Here’s How U.S. Businesses Actually Used Their Tax Cuts
Republicans predicted a growth explosion while Democrats warned of fat-cat investors. Both sides were wrong.
On Jan. 1, 2018, the biggest, most sweeping U.S. corporate tax cut ever enacted went into effect. A year later, we’re able to see how businesses used all that extra cash.
The short answer: to buy back shares. The long answer is slightly more nuanced, but not by much.
Corporations had been lobbying lawmakers for years to reduce the corporate income tax rate—which, at 35 percent, was the highest among the U.S.’s major trading partners. Republicans in Congress and the White House framed 2017’s Tax Cuts and Jobs Act as a means to boost employment, enhance wages, and encourage companies to invest and manufacture in the U.S. Among other things, the law reduced the corporate tax rate to 21 percent, at a cost of as much as $1.5 trillion in lost government revenue over 10 years.
Annual reports from four companies—Apple, Walt Disney, Visa International, and Starbucks—that completed their fiscal years on Sept. 30 show that free cash flow increased an average 33.7 percent from fiscal years 2017 to 2018. Overall, these four companies used their windfall to boost share buybacks an average 75.5 percent (including 119 percent growth in buybacks for Apple and a 64 percent decline for Disney), while paying out just 9 percent more in dividends (although Starbucks and Visa increased dividend payouts by at least 20 percent). Capital investments—which from now until 2022 are fully deductible in the year a purchase is made—rose 8.6 percent from a year earlier for these companies.
While the law lowered the statutory tax rate, the amount companies pay can vary greatly depending on how profitable they are and how many targeted tax credits and deductions, such as capital expenditures, they can claim. Almost all these companies saw their effective tax rates drop. Some, including Walt Disney Co., saw their rates fall much more than the 40 percent difference between the new and old corporate levies.
But effective tax rates won’t stay this low forever. Some of the taxes on international income go up over time, and the tax break for debt will become less generous. “It’s definitely front-loaded,” says Andrew Silverman, a tax policy analyst at Bloomberg Intelligence. “When rates start going up again, investors will be befuddled.”
During the debate over the tax cut bill, Democrats warned that any gains from it were more likely to flow to executives and investors than to workers or the underlying economy. Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, echoed that complaint in a February 2018 hearing with Treasury Secretary Steven Mnuchin, saying that corporate leaders were “funneling the tax windfall into buybacks that inflate the value of stocks held by affluent executives and wealthy shareholders.” Trump administration officials, including Mnuchin, have defended buybacks, saying they help the economy by freeing up money investors can allocate elsewhere. Ultimately, provisions that encourage companies to make capital expenditures provide about twice as much growth as corporate rate cuts, according to Kyle Pomerleau, an economist at the nonpartisan Tax Foundation.
At the end of the day (or rather, year), the law failed to live up to its proponents’ most optimistic promises of 4 percent economic growth, fueled by billions in new equipment purchases. But based on these four companies’ yearend results, it’s also clear that the detractors’ dystopian vision of chief executive officers lining their pockets while workers’ incomes stagnate hasn’t come to pass, either. Republicans have repeatedly pointed to rising wages and lower unemployment as a sign that their plan is—at least partially—working.
Of the companies in this group, Apple Inc. is the only one to have made any worker-related pronouncements, pledging in January 2018 to hire 20,000 new employees by 2023. It’s brought in 9,000 new employees since then, the company says, putting it squarely “on track” to meet its goal. In December, Apple announced it would spend $1 billion on a new campus in Austin, Texas, which will accommodate 5,000 additional employees, with the capacity for an additional 10,000.
But by far the company’s biggest expense under the tax law was share buybacks. In May, Apple said it would plow $100 billion into its own stock by the end of 2018; as of September, it had spent $72 billion buying back shares. Since then, its stock has had a mixed performance record. Early this year, Apple cut its revenue forecast on weaker-than-expected sales in China tied to the trade war, leading to a sell-off. The company is down for the year so far.
With the biggest year-over-year drop in effective tax rate, to 11.3 percent from 32 percent, Disney increased capital spending by $842 million in fiscal year 2018. Analysts say that figure is unlikely to grow much more in the coming years as slowing advertising sales temper Disney’s expansions in content, technology, and theme parks. Unlike some other companies—notably Apple and Starbucks Corp.—Disney decreased its share buybacks, which is at least partly tied to a pause in repurchases while it completes its acquisition of some of 21st Century Fox’s media assets.
Visa Inc. increased its dividend payouts about 22 percent, from $1.58 billion in 2017 to $1.9 billion in 2018. Many companies, including the other three on this list, announced one-time cash or stock bonuses as a result of the tax law, which some economists have panned as an ineffective way to stimulate growth. But Visa made the relatively rare move of boosting its matches to retirement accounts. Personnel costs increased 21 percent from a year earlier, tied to a larger head count and higher incentive compensation, Visa said in a filing.
Howard Schultz, who was executive chairman of Starbucks when the tax cut passed, panned the law, calling it “fool’s gold.” Still, Starbucks investors benefited from buybacks that more than tripled, to $7 billion, from a year earlier, vs. $2 billion in 2017. Dividends and capital expenditures increased slightly. The company said it also boosted a sick-time benefit for employees and expanded paid parental leave to include nonbirth parents as a result of the tax cut.