Trump’s 2017 Tax Cut Created a Huge Stock-Buyback Spree
For years we’ve been hearing that when President Donald Trump cut corporate taxes in 2017, corporations pissed away their tax savings on stock buybacks. Trump himself, in one of his rare episodes of truthfulness, admitted it. But that turns out not to be quite right.
According to a new report by the public interest non-profit Americans For Tax Fairness, between 2018 and 2022 the richest Fortune 500 corporations pissed away, on average, seven times what they paid in taxes on dividends and stock buybacks. These companies spent slightly more on dividends and buybacks ($4.39 trillion) than they earned in profits in the United States ($4.36 trillion). Shareholders are looting the companies they purport to own! And chief executives wonder why people hate them? In 2001 nearly half the country (48 percent) pronounced itself satisfied with the size and influence of major corporations, according to Gallup. Today that’s down to 24 percent .
It’s tempting to believe that corporations have grown too powerful. But I agree with Gerald F. Davis, professor of management at the University of Michigan and author of the 2016 book The Vanishing American Corporation, that the opposite is true: Corporations have become too weak. Strength implies a capacity for self-determination, and corporations lost that with the shareholder revolt that Milton Friedman kicked off half a century ago. In its heyday during the 1950s and 1960s the American corporation was self-financed, enabling it (per John Kenneth Galbraith in The New Industrial State) to reach beyond financial goals and create an independent culture. Corporations sustained industrial research labs, practiced (comparatively) enlightened labor-management relations, promoted employees from within, and more often judged regulators partners than adversaries. That’s seldom the case today.
This old paternalistic model had plenty of drawbacks, and perhaps the rise of global trade doomed it to extinction. Still, as an American institution, the corporation inspired loyalty from employees and customers, and an amazing degree of admiration from the public at large. A 1950 poll cited in a 2018 Atlantic article by Robert D. Atkinson and Michael Lind, showed that 60 percent of Americans viewed corporations favorably. General Motors, then the largest corporation in America, was judged favorably by more than 70 percent. Writing in 1952, the management guru Peter Drucker asserted that the large corporation “exists for the sake of the contribution which it makes to the welfare of society as a whole.” The only people who would disagree with that statement, Drucker wrote back then, dwelt “on the lunatic fringes of the Right and on the Left.”
Those days are gone. The contemporary corporation, far from governing itself, is a slave to Wall Street and disliked by 76 percent of Americans. All day long it plays automatic teller machine to hedge funds, mutual funds, pension funds, and other institutional investors. The beneficiaries are nearly always in the top 10 percent of income distribution (bottom threshold: $170,000), who own an unprecedented 93 percent of all stocks. More often than not these beneficiaries are the top 1 percent (bottom threshold: $607,000), who own 54 percent of all stocks. These are the people who’ve driven the price of a Hermès Birkin bag, according to The Wall Street Journal, as high as $32,000, or more than half the median wage of a full-time worker in the United States. These are the people who’ve driven the price of a single Rolex wristwatch into the millions.
The companies in the Americans For Tax Fairness study numbered 280 and were chosen because they were profitable over the study’s five-year period. They constitute 56 percent of all Fortune 500 companies. According to the study, “all but a handful” of the 280 spent more on dividends and buybacks than they paid in taxes. Collectively these companies paid $608 billion in taxes and $4.4 trillion in dividends and buybacks. They didn’t even pretend, in Drucker’s terms, to contribute to the welfare of society as a whole.
The majority of this shareholder-payout binge ($2.7 trillion) consisted of stock buybacks, which until 1982 were judged by the Securities and Exchange Commission to constitute an illegal form of stock manipulation. Ever since, four decades ago, then-SEC chairman John Shad issued his fateful Rule 10-b-18, buybacks have constituted, in the eyes of the federal government, a perfectly legal form of stock manipulation. Because buybacks raise the stock price, to which executive compensation is typically tied, they are frequently used by chief executives to enrich themselves. As many as 56 percent of buybacks are so-called “leveraged buybacks” wherein the buyout puts the company in debt. To return to the ATM analogy, corporations allow their customers (shareholders) to use their debit-card purchases (buybacks) to run up debt. But instead of the customer going into hock, the corporation does. This is not behavior you’d expect from an entity that is capable of governing itself.
It gets better (i.e., worse). The dollars dividends and buybacks return to shareholders are worth more than the dollars in your paycheck. That’s because they’re capital income, which is taxed at a lower rate than labor income. Trump’s 40 percent corporate tax cut therefore robs the Treasury in two ways. First, the Treasury loses 40 percent of what it would otherwise collect from corporations. Second, that money—multiplied by seven—goes to shareholders, who don’t pay taxes on it until they withdraw the money or receive dividends, at which time they pay only 20 percent to the Treasury (compared to a top marginal rate of 37 percent for the dollars in your paycheck). Or maybe they pay nothing at all, because, according to the Americans for Tax Fairness study, three-quarters of all American stocks are held in tax-exempt or tax-advantaged accounts.
What can we conclude from all this?
First, corporate taxes are way too low. Trump lowered the top corporate tax rate from 35 percent to 21 percent. Congressional Republicans reportedly want to push it down further to 15 percent. Biden would push it up to 28 percent. The Americans for Tax Fairness study says that would generate $1.3 trillion over 10 years. I’d go further and push the top rate all the way up to 35 percent, but never mind that. The presidential contest is a choice between a guy (Trump) who wants corporations taxed at 20 and perhaps 15 percent and a guy (Biden) who wants them taxed at 28 percent.
The 2022 Inflation Reduction Act introduced a 1 percent tax on stock buybacks. Biden wants to make it 4 percent. That would generate $166 billion over the next decade, according to Americans for Tax Fairness. I don’t know that Trump has taken a position on this, but he keeps threatening to repeal, at least partly, the IRA. I’m all for taxing stock buybacks as much as possible, but ultimately I’d like the SEC to go back to making stock buybacks illegal. That would reduce revenues from the buyback tax to zero. I can live with that.
Biden has also proposed taxing capital gains and dividends at the same rate as labor income, but he only wants to do that on capital income above $1 million. I think everybody should be taxed at the same rate for labor and capital income, and too freaking bad if that means some people earning less than $400,000, on whom Biden has promised not to raise taxes, end up paying more. But this is another area where Trump is going in the exact opposite direction. Biden also proposes eliminating the “angel of death” loophole that allows heirs to avoid paying capital gains tax on investments they inherit—if said inheritances exceed $10 million. That’s at least twice as high a threshold as makes sense.
Our long-term goal should be to liberate the corporation from its Wall Street oppressor. This will entail a significant increase in financial regulation and a lot more people joining labor unions. Corporate chiefs will cry foul. But mostly they’ll do that because their masters at hedge funds, mutual funds, pension funds, etc. demand it. They don’t even have to ask.