The Trump Tax Bill: The Wrong Incentives

Whitewater’s Community Development Authority twice touted a part of the Trump tax bill as good for Whitewater. (See press release 1, press release 2.)

Continuing a general look at the bill, it’s clear that it’s bad public policy, producing the wrong incentives.  By its very nature, a tax bill is a government policy, favoring some allocations and disfavoring others.  Any tax bill, as an instrument of government command, alters allocations that would take place in a truly free economy; this bill simply doubles down on the worst trends (trends encouraged in prior tax policies).

Indeed, the bill is so bad that the New York Times editorial board can confidently write that You Know Who the Tax Cuts Helped? Rich People:

When Republicans were pitching a massive tax cut for corporations and wealthy families last year, they promised voters many benefits: increased investment, higher wages and a tax cut that pays for itself. The tax plan, congressional leaders said, would turbocharge the American economy and provide a much-needed helping hand to working-class families.


The most notable outcome of the tax law is one that few Republicans talked about: Companies are buying back their own stock — a lot of it. Stock buybacks are expected to reach a record $1 trillion this year. After Congress reduced the top federal corporate tax rate from 35 percent to 21 percent, businesses are flush with cash. Lawmakers also let companies repatriate foreign earnings that they have been amassing at a rate of 15.5 percent for cash and 8 percent for other assets.


Share buybacks have an understandable appeal to executives, many of whom are compensated with stock themselves, and to investors. But buybacks do little for workers, most of whom own little or no stock. It is not even clear that it is in the best long-term interest of companies when they could be using that money to expand or invest in technology that would make them more productive and profitable in the future.

Prof. Steven Pearlstein sees the error in a tax policy that encourages these buybacks in Beware the ‘mother of all credit bubbles’:

Let’s recall those heady days of 2006 when home prices were rising 10, 15, even 20 percent a year, allowing millions of homeowners to refinance mortgages and collectively take out more than $300 billion in cash from the increased value of their properties. Some spent the money on furniture, appliances, cars and vacations, adding fuel to an already roaring economy. Others reinvested it in the already booming real estate and stock markets. When it finally occurred to everyone that those houses and those stocks weren’t really worth what the ­debt-fueled market said they were, markets crashed, banks flirted with insolvency, and the economy sank into a deep global recession.

Now, 12 years later, it’s happening again. This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks. As before, the cash-outs are helping to drive debt — corporate debt — to record levels. As before, they are adding a short-term sugar high to an already booming economy. And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession.

Welcome to the Buyback Economy. Today’s economic boom is driven not by any great burst of innovation or growth in productivity. Rather, it is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption. And it redistributes even more of the nation’s wealth to corporate executives, wealthy investors and Wall Street financiers.

Pearlstein’s right to call this financial engineering, but an even more precise term would be government-encouraged financial engineering.  Trump’s tax bill may be a profitable idea for a few, but it’s bad policy for America.

Policy – in Whitewater, in Wisconsin, and in America – should benefit the many, not merely a few.

Indeed, one would have thought that’s what community development truly meant.

PreviouslyAbout that Trump Tax PlanOn the Whitewater CDA’s Press Release (A Picture Reply Is Worth a Thousand WordsA Candid Admission from the Whitewater CDAMore About that Trump Tax Bill, and The Trump Tax Bill: That’s Not Reform.

See also How Stock Buybacks Work:

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