Companies Reinvesting in Growth

Bloomberg Markets reports that, after “months of heated debate over whether companies would hand the biggest tax break in three decades back to shareholders or reinvest it in their businesses, there’s finally some hard data.”

Of the 130 S&P 500 companies that “have reported results in this earnings season,” capital spending increased by an incredible 39 percent. That’s “the fastest rate in seven years.” And guess what? Returns to shareholders “are growing at a much slower pace, with net buybacks rising 16 percent,” and dividends seeing “an 11 percent boost.”

The data serves as “a fresh rebuttal to those who warned that hundreds of billions of dollars of tax relief will head directly to the stock market and be harvested by shareholders already fattened by a nine-year bull market.”

While so-called “stock buybacks”—when “a company buys its own shares off the market” to reduce available stock to increase its value for shareholders—did get “a boost from the windfall,” companies also “increased the rate at which they unleash cash for building factories and upgrading equipment.” The kinds of things that create jobs and drive economic growth.

As the Tax Foundation’s Erica York wrote recently, such an “increase in how much businesses are investing is good news, as business investment is a determinant of the long-term size of the economy,” because the “Increased capital expenditures can increase the size of the stock of capital, such as plants, machinery, and equipment,” which over the long term “leads to higher levels of productivity, employment, output, and incomes.”

And while York also notes it “is not yet clear that this data is related” to the Tax Cuts and Jobs Act (TCJA), the law’s “changes are all things one would expect,” such as reducing the corporate tax code from 35 percent to 21 percent.

Tax reform is working for all of us—Main Street, Wall Street, and every other “street” in our economy.