The Republican-led Congress approved a massive corporate tax cut last year on the premise that executives would put the money saved to good use.
Companies would build new factories. They would hire more workers. Buy new equipment. Get more efficient. Fund more research. Expand.
"A game changer for US businesses," is how Treasury Secretary Steven Mnuchin described the US$2.3 trillion ($3.3t) tax cut on CNBC after its passage. "You're going to see massive investment coming back to the US"
Companies would flourish, said Gary Cohn, who was President Trump's chief economic adviser at the time.
"There's an enormous amount of capital expenditures that can be spent in the system that enhance productivity," Cohn said a year ago during an interview with the Wall Street Journal.
So? Almost a year later, investments by Standard & Poor's 500 largest public companies on new equipment and factories have jumped nearly 19 per cent in the first three quarters of 2018, to about US$475 billion, according to Howard Silverblatt of S&P Dow Jones Indices. That doesn't account for spending by the many thousands of other public and private companies.
Companies also increased research and development spending by 34 per cent, to nearly US$175b, in the first three quarters of this year.
"The tax cut was very worthwhile for business," said David Kass, finance professor at the University of Maryland.
But Democrats and other critics of President Trump point to another crucial statistic, one they see as a betrayal of the tax cut's intent: increased spending on stock buybacks, which can pump up a share price without building anything or hiring anyone. Executives love buybacks because their compensation is often tied to share prices.
Buybacks totaled US$579b for the first three quarters of 2018 and are expected to smash the previous annual record of US$589b, set in 2007.
"It's just wrong for big corporations to pocket massive, permanent tax breaks and reward the wealth of top executives with more corporate stock buybacks, while workers are given pink slips and face layoffs," said Sen. Tammy Baldwin (D-Wis.), who has introduced legislation to limit buybacks and require public companies to give workers the right to elect one-third of their company's board of directors.
"We need to rewrite the rules of our economy so we start rewarding workers instead of the wealth of executives and shareholders with more stock buybacks."
Kevin Hassett, head of the Council of Economic Advisers, said the tax cut - and the repatriation to the United States of tax dollars that have been parked overseas - is working as planned. "Critics of buybacks see Scrooge McDuck sitting on a pile of gold," Hassett said.
In reality, he said, "the investor either buys some other stock or invests in some other business that actually needs the money. The money is reinvested and is increasing the efficiency of the economy by moving cash to the firms that need it the most."
Top US companies are getting in on the act. Apple is leading the way, with nearly US$64b in buybacks as of September 30, according to Birinyi Associates, followed by Qualcomm (US$34b), Cisco (US$19b), Oracle (US$18b) and Bank of America (US$15.8b).
Warren Buffett repurchased nearly US$1b of Berkshire Hathaway shares, although the billionaire Omaha investor has been reluctant to buy back shares in the past.
Since the first quarter of 2008, US companies have repurchased US$5.7t of their stock, according to Birinyi Associates.
Cash-rich Apple is a huge buyer of its own stock, but it also invests a ton in its business. Apple is spending US$14.2b in research and development for 2018, according to regulatory filings. That is up 23 per cent from a year ago. Apple also is spending US$16.7b in capital expenditures this year.
The iPhone maker announced a few days ago that it plans to invest US$1b to build a second corporate campus in Austin, where as many as 15,000 employees could eventually work. The company committed early this year to spending US$350b in the United States over the next five years, including US$30b in capital expenditures.
Dividends, which are cash payments to shareholders, are up as well. Based on payments for the first 11 months of 2018, dividends set a new annual record at US$420b, beating last year's US$419.7b, which was also a record, Silverblatt said.
"From where I sit, you've got buybacks and dividends up far more than CapEx [capital expenditures]," said Jared Bernstein, who served as economic adviser to then-Vice President Joe Biden.
"I'd expect business to be investing a lot more aggressively. Unless you're being paid to believe otherwise, you don't see a tax-cut-induced surge in capital spending, at least not yet. So you have to ask yourself, 'What was the promise of the tax cut?' "
Bernstein cited research by Goldman Sachs showing that business investment as a percentage of gross domestic product is in line with historical norms.
"It's not that CapEx has shut down. It's that it's largely on it's pre-tax-cut trend, while buybacks show clear and obvious increases since the 2017 cuts," he said.
"It's too soon to make any sort of final call on the tax cut's effect on business investment. But, at least so far, defenders of trickle-down once again have a lot of explaining to do."
Bernstein added: "I had on-the-record debates with the supporters of tax cuts who said buybacks aren't going to go up, it's all going to go into investments. Now they are saying, buybacks first, investment later. It's possible they will be proved right. But history is on my side."
Dividend payments register as income and have immediate tax consequences But buybacks allow shareholders to defer paying taxes on the increased price of the stock - known as a capital gain - until they sell the shares. That could be years later.
"I don't think the companies should be allowed to do any buybacks," said economist William Lazonick, of the University of Massachusetts at Lowell.
"Part of that money should go to higher wages and more job security. That's the way it used to work, but it has not been working since buybacks started becoming significant in 1984."
Average earnings for US private-sector employees are up 2.8 per cent in 2018, according to the Bureau of Labor Statistics.
Also at issue is whether the 45 per cent of Americans who, according to a May 2018 Gallup poll, don't own stock get any benefit from share price increases attributable to buybacks.
Buyback proponents say share price increases are good for people even if they don't invest in stocks or mutual funds. They point to pension funds, whose holdings increase with stock prices, helping them fulfill their obligations to pensioners without asking employers for more money or government for a bailout. Hassett pointed to a Fed statistic that shows independent business investment rising at an annual rate of 16 per cent this year, the highest year since 1993.
"We are seeing a big surge in investment by the little guy, who was cash-starved under the old tax code," Hassett said.
On Capitol Hill, there is a movement to curtail buybacks. Though always legal, buybacks became much more common after the Securities and Exchange Commission in 1982, during Ronald Reagan's presidency, made it easier for companies to repurchase shares without being accused of stock manipulation.
The SEC adopted what is known as "Rule 10b-18," which provides a "safe harbour" for a board of directors to authorise the repurchase of shares on the open market as long as the company abides by certain conditions. The conditions include public-disclosure requirements and limits on the number of shares repurchased.
Abuse is an issue, in part because executive compensation is often tied to a company's share price. And buybacks can raise share prices without a company doing anything more than spending cash to buy its stock.
Even some Democrats such as Bernstein say a revamping of corporate taxation was needed to make the United States more competitive with the rest of the world. Bernstein applauded the increase in capital expenditures.
"The numbers on capital expenditures are up, but they are up less than buybacks," Bernstein said. "I had no problem with the corporate tax-rate cut. What I am outraged by is how much revenue the government loses. I wouldn't have minded a revenue-neutral tax reform."
Douglas Holtz-Eakin, an economist and president of the American Action Forum, said the buybacks are irrelevant. It's getting the money out of corporate coffers and recirculating it through the economy that counts.
"I don't think you can hold buybacks as a demerit for the tax bill," he said. "Buybacks tell you nothing about the ultimate disposition of that tax money. What matters is, 'Did the tax bill improve the incentives for investment in physical equipment, R&D, new ventures or not?' "
Holtz-Eakin said: "I want to go out five years and look back and see that we changed the trend in capital expenditures and productivity. That's the goal. We have had very weak CapEx and productivity growth of under 1 per cent a year. I would like to see that number go to 1.5 or 2 per cent. That's where increases in standard of living come from, and it's the real heart of economic success."
Harvard law professor Jesse Fried has done extensive research on buybacks and supports them. Fried said the money spent on buybacks circulates back to workers because people reinvest the cash they get from selling shares to the company.
"Shareholders take much of this cash, invest it in capital-hungry private firms, which use it to invest and hire workers," Fried said.
"And while public firms may grab the spotlight, smaller private firms employ twice as many workers and tend to be much more innovative, and can often put this cash to better use."