The Taxman

[Jolly]

@taiwan_girl said in The Taxman:

@Horace With the US stock market being going to (almost) a record, are "they" predicting a President Trump re-election or a Vice President Biden win?

It doesn't matter. Presidents have no effect on the stock market.

[Horace]

@xenon said in The Taxman:

The biggest thing the stock market rise tells me is that businesses can't earn a return by investing money back in their own operations.

I'm not sure what you mean by this?

[xenon]

@Horace said in The Taxman:

@xenon said in The Taxman:

The biggest thing the stock market rise tells me is that businesses can't earn a return by investing money back in their own operations.

I'm not sure what you mean by this?

https://www.ft.com/content/e9bccd00-db98-11e8-8f50-cbae5495d92bv
https://www.ft.com/content/960ec8ec-5c36-11e9-9dde-7aedca0a081a

(open the links in incognito/prviate mode)

The stock market is being used as a vehicle to park huge amounts of cash available (it's better than the alternatives). Even businesses themselves are often buying back their stock instead of putting the money into their operations (e.g., capex).

[xenon]

https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy

The answer is clear: Corporate tax breaks contained in the Tax Cuts and Jobs Act of 2017 provided the corporate cash for the vastly increased level of buybacks in 2018. First, there was a permanent cut from 35% to 21% in the tax rate on corporate profits earned in the United States. Second, going forward, the 2017 law permanently freed foreign profits of U.S.-based corporations from U.S. taxation (Under the Act, the U.S. Treasury has been reclaiming some tax revenue lost because of a tax concession dating back to 1960 that had enabled U.S.-based corporations to defer payment of U.S. taxes on their foreign profits until repatriating them).

In 2018 compared with 2017, corporate tax revenues declined to $205 billion from $297 billion, hypothetically increasing the financial capacity of U.S.-based corporations to do as much as $92 billion more in buybacks in 2018 without taking on debt. Given that from 2017 to 2018 stock buybacks by S&P 500 companies increased by $287 billion (from $519 billion to $806 billion), the reality is that, through the corporate tax cuts, the federal government essentially funded $92 billion in buybacks by issuing debt and printing money to replace the lost corporate tax revenues.

Since the total federal government deficit increased by $114 billion (from $665 billion in 2017 to $779 billion in 2018), we can (again hypothetically) think of $92 billion of this additional government debt as taxpaying households’ gift to business corporations to enable them to do even more buybacks debt-free, shifting the debt burden of stock buybacks from corporations to taxpayers. If, as a “transfer payment,” we add $92 billion to the $150 billion in debt that, according to the JPMorgan data, S&P 500 companies used to fund buybacks in 2018, the percentage of their 2018 buybacks that were debt-financed rises to 30%, greater than the proportion of 29% for 2017. But because of corporate tax cuts, in 2018 taxpaying households were burdened with about 38% of the combined government and business debt that enabled corporations to do buybacks.

[Horace]

can't see the stories even in incognito mode. But yes the stock market is benefiting from a massive shift from bonds.

[Horace]

The demonization of buybacks is a neat political tool in that it exploits the "greedy corporation" perception to convince people that corporate tax reductions are bad, but in a healthy market, and for mature companies, it should be expected to happen sometimes. It only means the company values its own stock more than the market does. Why is that a bad thing? In theory, you can consider it as the company paying back the loan it took in its public offerings, which allows that money to be re-invested by the market in other places. It makes sense for mature, profitable companies to make more than they can reasonably invest in their own organic growth.

[Mik]

Capital and operational expenditure is no guarantee of future profits. Buybacks are simply financial management of corporate assets.

[xenon]

@Horace said in The Taxman:

The demonization of buybacks is a neat political tool in that it exploits the "greedy corporation" perception to convince people that corporate tax reductions are bad, but in a healthy market, and for mature companies, it should be expected to happen sometimes. It only means the company values its own stock more than the market does. Why is that a bad thing? In theory, you can consider it as the company paying back the loan it took in its public offerings, which allows that money to be re-invested by the market in other places. It makes sense for mature, profitable companies to make more than they can reasonably invest in their own organic growth.

I have no issues with buybacks on an individual corporate level. None. There are pros and cons.

I don't even like corporate tax as a tax vehicle.

But - when you step back and see a pattern at the aggregate level in the economy of high-buybacks and low investment, then you have a bit of a problem.

And it's a bit obvious even without hindsight. Cash has been very very cheap. It was not the right time to take on more debt to fuel tax cuts. It was time to pay down the debt.

[Horace]

I'm still struggling to follow your point. Would this pattern you're noticing be equally distressing if the corporations paid dividends rather than did buybacks, with that same money?

[xenon]

@Mik said in The Taxman:

Capital and operational expenditure is no guarantee of future profits. Buybacks are simply financial management of corporate assets.

They're not - but that's the primary mechanism through which tax cuts create growth.

[xenon]

@Horace said in The Taxman:

I'm still struggling to follow your point. Would this pattern you're noticing be equally distressing if the corporations paid dividends rather than did buybacks, with that same money?

Yes. One corporation giving back money to investors or buying back its stock can make sense for idiosyncratic reasons specific to that organization.

When you have businesses in aggregate at the macro-level giving that money back (or buying their stock) -> that speaks to a different problem.

[Horace]

any corporate tax cut will necessarily result in an aggregate increase in returns to investors. That's the point of a corporation's profits. And a tax cut will increase those profits. You can't say that an inevitability is a symptom of a problem.

[xenon]

@Horace said in The Taxman:

any corporate tax cut will necessarily result in an aggregate increase in returns to investors. That's the point of a corporation's profits. And a tax cut will increase those profits. You can't say that an inevitability is a symptom of a problem.

You're not focusing on the primary thing I'm saying. Corporations making profits, tax cuts increasing that - that's fine and dandy. I have no issue with "greedy" corporations and record profits.

Investments = factories, jobs and benefits for workers though and future jobs (read: regular Joe's). That's the mechanism through which it directly benefits society.

There's a secondary benefit of people with profits having more money to invest in other financial vehicles and companies.

But again - if at the aggregate level investment is going down, you have a problem.

[Rainman]

@George-K said in The Taxman:

For example, taxes levied on producers can be passed on to consumers through higher prices."

Yes, as can the 25% tariff. At some point, someone in the U.S. will deem it profitable to manufacture domestically. Hopefully, that will be soon.

Now, back to the heady corporate tax topic.

[Horace]

@xenon said in The Taxman:

@Horace said in The Taxman:

any corporate tax cut will necessarily result in an aggregate increase in returns to investors. That's the point of a corporation's profits. And a tax cut will increase those profits. You can't say that an inevitability is a symptom of a problem.

You're not focusing on the primary thing I'm saying. Corporations making profits, tax cuts increasing that - that's fine and dandy. I have no issue with "greedy" corporations and record profits.

Investments = factories, jobs and benefits for workers though and future jobs (read: regular Joe's). That's the mechanism through which it directly benefits society.

There's a secondary benefit of people with profits having more money to invest in other financial vehicles and companies.

But again - if at the aggregate level investment is going down, you have a problem.

I don't think the metric you're using - "aggregate buybacks increasing" - is reasonably indicative of any problem, since it will inevitably be the case with lower corporate taxes.

Society might want a mature, highly profitable company to pay the profits back to the market, so they could be invested elsewhere. Nowhere is it written that a corporation doing what it does so well that it makes too much money to invest it all in organic growth, is a bad thing.

I think the anti-buyback crowd should take it case by case. It would help to convince me, at least. Show me a corporation that is a prime example of the problem we're discussing.

[xenon]

@Horace said in The Taxman:

@xenon said in The Taxman:

@Horace said in The Taxman:

any corporate tax cut will necessarily result in an aggregate increase in returns to investors. That's the point of a corporation's profits. And a tax cut will increase those profits. You can't say that an inevitability is a symptom of a problem.

You're not focusing on the primary thing I'm saying. Corporations making profits, tax cuts increasing that - that's fine and dandy. I have no issue with "greedy" corporations and record profits.

Investments = factories, jobs and benefits for workers though and future jobs (read: regular Joe's). That's the mechanism through which it directly benefits society.

There's a secondary benefit of people with profits having more money to invest in other financial vehicles and companies.

But again - if at the aggregate level investment is going down, you have a problem.

I don't think the metric you're using - "aggregate buybacks increasing" - is reasonably indicative of any problem, since it will inevitably be the case with lower corporate taxes.

Society might want a mature, highly profitable company to pay the profits back to the market, so they could be invested elsewhere. Nowhere is it written that a corporation doing what it does so well that it makes too much money to invest it all in organic growth, is a bad thing.

I think the anti-buyback crowd should take it case by case. It would help to convince me, at least. Show me a corporation that is a prime example of the problem we're discussing.

I know I posted an "anti-buyback" article. But I'm not anti-buy back. I'm not anti-anything that corporations do. They respond to incentives. That's just an example of a thing you can do instead of increasing investment in your business.

My primary point here is that the tax cuts did not increase business investment. So what did we really "get" as a national for the increased national debt we took on?

[xenon]

I'm purposely also staying away from why I think this happens (this is not the traditionally observed relationship between tax cuts and investment).

There's lots of potential theories people have floated, e.g.: more winner-take-all type big businesses (Amazon, Google, Apple, etc.), regulatory capture, just the wrong time in the biz cycle, etc.

But that's a whole other ball of wax - and multiple issues end up getting conflated.

Similarly I don't really care what corporations do with the tax money outside of investment - that's not my point.

[Horace]

@xenon said in The Taxman:

My primary point here is that the tax cuts did not increase business investment. So what did we really "get" as a national for the increased national debt we took on?

I'm not sure what number you're using to establish that. To misuse one of jon's favorite phrases, what's your null hypothesis? How much should the "correct" sort of investment have increased, absent this problem you're pointing out?

I've explained how a buyback or a dividend is an appropriate and pro-social part of a market, for every reason a market itself is pro-social. It's just a company doing a normal thing with its profits. I struggle to identify a fundamental difference macro-economically between a mature company paying dividends and a less mature company investing in organic growth.

[xenon]

@Horace said in The Taxman:

@xenon said in The Taxman:

My primary point here is that the tax cuts did not increase business investment. So what did we really "get" as a national for the increased national debt we took on?

I'm not sure what number you're using to establish that. To misuse one of jon's favorite phrases, what's your null hypothesis? How much should the "correct" sort of investment have increased, absent this problem you're pointing out?

I've explained how a buyback or a dividend is an appropriate and pro-social part of a market, for every reason a market itself is pro-social. It's just a company doing a normal thing with its profits. I struggle to identify a fundamental difference macro-economically between a mature company paying dividends and a less mature company investing in organic growth.

Aggregate biz investment is tracked, just like GDP, unemployment and other metrics.

If your question is "how do you know that biz investment wasn't going to go down even further in the absence of the tax cuts" - well, no one has that counterfactual and I don't know.

To your second point - if it's just mature companies managing for cashflow vs. less mature ones investing, that's normal. I'm saying that if - on average across all companies - investment is going down with the advent of a tax cut, that speaks to a problem.

[Horace]

I think your thesis is hand-wavy. It would help me understand if you could provide an example of a company that is a good case in point of the issues you're concerned with. And no fair claiming this is aggregate stuff rather than individual company stuff. The aggregate implies the existence of plenty of individual companies that must be doing something problematic.