One of the biggest fears about the tax overhaul bill in Congress already is usually showing signs of coming to fruition.
Critics of the Republican-sponsored plan say that will a provision allowing companies to bring profits stored overseas back home at a one-time reduced tax rate wouldn’t foster economic growth.
Instead, they argue, companies will use the windfall to reward investors with share buybacks along with dividends. Democrats are using a handful of company buyback announcements to bolster their case.
“These companies, I’d say to President Trump along with my Republican colleagues, are not announcing fresh investments or wage increases like Republicans promised they could,” Sen. Chuck Schumer, D-N.Y., said on the Senate floor Thursday. “They’re announcing stock repurchasing programs that will benefit their wealthy investors.”
Indeed, T-Mobile, Home Depot, Bank of America along with Mastercard all announced significant repurchase intentions This kind of week. Home Depot led the way having a $15 billion buyback after This kind of raised its long-term sales target.
While the recent spate of buyback announcements is usually a modest sample size, This kind of brings back memories of the last time Congress tried to bring back cash overseas through a tax holiday.
In 2004, companies were allowed to bring their profits back home at a tax rate of 5.25 percent. although rather than pump that will money into the economy, most of This kind of went to shareholders, with some of the biggest recipients actually cutting employment in subsequent years.
Share buybacks have been on the decline in recent quarters, along with likely grew less than 5 percent within the third quarter, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
However, Silverblatt said buybacks could “increase substantially” should Congress approve the repatriation plan. The record of $172 billion within the third quarter of 2007 could be in play. By contrast, the current quarter is usually tracking for about $130 billion.
As for dividends, the third quarter is usually on pace to set a fresh record of $105.4 billion for S&P 500 companies. Silverblatt expects that will record to fall within the fourth quarter, which is usually tracking for $107.4 billion.
However, he sees the balance of the repatriation windfall going to buybacks, which investors understand to be temporary, than dividends, which are harder to rescind.
The tax reform package overall is usually supposed to provide a boost to earnings within the 14 percent range, according to Bank of America Merrill Lynch projections. The firm expects buybacks to account for about 16 percent of a total $19 per share benefit to the S&P 500.
Republicans backing the tax overhaul measure maintain that will the repatriation, which could affect the $2.5 trillion or so of profits stowed overseas, will bring growth through investment of dormant money.
In fact, Gary Cohn, director of the White House’s National Economic Council, has said that will even if companies use the repatriation windfall to reward shareholders, that will still will be better than allowing This kind of to sit fallow abroad.
“If that will’s our worst-case scenario, that will companies repatriate their money, along with they use This kind of for share buybacks along with dividends, what happens? They buy back shares, they issue dividends. They pay the repatriation tax. We get another 20 percent tax on capital gains or dividends,” Cohn told CNBC in October. “along with then the people that will get that will money back do what? They reinvest This kind of back within the economy in fresh investments along with fresh capital.”
WATCH: Senate hikes proposed tax rate for repatriated cash.