Corporations aren't just using the tax cut to buy back stock, but it's a very good thing if they do

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Published by: Herman Cain on Sunday January 07th, 2018

Correcting economic illiteracy.

We told you on the radio Thursday that Elizabeth Warren gets more wrong by the day. She insisted before the tax cut vote in December that the corporate rate cut would not benefit ordinary people at all, because the corporations would just use the saved money for stock buybacks and executive bonuses.

First of all, that was factually untrue. The latest roundup of companies using their tax savings for employee bonuses, wage increases and other similar investments includes AFLAC, BB&T, Comcast, Gate City Bank, Navient, Southwest Airlines and U.S. Bancorp. The list gets longer just about every day. Companies will use the tax savings in whatever way serves their strategic objectives, and the companies listed here join many others in believing it makes sense to invest in employees, facilities, product development and other things that will benefit people broadly.

But let's get back to the initial proposition from Sen. Warren, that it would not benefit the economy if corporations use the tax savings for stock buybacks.

That is not true, and anyone who believes it's true needs some basic instruction in economics.

Liberals like Elizabeth Warren would have you believe that when companies buy back stocks from investors, all the money used to buy back those stocks just gets stashed in a big room somewhere, and that aristocratic robber barons just sit there and admire their growing piles of hundred-dollar bills and gold coins.

It does not work like that. If you own stock in a company, that means you're active in investing. You believe in using your cash to create and earn more wealth. If a company finds itself with extra capital as the result of a tax cut, and it doesn't have a need to use the capital for facilities, or for product development, or for wage increases, then it's a very good thing when the company uses the cash instead for stock buybacks. Why? Because if the company can't think of a way to invest the money, then the investors can. And by transferring the capital to investors in exchange for more company stock, the company puts that capital in a better position to be used for something else that's productive and creates wealth.

This is what liberals continue not to understand. Ask any liberal why they don't think it's good to free up more capital into the productive sector, and they'll tell you the companies just horde the cash. But there's really no such thing as hording cash. If you keep the money on deposit with a bank, then the bank can use the capital to lend out to people who will buy homes or start businesses. If you put the money in a mutual fund, then the managers of the mutual fund will use it to invest in other companies.

Just about the only way a company's use of cash is not economically productive is if they stash it in offshore accounts to avoid paying taxes on it, and the tax cut is designed to disincentivize that type of behavior.

The bottom line is that there is no one right way for companies to use their tax savings, and just about any way they use it is better for the economy than paying it in taxes to the government. And yes, Sen. Warren, it's a very good thing if companies use their tax savings to buy back stock. I realize you don't understand that, which is why you have no business being a U.S. senator. But the rest of the country should understand it, because the more economic literacy we have in this country, the better.

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