Let’s talk theories for a moment.
Definition: A theory is “a proposed explanation whose status is still conjectural and subject to experimentation, in contrast to well-established propositions that are regarded as reporting matters of actual fact.”
Translation: What I’m saying is true. Unless it’s not.
First: A theory: I know what I’m talking about.
Second: See “Translation,” above.
Third: Another theory: Trickle-down economics.
Trickle-down economics suggest that when the rich get richer, they spend more money and that trickles down to benefit middle- and low-income people.
Fourth: Another theory: The 2018 tax cuts will exemplify the best of trickle-down economics; companies will pay less tax, have more money, and pass some of that along to employees in the form of raises and other benefits.
Fifth: Another theory:
“It’s in all of our best interest to have these tax cuts for corporations so that they will have more money to invest in their business and pay their workers.” Rep. Mike Conaway (R-TX)
Sixth: What he’s saying is true. Unless it’s not.
Seventh: Reality: Instead of giving raises, many companies are using that money from tax cuts for other purposes. Recent wage growth remains slower than it was prior to the Great Recession: Median wages grew at an average annual rate of 4.6 percent from 1983 to 2007, while wage growth for the past 12 months was just 2.7 percent.
In fact, thanks to inflation, the average paycheck is worth 0.1% less than a year ago.
Eighth: A larger portion of that money from the tax cuts is going to stock buybacks: As of the end of June 2018, buybacks were up 80 percent from the same period last year, and the value could reach a record $1 trillion by the end of this year.
What’s a “buyback”?
Let’s say you start a company but you need more money to get it up and running. You issue shares of stock in your company, and investors buy them, becoming stockholders. When your company starts making money, you pay dividends to the shareholders, and everybody’s happy.
Then the 2018 tax cuts come along – the corporate tax rate drops from 35 percent to 21 percent – and now you’re making beaucoup bucks. You say to yourself, “Self, instead of paying out dividends to my stockholders, why don’t I buy back some of those shares and keep all that money for myself?”
So you do.
Ninth: Another theory: Then you say to yourself, “Self, what should I do with all the money all my shares are now earning me? Should I spread the wealth around and give my employees raises? Bonuses? Give them better health insurance?
So you don’t.
Tenth: Final theory: