold just a
few shares in the mutual fund to a few dozen, maybe even a few hundred. Regardless, you are one of thousands of
people invested in the fund. All that to
say that the cut of that increased dividend coming from Wells Fargo into your
personal retirement account is going to be pretty darn small.
There’s another aspect of the buybacks that needs mention as
well, and it’s the reason trickle-down economics doesn’t work. The trickle-down theory works on the notion
that companies that are flush with cash will turn around and hire more
workers. More people working and earning
a paycheck will, in turn, increase demand for goods and services, thus
justifying the increased hiring. Run
through this cycle a few times and Viola! you have economic growth. Here’s the rub, companies are not going to
employee more people than are needed to meet current demand. If a manufacturing company needs 200
employees working the assembly line to meet current demand, it’s not going to
hire an extra 50 people just because it got a big tax break – there’s no
business justification for it. Why
should the manufacturing company hire more people when there is no indication
that doing so will improve the bottom line?
That’s the cold hard reality in a society that judges companies first
and foremost on profitability and return on equity. The days of companies caring about employees
first and profits second are long gone.
Yeah, a few examples still exist, but it’s no longer the norm.
Some companies tried to show an investment in their
employees like Home Depot. After passage
of the TCJA, Home Depot announced bonuses for all of their employees. Sadly, the bonus was just a one-time event,
despite the tax cuts being permanent.
That’s not to say the bonus wasn’t welcome by many of the employees;
just that Home Depot could have done better.
With a permanent drop in the corporate tax rate, why not a larger annual
raise for everyone? That would be making
a lasting impact on the employees. The
one-time bonus is really a token gesture meant to give the appearance of caring
for the employees while still providing the biggest reward for the biggest
stockholders
This brings up another major issue with the TCJA – the
nature of the corporate tax changes versus the personal tax changes. Republicans gave corporations a PERMANENT tax
cut while giving individuals a TEMPORARY tax cut. In other words, come 2025 your taxes will go
up unless Congress does something.
Meanwhile, corporate America will continue sailing on with their lower
tax rates. Republicans continue to try
and claim that they really do care about average Americans and they claim to
want a strong middle-class. Seems pretty
clear to me that Wall Street is still more important to Republicans than Main
Street.
The TCJA is, first and foremost, a boon to corporate America
with just enough crumbs thrown in to make many on Main Street think they got a
good deal. It also puts a lie to
everything Republicans has said about wanting a balanced budget – the subject
of my next post.
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