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Why You Should Care about Stock Buybacks – in 3 Charts

top corporate tax rate 1945 - 2013For decades, we’ve been letting the GOP tell us that corporate tax cuts could somehow fix our economy and balance the budget.

Turns out: corporations have been using that extra money to buy back their own stock, instead of creating jobs.

Last year, corporations in the S&P 500 index spent a combined $564 billion on stock buybacks.  That’s more than 3.1% of the entire US Gross Domestic Product for 2014.  Spent NOT on job creation… not on deficit reduction… but instead, spent on consolidating corporate ownership.

For decades, the political rhetoric about “cutting taxes for job creators” has been both accepted and effective.

But back when our country had a thriving Middle Class, corporations had top tax rates in the 50% range.

share of income taxes 1945-2014But as corporate tax rates began to fall, total federal income tax revenues began to fall – and the share of taxes paid by individuals began to grow.

And we all waited for corporations to spend their extra money on job creation.

And we waited.

And we waited.

And somebody convinced the Securities and Exchange Commission to create its “Safe Harbor Rule” in 1982 – enabling corporations to buy back their own stock without fear of federal prosecution.

And under the radar, that’s exactly what corporations started doing.  And I DO mean “under the radar.”  Nobody knows exactly how much money US corporations have been spending on stock buybacks.  Buybacks are tracked for the S&P 500 – which are the numbers I’ve used here –but not for all the other corporations that do business in our country.  Even the SEC doesn’t keep statistics on overall stock buybacks.

But let’s take a minute to pretend.

Let’s pretend that our corporate tax rates weren’t so low (and there weren’t so many loopholes), and that the SEC’s “Safe Harbor Rule” had been repealed.

2014 share of federal income taxesLet’s pretend that all the money (the S&P 500) spent on stock buybacks had been paid as corporate taxes, instead.

Here’s what that would have done, to the share of federal income taxes paid by individuals in 2014.

Yep.  THAT’s why you should care about stock buybacks.

They’re coming out of your pockets, in the form of higher taxes.

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Read more NHLN coverage of stock buybacks here.

Read Marketwatch, “Wall Street’s new drug is the stock buyback” here.

Tax Policy: Time to go Back to the Future?

President Dwight EisenhowerRemember what it was like, back in 1952?  The nation’s unemployment rate was 3%.

Remember the days of annual raises? Back in 1952, the average family income was growing by about 5.4% a year.

Remember the days when one job was enough for a family to live on?  Back in 1952, 75% of American families had only one income.

Remember when our country had a solid middle class?  Back in 1952, CEOs were paid only 47 times as much as their average employee.  (These days, CEOs receive about 230 times what their employees earn.)

Back then, lobbying was an $8-million-a-year industry.   In 2010, lobbying reached an all-time high of $3.55 billion (even after adjusting for inflation, that’s about 46 times what corporations spent lobbying 60 years ago).

What else has changed?  Tax rates.  After all that lobbying, Congress has slashed the tax rates that apply to top-income individuals.  (The top tax rate used to be 90% — both for earned income and for dividend income.  Now, the top tax rate for wage income is 35%, while taxes on dividends are capped at 15%.  Back in 1952, corporate dividends were taxed as “income”; now they are considered “capital gains”.)

What else?  The structure of executive compensation has changed significantly, to reflect changes in the tax laws.  Back in the 1950s, most executives received salaries plus perks such as a company car.  Now, executives receive compensation “packages” that can dwarf their base salary — including “non-cash” awards of corporate stock, which takes advantage of the low capital gains tax rate.

What else has changed? As CEOs receive more of their compensation in stock, they have a bigger personal stake in decisions about what to do with corporate profits.  Should the company reinvest profits by expanding operations and hiring new employees? Or pay profits out to shareholders as dividends?   Implement a long-term growth strategy?  Or loot the company for as much immediate payout as possible?  When top executives own millions of shares, they have a huge personal stake in that decision.

Remember how casino mogul Sheldon Adelson pledged to spend $100 million on Mitt Romney’s campaign?  Wonder how he could afford it?  It was only a fraction of the amount Adelson received this year in stock dividends from his company – even though “Dividend payments to shareholders are not standard in the casino industry, as companies generally still prefer to spend cash on new growth opportunities.” (Are you wondering who made the decision to pay dividends rather than grow the business?)

That $100 million was also slightly less than what Adelson could have received – just in lower taxes on dividends – just in one year – if Mitt Romney had been elected President and had been able to implement his proposed tax policies.  (All told, Adelson could have received tax breaks totaling $2.3 billion, if Romney had been elected.)

Lots of things have changed, since 1952.  Sixty years ago, who would have dreamed that one person would try to buy a presidential election?  Or that a presidential candidate would propose tax breaks which would benefit a single campaign contributor to the tune of $2.3 billion?

Maybe it’s time to start asking whether all those tax cuts have actually benefited America’s economy?  Or have they only benefited America’s richest individuals?

Maybe it’s time to consider what effect those tax cuts have had on corporate decisions.

Maybe it’s time to consider what effect they’ve had on America’s middle class.

Maybe it’s time to stop giving CEOs tax incentives to loot their own companies.

Maybe it’s time to go back to the 90% tax on dividend income, at least for dividends paid to executives by the companies they control.

 

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