Before the Tax Cuts and Jobs Act largely eliminated U.S. corporate income tax on the foreign profits of U.S. corporations, Republicans routinely complained about the problem of “cash held overseas,” as companies retained their profits abroad in order to avoid paying taxes here.
The theory of the complaint was that this practice led to reduced business investment: Because the cash was overseas, it couldn’t be reinvested in businesses here. And so Republicans fought for policies that let companies pay sharply reduced taxes when repatriating their profits.
The main problem with these arguments was that the “cash held overseas” wasn’t cash and it wasn’t overseas. By and large, when companies like Apple retained huge profits in foreign accounts for tax reasons, they held them in corporate bonds, often issued by U.S. firms. That is, the money was available for domestic U.S. business investment, because it was being loaned to other firms.
I wrote in 2017 about proposals to give businesses relief on the repatriation of foreign profits:
A repatriation holiday neither reduces the cost of capital for American businesses nor increases the expected return on business investments in America. Therefore, it should not be expected to raise business investment or grow the American economy.
Now, Democrats have their own idea for changing the rules about how businesses can move their capital around. It similarly fails to affect either the cost of capital or the expected return on capital, so it similarly would not affect business investment decisions. But this proposal is designed to appeal to liberal interests rather than conservative ones.
That is, some Democrats want to restrict businesses’ ability to return capital to investors by buying back shares of stock. For example, here’s what Chuck Schumer and Bernie Sanders wrote back in February:
[W]hen corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest profits more meaningfully in the company in terms of R&D, equipment, higher wages, paid medical leave, retirement benefits and worker retraining.
They proposed that companies should be barred from buying back shares unless they meet certain requirements, such as paying a wage of at least $15 per hour.
We should ask the same question about buyback restrictions that we asked about taxes on the repatriation of profits: Does changing the rules around the practice change a business’s incentive about how to spend and invest? What would we expect companies to do if their ability to buy back shares was restricted?
One obvious possibility, rather than paying workers more or making new capital investments, is that companies would respond to restrictions on share buybacks by returning capital to investors in the form of dividends instead. If dividends were also restricted, the companies could do what they did about the former taxation on repatriated profits: They could retain the profits, and wait to distribute them at a future date when political party control of the government had changed and policy had become more favorable.
The model we have from the period when companies faced a tax upon repatriation is instructive. As Democrats repeatedly pointed out at the time, what companies were doing in response to the policy of taxing repatriated profits did not appear to be harming companies’ ability to invest and grow in the U.S. Companies with retained profits held abroad could lend them out; companies that needed capital in the U.S. could borrow from the companies doing the lending.
If companies resurrected their strategies for dealing with worldwide corporate taxation to respond to a restriction on share buybacks, we should expect the effect on investment in the real economy to be similarly trivial.
Companies that would like to buy back shares but now face restrictions on returning capital would instead invest their retained earnings in other securities; shareholders who would have sold their shares in the buyback would instead sell them on the open market. Capital would still make its way from companies with retained earnings to companies wishing to make new investments, whether in the form of debt or equity.
There’s no reason to believe a restriction on stock buybacks would be more effective at encouraging more corporate investment than a repatriation tax holiday was, because it wouldn’t change a company’s expected return on new investments or its cost of capital, and therefore wouldn’t change its interest in making investments.
If Democrats wish to change corporate behavior, they have other avenues. For example, if they want companies to pay a higher minimum wage, they can raise the minimum wage. If they want companies to pay more across the wage spectrum, they can implement fiscal and monetary policies that support full employment. They can make it easier to unionize.
Persistently disappointing levels of corporate investment are a tougher problem, driven by weak expectations of global economic growth, and not easily amenable to policy solutions often floated by Democrats or Republicans. Stock buyback restrictions, like most other proposals, won’t move the needle on that one.
