Tuesday, December 5, 2017

This Week's Message: Does It Really Matter How Companies "Spend" Their Tax Savings?

The following is me thinking via my keyboard about an article I just read.

A senator from New York is leveraging Bank of America's plan to add another $5 billion on top of a previously announced $12 billion share buyback campaign to argue that 
"big corporations can smell the huge tax cut they have coming, and rather than raising workers' pay or hiring new workers, they're buying back stock and prepping huge dividend payments," 
Well,  here's how I see it: Companies in a competitive market environment will utilize excess liquidity in a manner that they believe will best serve their owners. If indeed a given company's agents believe that expanding operations in a manner that, by sheer coincidence, a given politician would prefer they do best meets their objectives, well, then, that's what they'll do. 

If, however, they deem otherwise; if, for example, they determine that the optimal use of their tax savings is to simply inject it into the private economy by way of distributing it to their shareholders, who will in turn deploy it in the manner in which they deem most productive, so be it. The end result will be more capital entering the private sector via U.S. businesses, and less entering the public sector. Whether or not we agree that that's a good thing is of course another debate altogether. 

So, if/when you're inclined to sympathize with the soon to be heavily leveraged line "they're not going to invest their tax savings, they're going to give it all to their shareholders", understand that even if that were true across the board (which surely it won't be, some companies will indeed increase capacity and, perhaps, in the process gain an edge over the competition who simply passed their savings directly onto shareholders), it simply means that a whole bunch of money is about to be injected into the economy. Kinda like quantitative easing without the central bank blowing up its balance sheet.

Bottom line, while tax reform may indeed "fail" by the good senator's standards, it certainly won't be because companies passed the savings onto/into the private economy. Actually, I believe that's ultimately the idea...

Now all that said, whether or not, economically speaking, this is at all the right time is where I'm skeptical. Here's from last Friday's blog post:

You see, the U.S. economy is actually doing quite well at the moment, while the jobs market is as healthy as it's ever been --- and, friends, that's not open for debate. Therefore, a tax plan whose title encompasses economic and jobs growth at a time when both are firing on most cylinders conjures up images of a pulling forward of economic activity (that would've occurred over a longer period), rising inflation, higher interest rates and so on.

In a perfect world, such presumably stimulative measures would be reserved for the next recession. Implementing them during an expansion (some would say in its later phases) could -- after a likely surge in activity -- actually move up the timetable for the next recession, while, alas, leaving the powers that be with less ammunition with which to combat it.

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