In case you missed it over the weekend, Cato scholar Ryan Bourne wrote about the Republican tax reform plan in an op‐ed featured in The Hill. He responds to the argument that corporations will use money saved from the reduction in the federal corporate tax rate to increase dividends, buy back shares, or other strategies that benefit their shareholders.
Major companies, including Cisco Systems, Pfizer and Coca‐Cola, have said they will use most of the gains from proposed corporate rate cuts to increase dividends to shareholders or buy back their own shares. This has been reported and shared on Twitter as a slam dunk against the Republican tax plan.
After all, a major claim of the administration has been that corporate rate cuts would benefit workers through wage rises, rather than flowing exclusively to capital owners.
Yet, the reaction of these companies is nothing unexpected, at least in the short term. Any substantial cut to the corporate rate provides an immediate windfall to so‐called “old capital.”
But even though the initial beneficiaries of changes in the corporate tax rate will indeed be corporate shareholders, Bourne points out that those savings have to go somewhere.
If existing firms have excess capital in the short‐term, distributing it to shareholders in some way makes sense. This money is unlikely to sit dormant afterwards. In all likelihood, that money will be deployed elsewhere to find new value.
The market for growth industries through venture capital and angel investment is huge, and these windfalls can be invested in the start‐ups and industries of the future.
The key point though is that the lower corporate rate improves the after‐tax profitability of investment across the economy, and as such generates new activity. Other things given, domestic companies will have greater incentive to invest.
Foreign companies will be more likely to expand their investments in the U.S. — or even shift their operations here. U.S. companies will repatriate profits earned by their foreign subsidiaries rather than leaving them abroad, and more capital will flow from other less productive U.S. sectors into the U.S. corporate world.
Read the op‐ed here.