What did large US corporations do with their extra money from the Trump Tax Cut in 2018 ?

In the January - February 2018 

ECONOMIC LOGIC newsletter,

my article about the Trump 

corporate tax cut began with 

these paragraphs:

( reformatted here )

"Corporate income taxes 

paid for one quarter of 

total federal spending

in the 1950s. 

Before the Trump "tax reform", 

corporate income taxes were 

expected to pay for only 7% 

of total 2018 spending.

The statutory 2017 corporate tax rate

of 35% was already competitive 

with statutory rates in OECD 

developed nations, when including 

value-added taxes for corporations, 

paid in the 34 other OECD nations, 

but not in the US. 

For 2017, the statutory corporate 

tax rate plus the value added tax rate 

added up to over 30% in every 

OECD nation, except Switzerland, 

which was a few points lower.

Only 6.6% of consistently profitable 

US corporations paid 35% or more 

in recent years, and the average 

effective tax rate was 21% 

( 40% below the 35% statutory rate ) 

in recent years, near the lowest 

effective tax rate in US history, 

outside of recessions. "

I opposed the Trump corporate

tax cuts for several reasons:

(1) 

Corporations already had high profit

margins, and high stock valuations,

so no help was needed.

During the next recession, when

corporations really needed help, 

the option of another large tax cut

would be off the table.

(2) 

Few large corporations paid

35%, or anywhere close to a 

35%, corporate tax rate, and there

were no value-added taxes in the US 

-- meaning few US corporations were

"overtaxed" versus other developed 

nations when value added taxes 

were included, for a fair comparison.

(3)

Tax breaks would be mainly used

for stock buybacks, which create

no jobs, rather than for capital

investments, which do create jobs.

(4) 

A tax cut would boost Real

GDP a small amount in the first 

year (2108), but the forever

lost corporate tax revenues

would be have to be financed 

by more deficit spending, 

more debt, and more interest

on the debt, which would offset 

the stimulus from the tax cut 

after the first year.

(5) 

The larger federal deficits would

build up the federal debt even faster,

making annual interest expenses

even higher ... forever after 

( I said "forever" because there is

almost no hope of a budget surplus 

reducing the total government debt. ) 

We now have 

a Bloomberg study 

of the effects of 

the corporate tax cuts

on the 10 largest 

technology companies

in 2018, versus 2017:

The companies supported Trump's tax cut,

and offshore tax repatriation holiday.

They implied they would go on hiring sprees 

that would boost the economy. 

That did not happen.

In fact, these firms 
gave most of their 

tax savings to investors, 
in the form of stock buybacks, 
as I had predicted, based on 
the effects of a Bush tax
reduction in 2004.

Bloomberg analyzed 

2018 spending 

by the 10 largest 

U.S. tech companies: 

  Alphabet, 

     Amazon,

  Apple, 

     Cisco, 

  Facebook, 

     Intel,

  International Business Machines, 

     Microsoft, 

 Oracle,

    Qualcomm. 

The study looked at 

six common uses 

of corporate cash: 

- stock buybacks,

- stock dividends, 

- hiring more workers, 

- acquisitions, 

- capital expenditures,

- research and development. 

2018 data 

were compared 

with 2017:

A +55% surge in stock buybacks,

Only an +8.7% increase in hiring new workers,versus a +24% increase in 2017.

Research and development 

spending up +17% in 2018,

slightly more than +15% in 2017.

The top 10 US tech companies 

spent more than $169 billion 

purchasing their shares in 2018, 

a record 55% surge from the year 

before the tax changes. 

TrimTabs reported that 

the entire tech industry 

authorized the

greatest number 

of share buybacks 

ever recorded, 

totaling $387 billion 

in 2018,

more than 

triple the amount 

authorized in 2017.

Buying back stock is great

for stock shareholders 

and company executives.

It boosts a company’s 

earnings per share, 

and increases the value of the 

holdings of shareholders, 

including insiders, whose 

compensation is often linked 

to stock return.

Repurchases do little, if anything, 

for the economy, especially compared 

with other potential uses of that money, 

including capital investments and 

hiring more workers.

The Tax Cuts and Jobs Act 

cut the nominal corporate tax rate 

to 21% from 35%, while offshore profits 

could be repatriated at a special rate 

of 15.5%.

 Bloomberg noted: 

"Tech companies were the main 

beneficiaries of the cash 

repatriation provision." 

Before the law, the largest 

overseas cash hoards 

among U.S. companies 

were held by Apple, 

Microsoft Corp., 

Cisco Systems Inc., 

Oracle Corp. 

and Alphabet 

-- they all unleashed 

a historic stock

buyback spree.

Not all the tax savings 

were transferred 

into investors' pockets 

through buybacks:

for the 10 largest 

tech companies:

- R&D spending climbed slightly, 

- Capital expenditures rose, mainly

because Alphabet and Facebook 

almost doubled spending in that category.

- Apple and its peers 

"have yet to bring manufacturing 

back to the U.S., 

as President Donald Trump 

had hoped." 

- And there was no surge in tech hiring !

- Trump said the law would bring $4 trillion 

in overseas cash back to the U.S. 

Corporate America repatriated $665 billion

in 2018, according to the Commerce Department. 

Bloomberg observed these results were 

similar to 2004, George W. Bush launched

a similar corporate tax holiday

that allowed companies to pay 

only a 5.25% US corporate tax 

on overseas profits, if they returned 

the money to the U.S..

( 5.25% rather than paying a 35% US tax rate, 

less corporate income taxes already paid 

to other nations, typically averaging a 25% rate,

for a net tax payment of about 35% minus 25%,

or 10%, on repatriated earnings, which is

almost double the 5.25% offer ).

The Bush Administration pitched it 

as a jobs booster, but it was followed 

by large share repurchases. 

The 2004 law explicitly forbade companies 

from using the money for buybacks, 

but they used this new source of cash 

to pay other expenses, and used the money 

they otherwise would have spent on 

those expenditures, for share repurchases.

Soon after the passage of the 2017 tax act, 

Apple said it would contribute $350 billion 

to the U.S. economy over five years, 

including a plan to open a new campus. 

The amount included some investments 

already planned.

Instead, as Bloomberg notes, what Apple did 

do was to unleash a historic buyback spree: 

  Apple authorized a $100 billion buyback in May, 

and spent $73 billion on repurchasing shares 

in 2018. 

As for jobs... don't hold your breath:

Apple’s largest manufacturing partner, 

Foxconn, promised to create 13,000 jobs 

at a U.S. facility as early as 2022, 

winning its own huge tax breaks 

from Wisconsin.

It’s unclear if all 

those manufacturing jobs 

will ever materialize ...

or any of them !