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April 27 2018

Here’s why stock buy-backs are a good thing

by Mattie Duppler

The effects of last year’s tax reform bill can be broken into three phases. The first phase began immediately with enactment of the law in 2018: businesses began awarding bonuses and expanding benefits for workers because of the changing tax code. Unsurprisingly, perhaps, detractors immediately belittled this unequivocally good news for American workers – Democratic House Leader Nancy Pelosi’s now-famous characterization of a $1,000 bonus as “crumbs” stands out amongst a chorus of criticisms that reflect the democrat antipathy for America’s working class.

The second phase followed closely when the IRS began to implement the individual changes to the law; once the withholding changes made by the Tax Cut and Jobs Act were enacted, a full 90 percent of Americans started seeing more money in their paychecks each  month. 

We are just now beginning to enter the third phase of the implementation of tax reform: with dynamic changes to how businesses in the U.S. are taxes, we will start to see widespread behavioral responses from companies reacting to the new tax code. While this evolution in American business behavior will cover the course of many more months, there are emerging metrics that demonstrate shifts in corporate behavior that will undergird strong economic shifts.

One effect of tax reform that has garnered undue media attention is the uptick in “stock buy-backs,” a fairly routine business practice that is now a favored bête noire of those hoping to distract from the bigger picture of American tax relief.

What is a stock buy-back? A buy-back refers to a corporation’s offer to purchase its shares from shareholders; it is generally seen as a business’s attempt to invest in itself.

Why would companies engage in a buy-back? By buying back its own stock, companies are not only signaling confidence in their business but also decreasing the availability of its stock on the market, thereby increasing its value. Investors holding that stock are thus rewarded with more valuable equity, which is why tax reform’s detractors have castigated buy-backs as a boon for the investor class.

Importantly, however, this exchange doesn’t happen in a vacuum. While detractors may malign buy-backs as a move that enriches shareholders, it is an inaccurate characterization of their beneficiaries. In fact, an overwhelming majority of Americans are exposed to the stock market in some way – either by directly owning stocks or through retirement accounts, mutual funds or pensions.  Stock prices driven higher by buy-backs, then, directly increase the value of the overwhelming majority of American’s savings. To argue that only investors benefit from buy-backs is to ignore the obvious reality of how Americans invest and save.

Research published by the National Taxpayers Union Foundation estimates that the median stock and mutual fund investment portfolio’s yield would jump from $3,153.60 to $3,620.80 – a full $467 dollars increase following the passage of the Tax Cut and Jobs Act. Meanwhile, the median retirement account would yield an additional $723 following tax reform, meaning the typical retiree would see $5,604.80 in retirement income compared to just $4,881.60 prior to tax reform.

These gains are on top of the increase in wages workers will experience as a result of the cut in the corporate income tax rate, and the tax relief they are granted through the changes in the individual tax code. As businesses continue to respond to the changes in the tax code that make the United States the best place to start, build and run a business, Americans will continue to reap the benefits.

Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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