Making the tax bill pay social dividends: A call to investors
In the wake of the Tax Cuts and Jobs Act, US multinational corporations are due to receive a giant cash windfall. Investors should call on these companies to use this money with an eye toward long-term, inclusive, and sustainable value creation.
On December 20, the US House of Representatives voted to approve a tax bill that is widely expected to exacerbate inequality, due in no small part to the bill’s generosity to corporations. The corporate handouts are being paid for by the middle and working classes, whose comparatively measly tax cuts are set to expire by 2027. The new law hands US multinational corporations vast sums of money in many forms, starting with the decrease in the overall statutory corporate tax rate from 35 percent to 21 percent. US multinational companies will also be able to repatriate profits earned offshore at a steeply discounted tax rate between 8 and 15.5 percent instead of 35 percent, after which time foreign earnings will no longer be subject to US tax. This mandate will allow foreign subsidiaries to return nearly $3 trillion in earnings to their US parent companies.
How will corporations spend the money? Headlines imply that they will use it altruistically. Shortly after the enactment of the Tax Cuts and Jobs Act, a number of companies, citing the tax law, announced that they will pay extra employee bonuses and increase capital expenditure—investment in physical assets—by a high degree. But history has demonstrated that corporations tend to use their repatriated earnings in more self-serving ways.
In the year following Congress’s one-time repatriation holiday under the Bush administration, the rate of stock buybacks—a feat of financial engineering where corporations repurchase the shares they issued on the public markets, boosting the share price and enriching stockholders – increased from 16 percent to 38 percent. Another study found that a $1 increase in repatriations was associated with a nearly $1 increase in payouts to shareholders, primarily through buybacks. Now infamously, a group of CEOs reacted in silence when asked at the November 2017 Wall Street Journal CEO Council if they would increase capital investment were the tax bill to pass, all but confirming that workers and domestic industry will not be the primary beneficiaries of this windfall. Other commonly-cited uses of repatriated capital, like issuing dividends and funding mergers and acquisitions, can be beneficial to the economy in the presence of job creation and capital expenditure. Without this, though, and coupled with a tax law that is designed to benefit wealthy individuals and large US multinational corporations, these uses of capital will exacerbate inequality. And the companies giving away all those bonuses? Some have subsequently announced layoffs and store closings.
This should not come as a surprise. The $3 trillion we are talking about is “offshore” only in the technical sense that it is booked in the accounts of foreign subsidiaries. It is either invested in physical plants abroad or in financial securities – including securities traded in New York City. The US parent companies of these subsidiaries have been able to borrow against that money in order to invest in physical plants in the US as well, but they haven’t. Instead, they have largely sat on the cash. And they are now able to return it to their shareholders, in the form of dividends and buybacks, at a steeply discounted tax rate.
Companies defend this behavior by saying they are meeting their fiduciary duty of increasing the company’s value to benefit shareholders, and supply-side economics would tell us that this “trickle down” effect will bolster the middle class. A rising tide lifts all ships. Or does it? Research shows that the wealthiest 20 percent of Americans own more than 92 percent of all publicly-traded US equity securities—meaning 80 percent of American households together own just 8 percent. So the rich get richer. This data flies in the face of the assumption that if Wall Street does well, we are all better off. For most of us, it makes little difference.
Despite this concentration of wealth, there are investors who are intrinsically motivated to do more with their money than take their dividends to the bank. For example, pension plans that safeguard the financial security of the working class, endowments that fund critical medical and educational institutions, and a growing league of socially responsible investors who use their portfolios to create social and environmental change.
If the corporate handouts in this bill are intended to make investors happy, all investors should use their voice, no matter how seemingly small, to call for a better use of this capital. At first glance, it seems impossible that investors would tell companies to not distribute the money through dividends or inflate the price through stock buybacks; but the cost of not doing so is great, and a new form of finance is burgeoning. Forward-thinking investors – like many pensions and endowments – have demonstrated that, contrary to old school Wall Street logic, corporate policies that benefit society (which many companies call “too expensive”) also benefit business in the long-term: paying a living wage, transparency and reporting on human rights protections in supply chains, and promoting and protecting workers’ safety, to name a few. This philosophy may be catching on with mainstream financial giants, like asset manager BlackRock, who recently sent a letter via CEO Larry Fink to public company CEOs telling them that their businesses need to proactively manage and demonstrate positive social impacts.
Oxfam America, as a shareholder of 45 publicly traded US corporations, is calling on companies to invest this cash in policies and practices that will reduce inequality.