How to judge the corporate tax cuts

The New York Times

President Trump’s critics argue that a surge in stock buybacks indicates that companies aren’t spending their tax cut savings on “anything useful like new investments,” said Justin Wolfers. But how corporations spend their windfalls doesn’t actually tell us much about “whether the tax cuts were a good idea.” The mistake is thinking that companies make investments only when they have cash on hand. Access to cash isn’t an impediment for most firms, though; what they lack are good investment ideas. If a firm has a profitable investment opportunity, it can almost always get financing to pursue it. What’s happening now is that the corporate tax cuts have showered

money on firms “indiscriminately,” and many have “no idea” how to spend it. So they return the money to shareholders. What comes next is what matters to judging the tax cuts’ usefulness. In the happier scenario, investors use their buyback money to channel funds into firms with bright futures; “investment rises and the economy grows more rapidly.” But in the darker scenario, profitable investment opportunities remain scarce or interest rates go up quickly—both of which render the tax cuts “a bust.” Either way, buybacks happen. It’s only when shareholders find useful outlets for their money that tax reform truly makes sense. Right now, “it’s simply too early to tell.”