President Trump signed the Tax Cuts and Jobs Act late last year, dropping the U.S. corporate tax rate from 35 percent to 21 percent. That was less than two months ago, and yet we're already seeing major changes in corporate behavior. For example, companies have announced $3.7 billion worth of bonuses to be paid to employees. That's great news for lots of Americans, but, it's not the only news. U.S. companies have also announced $171 billion in stock buybacks since Jan. 1. In light of that, it's worth remembering that executives can abuse stock buybacks to enrich themselves at the expense of all shareholders. Here's how:
Don't be surprised if the majority of the money that U.S. corporations save in taxes in used to fund buybacks. In 2004, as part of the American Jobs Creation Act, Congress allowed a one-time tax holiday that resulted in U.S. companies bringing home $312 billion from overseas. Analysts at Bank of America believe that 80% of this money was used to fund stock buybacks (and a Senate report suggests that there was a net loss in jobs at the companies that repatriated their foreign earnings). Executive compensation rocketed higher during this time.
It's now predicted that U.S. companies will devote $450 billion of their tax savings to buying back their own stock. Now, more than ever, investors (and that includes anyone who has a 401k) must be mindful of how their money is used by the executives who run public companies. Tax reform has the potential to benefit all Americans, but that's unlikely to happen unless investors act like rightful owners of the companies they invest in, demanding honesty and accountability from managements. Remember: Executives at public companies work for you. Don't let them work against you.