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Tax Facts Tuesday: Stock Buybacks and Investment: Good News for American Workers

May 15, 2018

The Facts: Following enactment of the Tax Cuts and Jobs Act, companies have announced bonuses and benefits for employees, increases in employees’ wages or salaries, and increased investment. Some companies also have announced stock buybacks. Companies are pointing to their tax savings under the Tax Cuts and Jobs Act as making all this possible.

The Rhetoric: Many Democrats are pushing the narrative that stock buybacks exclusively benefit the wealthy. Sen. Chuck Schumer (D-NY) proclaimed that, “Buybacks don’t help the American workers, they don’t grow the economy.”

The Reality: A stock buyback, also known as a share repurchase, is a standard business practice in which a company uses earnings to repurchase outstanding stock. Companies have been doing this for decades and stock buybacks are part of a healthy economy.

The rhetoric fails to acknowledge that 50 percent of Americans are invested in the stock market and 4 in 10 dollars invested in the stock market are held in retirement funds. One outcome of stock buybacks can be higher stock prices. This will help Americans increase their retirement savings and after years of slow economic growth during the Obama era, that would be a welcome development for many families.

The rhetoric also misses the point that a buyback itself does not make shareholders any better off as it is just the exchange of a share of stock for its value in cash. And most importantly, stock buybacks free up capital to be used by shareholders for new investments – stock buybacks realign capital so it can be deployed where the investment opportunity is greatest. Economists Kyle Pomerleau and Scott Greenberg of the nonpartisan Tax Foundation found that:

“Ultimately, the effect of buybacks will also depend on what shareholders do with the money they receive. For instance, shareholders might just reinvest the money they receive from some companies’ buybacks into other stocks. In this case, the buybacks could actually have a positive economic effect, transferring capital from less productive businesses into more productive ones.”

When looking at the entire picture of the American economy, tax reform is boosting investment in a major way. According to the nonpartisan Congressional Budget Office (CBO), the Tax Cuts and Jobs Act will boost investment by $600 billion over the next decade. That helps the American worker. More investment means greater job creation and higher wages. According to CBO, the Tax Cuts and Jobs Act will create 900,000 new jobs and increase wages by $1.2 trillion.

The Bottom Line: Tax reform means more retirement savings, more jobs, and higher wages – and that’s a good thing.