The festive season ended early on New Year’s Day for most, but the party is still in full swing in corporate America. The biggest companies continue to shower their employees with bonuses, pay rises and other gifts to celebrate the corporation tax cut that was passed just before Christmas.
It’s music to President Trump’s ears. “This is a phenomenon that nobody even thought of, and now it is the rage,” he tweeted after AT&T and Comcast handed $1,000 bonuses to employees, raised wages and promised to hire more staff. “Huge win for American workers and the USA,” he said last week as Apple gave $2,500 share awards to staff and pledged to create 20,000 jobs. “There has never been anything like it,” he said after Disney, Starbucks, JP Morgan and Verizon joined the party this week.
It’s good PR for the companies and great PR for Mr Trump, whose approval rating in his first year as president was the worst since records began in 1945. He needs tax reform to work because it may be his only shot at a legacy before the Democrats take control of Congress in the mid-term elections.
The tax cuts will cost $1.5 trillion over ten years. Mr Trump’s big bet is that they will pay for themselves (and more) by spurring additional economic growth. Any more than break-even and Mr Trump will claim victory; any less and America’s $20.6 trillion debt pile will swell further, giving Republican hawks licence to tear him apart.
One element of Mr Trump’s gamble is that the corporate tax cut, to 21 per cent from 35 per cent, will free up trillions of dollars for investments that create jobs, jobs and more jobs for the American middle class. Even if economic growth fails to completely cover the cost of the cuts, Mr Trump could still claim victory if the money creates jobs and boosts wages.
Advertisement
The worry is that the lion’s share of the tax savings will go into shareholders’ pockets in the form of share buybacks and dividends. Closer inspection of companies’ investment plans, and developments this week, have dampened the party atmosphere somewhat.
Apple will benefit handsomely from the tax reforms, mainly through a new profit repatriation tax that has freed up about $250 billion in cash. The money, accumulated in overseas tax havens for years, can now be brought into the United States without fear of being taxed at the old 35 per cent corporate rate. So what is Apple planning to do with it?
The company’s investment plan, released last week, was a masterclass in dodging the issue. Apple’s headline pledge was to inject $350 billion into the US economy over the next five years, which sounded impressive enough. But of that amount, $275 billion was what it expected to spend on domestic suppliers, anyway, and $38 billion was to pay the profit repatriation tax. This left $37 billion for investments over five years, which didn’t seem like a whole lot for the world’s largest company — let alone one that suddenly had a quarter of a trillion dollars to play with.
The story is the same with other companies: there is a sizeable gap between the amount they expect to save from tax reform and the sums pledged for new investments.
Comcast and Wells Fargo gave the strongest signal yet about where the bulk of the tax savings are headed. Comcast announced $5 billion of additional share buybacks and boosted its dividend by 21 per cent. Wells Fargo, America’s third largest bank, announced $22.6 billion of additional share buybacks.
Advertisement
It’s too early to say whether the president’s tax gamble will succeed. However, there are growing signs that the shower of employee gifts was little more than sugar coating on a big shareholder payday pill.
James Dean is US Business Editor of The Times
•Robin Pagnamenta is away
