It was not only firms with greater savings from the Tax Cuts and Jobs Act that paid more bonuses to employees following the law’s enactment, but those with higher political action committee donations to Republicans.
Jeffrey L. Hoopes of the University of North Carolina discussed the findings of the research paper, "Tax Reform Made Me Do It!," which he coauthored with Michelle Hanlon of MIT and Joel Slemrod of the University of Michigan, at an event in Washington June 6, sponsored by the Tax Policy Institute.
“This was a political act, and you had actors on both political sides of the aisle. The left said there aren’t many firms [offering bonuses]; the amounts aren’t very large; and this is all just marketing for tax reform,” Hoopes said. “On the other side, you’ll say, ‘Well, if tax reform really did save these corporations some money, they were at some sort of competitive disadvantage, and some of the savings of tax reform may well be expected to go to employees.’ . . . We find things supporting both conjectures.”
Studying corporate announcements following the TCJA's enactment, the paper found that entities with PACs that donated more to Republicans than to Democrats in the 2015-2016 election cycle were more likely to announce benefits to workers tied to the TCJA. No similar results were found related to investment inspired by the TCJA. Multinationals and highly unionized industries were less likely to announce TCJA actions, the paper found. Overall, only 4 percent of public companies sampled announced in the first quarter of 2018 that some tax savings would go to workers, according to the paper. Most of those worker benefits were in the form of one-time bonuses, but increased wages, additional hiring, and enhanced benefits were also observed.
The paper, which also examines share repurchases and dividend announcements, has been cited by both the Trump administration, in its March economic report lauding the TCJA, and by the Center for American Progress, which excoriated the law in December 2018.
In October 2017 the White House Council of Economic Advisers issued a report on the economic effects of corporate tax reform, claiming that reducing the corporate tax rate would in turn dramatically boost wages for American workers by between $4,000 and $9,000 annually.
Hoopes indicated the data did not support the contention that workers were receiving $4,000, and while it remains to be seen whether that can be achieved long-term, he was skeptical it could be accomplished even when accounting for investment. While there have been some instances of increased corporate generosity, he didn’t see a huge impact.
“I think it is interesting how the messaging shifts,” Hoopes said. “If you’re an associate at Walmart, you can qualify for anywhere from [a] $500, $1,000, or $1,500 bonus. What’s fascinating to me is the politicians who talked about this, to them $1,500 isn’t much. To a Walmart employee, that’s quite a bit.”
Buybacks, Yes! Dividends, No!
The data compiled by the paper also show that share repurchases increased following the TCJA, but those repurchases were “extremely concentrated in a small number of firms,” with only nine companies announcing a new repurchase plan attributed to the TCJA. There was no sign of significantly increased dividends attributed to reform in the announcements, the paper notes.
“This is not a story of more firms doing share repurchases. It is existing firms doing way more share repurchases,” Hoopes said, noting that much of the increase in repurchases was from Apple alone.
As to why firms were more inclined to increase share repurchases rather than dividends, Hoopes speculated that the latter represented a firmer commitment from a company to continue payouts in the future, which may not be desirable, given political uncertainty.
But Reuven S. Avi-Yonah of the University of Michigan Law School had a different explanation for a trend he had observed for years that would initially appear “puzzling,” given that dividend and capital gains rates have been equal since 2003.
“The answer has nothing to do with tax reform. The answer is the fact that a lot of equities are held by hedge funds in the Caymans. If you are a foreigner in the Caymans, dividends are subject to 30 percent withholding and capital gains are tax exempt,” Avi-Yonah said.