The Tax Cuts and Jobs Act (TCJA) was marketed as a middle class tax cut that would promote higher wages. Exactly one year after its passage, stock buybacks have soared while wage growth has remained stagnant.
During the first half of this year, a whopping $384 billion was spent on stock buybacks. Stock buybacks, which happen when a company repurchases its own shares from the market, are basically another way for a company to payout its increased profits to its owners and give its remaining investors greater relative ownership of the company’s earnings. It’s simply another way to give money back to investors without the company losing value, and does nothing for the workers. So, unsurprisingly, during the same period, wage growth was far under the expectations of economists.
Many companies tried to drown this out by announcing employee bonuses immediately after the TCJA was signed. American Airlines and AT&T for example, offered $1,000 cash bonuses for a number of employees. Far fewer companies announced salary and wage increases, which follows a trend of companies allocating more of their payroll budgets to discretionary bonuses, also called variable pay, and less to salary increases. In 1992, 5.7% of payroll budgets was for variable pay, while 4.6% went to salary increases. More recently, 12.7% went to variable pay, and 2.9% to salary increases. When adjusted for inflation, today’s real average wage has almost the same purchasing power it did 40 years ago.
The impact of this cannot be understated, especially given how many of these companies rely on minimum wage labor and public assistance for their workers to stay profitable. Workers from corporations like Walmart and McDonald’s, for instance, relied on $153 billion worth of public assistance.
Some may argue that since this trend has been seen for decades, it’s unfair to blame the tax bill for wage stagnation. While that is partially true, this level of corporations returning capital to shareholders at the expense of workers has not been seen prior to Republicans’ massive tax cut for wealthy. For example, in 19 of the past 20 years, capital spending represented the single largest use of cash by S&P 500 firms. What was the lone year that was different, and what did the money go towards? 2018 and stock buybacks.
Tack onto this that what little boosts were seen by the tax cuts, like GDP growth, are expected to run out very shortly, and we’ve got a real problem on our hands. This is because the TCJA only gets more topheavy as time passes, meaning the inequality created by it will only become more egregious in the future, and at the expense of the middle class. This year, 16.5% of the total benefits from the tax bill have gone to households earning $1 million or more. In 2027, that percentage balloons to 81.8%. The effect of this on wealth inequality is flatout devastating.
As such, Democrats in the Senate are projected to introduce a number of bills to recover some of the loss tax revenue and make the tax code more equitable. With the Republicans tax cuts still widely unpopular, they probably have a greater chance of success than their numbers suggest. Still, what isn’t up for conjecture is the terrible effect on wage growth the TCJA has had, and the importance of the next Congress making up for it, whether it be through new tax bills or raising the minimum wage, sooner rather than later.