The Battle Over Corporate Buybacks

The Battle Over Corporate Buybacks


Corporate buybacks have hit record highs and dividends are rising too, according to Tuesday’s Wall Street Journal, driven upward by both strong earnings and the $1.5 trillion tax cut Congress passed in December.

Critics have highlighted the wave of buybacks as proof that the tax overhaul was a gift to stockholders, with few long-term benefits for workers beyond a handful of heavily promoted bonus payments. But Republicans and pro-business groups have pushed back on the idea that buyback and dividend increases are serving only the interests of the rich. Scott Greenberg of the conservative Tax Foundation summed up the general argument in a recent tweet saying that it’s too early to tell if the tax overhaul is working, regardless of the buyback surge. “High levels of buybacks could mean a lot of things,” he wrote, including the movement of capital from lower to higher productivity sectors.

Kevin Hassett, who leads President Trump’s Council of Economic Advisers, recognized last week that many companies are focused on buying back their own shares, but said things would look different in the long run. “Right now we’re going to have an adjustment where you see probably more dividends and share buybacks than wage increases. But going forward we’re going to see a lot of capital formation and wage growth,” Hasett said. And as The Wall Street Journal’s Richard Rubin pointed out Tuesday, “Wage increases via corporate tax cuts were always a long-run story.”

Critics of the tax cuts say the historical data indicates that since the 1980s, companies have used tax windfalls almost entirely for buybacks and dividends, and that the wage thesis is purely theoretical and unlikely to play out. Heitor Almeida, a professor of corporate finance at the University of Illinois at Urbana-Champaign, told The New York Times Tuesday that buybacks may themselves result in lower levels of investment. “We have some causal evidence that because of short-termism companies are doing some stock repurchases that maybe they shouldn’t do. And maybe that’s causing them to reduce investment,” he said.

Even some of the tax cut’s proponents admit that increased capital formation and higher wages may not be in the cards. The Tax Foundation’s Greenberg said that, while it’s too soon to tell one way or another, the buybacks could indeed end up being a bonanza for the already rich: “it could indicate an increase in the consumption of high-income households, if the money from buybacks isn't reinvested by households into U.S. businesses that increase real investment. I agree this is the scenario to be afraid of.”