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The deceptively named Tax Cut and Jobs Act slashes the corporate tax rate from 35 percent to 21 percent on the theory that companies will use the extra after-tax profits to make productive investments that will create jobs for Americans.
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Yet it is clear that instead of helping to rebuild the vanishing middle class, corporate executives will funnel the tax savings to already-rich shareholders through stock buybacks and cash dividends, increasing their take from the stock market. As a result, the nation’s rampantly unequal income distribution will only become worse.
When only a very few CEOs tentatively raised their hands, Cohn asked, “Why aren’t the other hands up?” Subsequent interviews made clear that, among the CEOs, it was already a foregone conclusion that the tax breaks would end up as buybacks and dividends.
For the Republican corporate tax cut to result in job creation, Congress must follow it up with legislation to rein in these distributions to shareholders. There is a straightforward and practical way to accomplish this objective: Congress should ban corporations from doing stock buybacks, more formally known as open-market stock repurchases.
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First, the stock-based compensation of senior executives incentivizes them to do distributions to shareholders. Annual mean remuneration of CEOs of the same 475 companies listed on the S&P 500 from 2007 through 2016 ranged from $9.4 million in 2009, when the stock market was in the dumps, to $20.1 million in 2015, when the stock market was booming.
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Second, for more than three decades, executives of major U.S. corporations have preached, conveniently masking their self-interest, that the paramount responsibility of their companies is to “create value” for shareholders. Most recently, from 2007 through 2016, stock repurchases by 461 companies on listed on the S&P 500 totaled $4 trillion, equal to 54 percent of profits.
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In addition, these companies declared $2.9 trillion in dividends, which were 39 percent of profits. Indeed, top corporate executives are often willing to incur debt, lay off employees, cut wages, sell assets, and eat into cash reserves to “maximize shareholder value.”