A couple of tax truths get revealed

Long before the Tax Plan was passed in December, I have shared my concern about our runaway debt problem. So, I am none to thrilled by a Tax Plan that will make it worse. Yet, that is not my only concern. While I was all for some tax relief on corporations to encourage the repatriation of overseas earnings, Congress and the President went much too deep.

Their stated goal was to fuel even more growth in the economy which was already doing pretty well for a long time – over 8+ years of growth – which is now the second longest growth period in our history. In essence, we borrowed from our future to improve on something that was percolating at a pretty good clip.

Yet, while this was a stated goal, I said then and repeat now, that may have been oversold. My fear is by giving money to corporations with no requirement, they would likely use it to benefit their EPS using a fairly expedient approach – they would buy back shares from the open market. Companies that cannot figure out how to grow earnings, can easily reduce the outstanding shares in the denominator through buy backs. I learned many years ago, share buy backs are usually a sign of weakness. Companies do this to meet EPS targets to pay bonuses. Board members do not complain as they may be doing the same thing at their own companies.

But, don’t take my word for this concern. In an article in Reuters this week, “Republican U.S. Senator Marco Rubio, in a move that may undercut his party’s message about the recent tax overhaul ahead of the 2018 midterm elections, told the Economist magazine there is ‘no evidence whatsoever’ the law significantly helped American workers.

‘There is still a lot of thinking on the right that if big corporations are happy, they’re going to take the money they’re saving and reinvest it in American workers,’ Rubio said in the interview published Thursday.

In fact they bought back shares, a few gave out bonuses; there’s no evidence whatsoever that the money’s been massively poured back into the American worker.’”

Per an article in March by CNN Money reporter Matt Egan, “Buy backs have exploded in 2018 thanks to windfall from the Republican tax law. American companies including Wells Fargo (WFC) and Cisco (CSCO) have showered Wall Street with $214 billion of stock buy back announcements so far this year, according to research firm TrimTabs.

But critics argue Corporate America’s fascination with stock buy backs has come at a real cost to American workers. Instead of focusing on short-term rewards for shareholders, they say companies should make long-term investments by retraining workers, ramping up benefits and boosting wages.

Stock buybacks have been a prime mode of both concentrating income among the richest households and eroding middle-class employment opportunities,‘ said William Lazonick, a professor at the University of Massachusetts Lowell who has studied the impact of stock buybacks.”

In my view, it would not be surprising to see some additional growth in our economy, but it is projected to be much less than Congress and the President have touted. What is throwing even more water on projected growth is the President’s announced tariffs. This has thrown global markets in a state of disarray and companies do not like uncertainty. If they don’t know if terms will be favorable, they will choose more cautious roads which lead to less but more predictable profits.

This uncertainty is already showing up in the capital markets. What frightens me is we sold our future with more debt while not even addressing the existing debt. And, for what purpose is to be determined.