Our view: Stock buybacks invite a backlash on corporate rates

As regular readers know, cutting the corporate income tax was one of the few parts of the recent tax bill that this Editorial Board supported. The previous rate of 35% was both exceptionally high and easily gamed.

But corporate America isn’t doing itself any favors in how it is spending its tax windfall, which comes from lower rates and, in some cases, from repatriating profits stored overseas.

The tax bill was sold as a way to create jobs and boost stagnant wages. So far, at least, corporations have been showing more concern about shareholders than about employees or the economy as a whole. In fact, it is hard to imagine a better strategy for fomenting a backlash and ensuring that the new low rates don’t last.

Just since passage of the law, companies have announced an astounding $200 billion in stock buyback plans, with some of the bigger ones coming from Cisco Systems ($25 billion) and Wells Fargo ($22.5 billion).

Buybacks — a way of boosting a company’s stock price by decreasing the supply of shares in general circulation — don’t do much to increase economic growth, raise wages, hire workers or build facilities.

In addition to stock buybacks, companies have been doing other things to reward stockholders, including increasing dividends and reducing debt. In a poll by Morgan Stanley, companies said they intended to spend 51% of their windfall on these three things.

Nearly 20% would go to mergers and acquisitions, which are, in essence, another form of stock buyback, one in which a company buys shares of a targeted company rather than its own. In fact, mergers tend to bring job cuts.

Add this up, and you get a whopping 70% of the tax windfall going to shareholders in ways that have little direct impact on the economy.

The remainder would be divided between 17% for capital expenses and just 13% for wage increases.

Some companies have touted bonuses they have given out. Any bonus is welcome, but the numbers don’t lie. This is a tiny portion of the windfall. And the fact that they gave out onetime bonuses, rather than permanent raises, was telling.

In the coming years, many of the tax bill’s provisions dealing with ordinary taxpayers are scheduled to expire. Provisions dealing with corporations, private companies and wealthy heirs will come under enhanced scrutiny — particularly if Democrats reclaim more power in Washington.

If corporations want to hang on to some or all of their tax breaks, they had better start making a better case for themselves.