What are Corporations Doing With Their Tax Cut?

Popular Economics Weekly

Economists are predicting second quarter GDP growth of as much as 3.8 percent, up from 2.2 percent in Q1 2018. But it may be a one-time surge, as all indications are the massive 2017corporate tax cut that lowered their nominal tax rate from 35 to 21 percent won’t create any more jobs than are normal in a fully-employed economy by investing, say, in more production capacity (i.e., in capital expenditures).

Instead, corporations are returning their one-time windfall of up to $300 billion to the stockholders, part of their already $2.1 trillion cash hoard that corporations haven’t been able to find a use for. So stock buybacks are the preferred use of their cash, or more M&A acquisitions like the AT&T purchase of Time Warner.

Graph: FRED

This isn’t helping the ordinary tax payer, as Medicare and Medicaid spending cuts of up to $1 trillion over the next ten years had to be enacted to pay for the corporate windfall and consequent addition of $1.5 trillion to the national debt. Federal tax revenues are plunging in consequence, as shown in the FRED Graph.

It isn’t boosting the stock market very much, either; just keeping the DOW and S&P indexes from falling further after the first-quarter selloff, with a 1.6 percent S&P 500 decline in the first quarter offset by a 3 percent gain in the second quarter, reports CNBC, leaving the index barely up about 1.4 percent for the year.

“Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record,” said CNBC.

Companies announced $433.6 billion in share repurchases during the period, nearly doubling the previous record of $242.1 billion in the first quarter, according to market research firm TrimTabs, per CNBC.

At the same time, investors dumped $23.7 billion in stock market-focused funds in June, also a new record. For the full quarter, the brutal June brought global net equity outflows to $20.2 billion, the worst performance since the third quarter of 2016, just before the presidential election. The selling is particularly acute in mutual funds, which saw $52.9 billion in outflows during the quarter and are typically more the purview of the retail side.

Why the selloff in stocks? Much of it has to do with the misinformation campaign of Trump officials, who literally maintain the opposite of reality. The Republican’s tax cut orthodoxy has always maintained that tax cuts create more jobs—that repatriating some $300B in overseas’ profits will be spent at home. But that’s only when corporations choose to invest in future growth, as I said, rather than enriching their CEOs and stockholders with higher dividends, or M&As that usually dilute shareholder equity,.

The national debt is on track to approach 100 percent of gross domestic product (GDP) by 2028, said the nonpartisan CBO, which analyzes legislation for Congress. That amount is far greater than the debt in any year since just after World War II when it was 120 percent of GDP, which paid for WWII.

The numbers don’t lie. Tax revenues are in fact declining, which means those tax cuts aren’t paying for themselves. It also means a larger share of the tax revenue pie will have to be spent on interest payments, and therefore less on the programs that benefit most Americans—on healthcare, education, R&D, environmental protection, workplace protection, and poverty programs like food stamps—anything that would boost the standard of living for those living on the edge.

Harlan Green © 2018

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