Trump’s tax promises undercut by CEO plans to help investors
Major companies including Cisco Systems Inc., Pfizer Inc. and Coca-Cola Co. say they’ll turn over most gains from proposed corporate tax cuts to their shareholders, undercutting President Donald Trump’s promise that his plan will create jobs and boost wages for the middle class.
The president has held fast to his pledge even as top executives’ comments have run counter to it for months. Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.
Robert Bradway, chief executive of Amgen Inc., said in an Oct. 25 earnings call that the company has been “actively returning capital in the form of growing dividend and buyback and I’d expect us to continue that.” Executives including Coca-Cola CEO James Quincey, Pfizer Chief Financial Officer Frank D’Amelio and Cisco CFO Kelly Kramer have recently made similar statements.
“We’ll be able to get much more aggressive on the share buyback” after a tax cut, Kramer said in a Nov. 16 interview.
U.S. voters disapprove of the Republican tax legislation by a two-to-one margin, according to a Quinnipiac University poll released Nov. 15, and corporate promises to return any windfall to investors aren’t helping the White House sales effort. The Trump administration has appeared flummoxed. At a Nov. 14 speech to the Wall Street Journal CEO Council by Trump’s top economic adviser, Gary Cohn, the moderator asked business leaders in the audience for a show of hands if they planned to reinvest tax cut proceeds. Few people responded.
“Why aren’t the other hands up?” Cohn asked.
Trump has insisted that the Republican tax plan cut the U.S. corporate rate to 20 per cent from 35 per cent. Another provision would impose an even lower tax rate on companies’ stockpiled overseas earnings, giving them an incentive to return trillions of dollars in offshore cash to the U.S. That money is also unlikely to spur hiring because companies are already well-capitalized and can bring on as many employees as they need, said John Shin, a foreign-exchange strategist at Bank of America Merrill Lynch.
“Companies are sitting on large amounts of cash. They’re not really financially constrained,” Shin, who conducted a survey of more than 300 companies asking their plans for a tax overhaul, said in an interview. “They’re still working for their shareholders, primarily.”
White House officials say their coordination with business leaders has been effective, highlighting remarks by executives at companies including Broadcom Ltd. and AT&T Inc. that have explicitly linked tax cuts to job growth.
“The administration has been working with business leaders and job creators from the beginning of the tax reform process,” White House spokeswoman Lindsay Walters said in a statement. “We are encouraged by the strong support we continue to receive as we create a pro-growth, pro-worker and pro-American business tax system that will lead to more jobs, higher wages and a renewed competitive advantage for American companies.”
But in testimony before the bicameral Joint Economic Committee on Wednesday, Federal Reserve Chair Janet Yellen said that the plans outlined by corporate executives to reward investors were unlikely to raise wages for workers.
“I don’t think share buybacks would increase wages,” Yellen said when asked by Michigan Democratic Senator Gary Peters about the impact of CEOs’ plans. Investment in capital and equipment, not buybacks, would raise productivity and pay, she said.
The Trump administration has made plain its desire for companies to publicly embrace the tax legislation. Speaking to the Wall Street Journal CEO Council just hours after Cohn’s appearance, Vice President Mike Pence pleaded with executives to advocate for the bill, and “particularly” to help make the case that corporate tax cuts would lead to higher wages.
“We need all of you to tell this story,” Pence said.
One leading proponent of Trump’s tax plan, JP Morgan Chase & Co. CEO Jamie Dimon, has lamented that corporate taxes weren’t cut under former president Barack Obama and says companies would both return money to shareholders and invest in their businesses.
“Had we had the right system seven years ago, trillions of dollars would have been retained. Some would have been paid out in dividends and stock buybacks, but so be it, that’s your money,” Dimon said last week at the Economic Club of Chicago. “But companies would’ve made huge investments, and we know one thing for sure: investment drives productivity, drives jobs and wages.”
The White House released a paper last month predicting that cutting the corporate tax rate to 20 per cent would increase average household income by US$4,000 to US$9,000. Other economists have questioned that claim.