Stock Buybacks Instead of Employee Raises

Under the guise of improving and encouraging investments in our economy, federal legislation has made shareholders richer and richer. At the same time, the federal minimum wage and tipped-minimum wage have remained stagnant. The combination of these two policies has resulted in the weakening of American innovation.

When Republicans lowered the corporate tax rate to 21% from 35%, they did so under the promise that it would significantly raise wages. Not only has this not happened yet, but it has continued the trend of stifling American innovation in order to enrich companies’ shareholders. According to The Institute for New Economic Thinking (INET), lowering the corporate tax rate would only encourage companies to buy back stock. This is a result of what INET calls the “prevailing ideology” that business corporations should always maximise shareholder value (MVS). By doing this, shareholders are not investing in a corporation’s productive capabilities, but simply buying shares in order to increase their value without actually creating any. Thus, “the prevailing stock market ideology enriches value extractors, not value creators.”

You might be wondering, just how is this legal? Well, in 1982 the Securities and Exchange Commission (SEC) added Rule 10b-18. This rule allows companies and their affiliated purchasers to buy back the company’s shares of common stock without being in violation of anti-fraud provisions of the Securities Exchange Act of 1934. While repurchases must fall under four conditions since the rule’s enactment, it wasn’t until 2003 that the SEC required companies to disclose more detailed information on said buybacks.  

Although the disclosures add to the transparency of the transactions, the availability of information does not detract from the damage done by Rule 10b-18. By using the corporate tax cut to enrich shareholders with stock-based incomes, lower-level employees miss out on the savings. In fact, various unions have publicly demanded to know where the tax-cut money is being funneled to in order to better negotiate contracts on behalf of workers.

In 2017, S&P 500 companies set a record by spending $780 billion between them on buybacks. With the full effects of the GOP tax bill yet to be felt, the record could be easily broken again this year, continuing the trend of enriching the bosses instead of workers. By February, the amount of money spent on buybacks, $88 billion, surpassed the amount spent last year over the same period of time. At the same time,  just $2.5 billion went to employee bonuses. While the GOP tax bill did not create the culture of stock buybacks whenever possible, it increased companies’ means to do so while selling the legislation as a boon to workers. We should keep this in mind come November.

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