The Washington Post’s top of the Business Section article on Sunday, 16 December is headlined “How have corporations spent their tax cut windfall?” Thomas Heath, the author, notes that many experts believe that corporations should spend the money no longer taken from them by force to build new facilities, buy equipment, invest in R&D, hire more employees, and pay their employees more. Stock buybacks and higher dividends for stockholders are rather immoral and not in the spirit of the tax cut law.
You see, the government taxes a business, forcibly depriving it of the income it worked hard to earn in a competitive global economy. The government thereby gains the moral right to expect the company upon the government’s graciously deciding to take a bit less of the company income to spend that income according to the government’s wishes. Those wishes require that the company creates more and better jobs and does so in a way that is as obvious to the voters as possible.
What has become of the money that companies are now able to keep since the tax cut last year? Business investment by Standard & Poor’s 500 largest public corporations on new equipment and factories is up 19% in the first three quarters of 2018. Research and development spending increased by 34%. A Federal Reserve statistic shows that independent businesses in general increased business investment by 16% so far this year, which is the highest increase since 1993. For years, capital expenditure by business has been very weak and productivity growth has been less than 1% per year. Private sector employee average earnings are up 2.8% in 2018, after many years of stagnation under the Obama Regime.
The 2018 increases in business capital expenditures, R&D, employee earnings, and the expected increases in productivity should make Americans very happy. Unless you are a Democrat socialist, in which case you bemoan the fact that stock buybacks cost companies $579 billion in the first 3 quarters of 2018. This will set a new record for a year, replacing the record of 2007, just prior to the Great Recession. Wisconsin Senator Tammy Baldwin says “It’s just wrong for big corporations to pocket massive, permanent tax breaks and reward the wealth of top executives with more corporate stock buybacks, while workers are given pink slips and face layoffs.” Never mind that unemployment is at a record low, that millions of open positions cannot be filled with qualified workers, and that average employee earnings are up 2.8% this year. Never, ever allow the facts to get in the way of a very emotional argument for the villainy of businesses.
The left also complains about the fact that dividends to shareholders this year will set a record previously set in 2017.
There is a very unrealistic expectation in the criticisms of the Democrat socialists which we are not supposed to notice. The management of a large corporation now able to keep enough of its earnings to contemplate building a new facility first has to evaluate a number of purposes for that facility, where it will be built, design it, get building and environmental permits, find and hire the people to build it, evaluate and purchase the equipment to put into the facility, and find and hire the people to be employed in the facility. If you have just had a substantial change in the parameters under which your business operates, you are also likely to have to hire more managers to make all of these decisions and kick this whole process into gear. How much of this process can be accomplished in the first 3 quarters of operations under the new tax conditions?
Consider R&D. You have long been doing less R&D than your company should have been doing because too much of your company earnings were taxed away and the regulatory environment was too expensive. During the Great Recession and the numbingly glacial recovery, you released many company scientists and engineers or did not expand their numbers. Your company did not invest much in analytical equipment, your laboratories, the training of your technical experts, prototyping capabilities, and your forward-looking plans for R&D were scaled to your very modest means to do R&D. Now conditions have changed. You want to invest in R&D, but you have to figure out what directions to explore and develop with your greater R&D effort. You consult with your technical people, make decisions on new directions based on evaluations of markets and technical possibilities, figure out what laboratory equipment is needed, evaluate the instruments available from vendors, prepare facilities for their installation, and hire more people to operate the equipment and to solve the technical problems. By the way, the people with the brains, the dedication, and the training for these R&D tasks are hard to find. What fraction of this process is likely to be completed within 9 months of a changed tax environment?
So, while your company is trying to become more productive and to offer new products and services, but is limited on the rate of its spending by these limits of time and resources, what do you do with your suddenly increased available funds? Rationally, you use it for some combination of paying back debts, buying back stock, and offering improved dividends to your shareholders.
Not only is this rational from the company viewpoint, but it is hardly bad for the economy. Lower company debt makes companies more able to weather future downturns and to minimize the layoffs of valuable employees when a downturn occurs, as they always will. The buyback of stock, puts more money in the hands of investors who will then either spend that money or invest it in other firms that need that investment. The increases in dividends help many investors to be able to spend more money in the economy and helps pension funds to be less unstable, as so many of them are. To be sure, some of this money will go to foreign investors. Some of these foreign investors will put their money back into US investments because our economy is about the best in the world. Some will leave our economy. But, if we suppose that money had been left in the hands of the government, what fraction of it would have been utterly wasted and gone to not only unproductive use, but to uses that cause our national productivity to have negative components? Yes, the Democrat socialists believe that government spending is the Gold Standard for the good use of our money. But you have to be loony to think that is the reality.
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