Donald Trump believes massive corporate tax breaks will lead to higher growth. But a new Goldman Sachs study points to just the opposite. (Collage: MPG)
Corporations have been sitting on record amounts of cash for years thanks to the Bush administration tax cuts.
But they haven’t invested in new plant, equipment and jobs, as supply-side advocates predicted, for one simple reason–lack of demand.
While corporate profits have skyrocketed, the wages of average Americans have been stagnant for almost as long, cutting into their buying power and dampening demand for new goods and services.
Without rising demand to lift profits and stock prices, corporate chief executives have been using excess cash to buyback stock or to buy other companies.
That makes the balance sheet look good–profits are spread over fewer shares–but does nothing for the economy. In fact, acquisitions tend to lead to job cuts.
But the moves fatten CEO paychecks because their compensation is often tied to stock performance. With a new tidal wave of cash about to break, thanks to the Trump tax breaks, CEO’s simply plan to do more of the same.
Goldman Sachs, one of Wall Street’s leading investment banks, predicts in a new study that corporations will spend $780 million on stock buybacks in 2017, a 30 percent increase over this year.
In contrast, spending on new plants and equipment is expected to rise just 6 percent and spending on research and development is expected to rise by 7 percent. Spending on acquisitions and dividends is expected to rise by 5 percent and 6 percent respectively.
“For only the second time in 20 years, buybacks will account for the largest share of total (Standard & Poor’s) 500 cash use,” the report says.
Driving the trend are Trump’s plans to enact a temporary tax break on offshore profits that are returned to the United States. That could saddle corporations with $2.6 trillion in excess cash next year, according to the study.
Right now, overseas profits are taxed at a 35 percent rate if returned to the United States. Instead, many corporations offshore the money in countries like Ireland, which has a 12.5 percent corporate tax rate.
Under one House Republican plan, the tax rate on overseas profits returned to the United States would be lowered to 8.75 percent.
During the campaign, Trump proposed lowering the corporate tax rate to 15 percent and reducing taxes on foreign profits to 10 percent, according to the Tax Policy Center, an arm of the Urban Institute and Brookings Institution.
The lion’s share of that amount is expected to be spent on stock buybacks, predicts Goldman’s chief U.S. equity strategist David Kostin, who co-authored the study.
In all, Goldman predicts corporations will take advantage of the one-time tax break to repatriate $200 billion from overseas accounts. But that will still leave more than $800 billion outside the reach of U.S. tax laws.
Trump is counting on his massive tax cuts, aimed mostly at the nation’s corporations and richest households to jump start the economy and lead to an average growth rate of 4 percent a year to ward of a massive spike in the deficit.
But like two previous efforts at “trickle down economics,” during the Reagan and Bush administrations, the rich will get richer while everyone else will slide further down the economic ladder.