Brooks on Tax Bill: Seems Like ‘What the Trump People Told Us Would Happen Is Happening’

On Friday’s “PBS NewsHour,” New York Times columnist David Brooks said that the GOP tax bill is working better than he thought it would and the evidence “seems to be that what the Trump people told us would happen is happening, that companies are reinvesting the money.”

Brooks stated, “I was against the Trump tax cuts. But the early evidence is that they’re working better than I thought. And so, in the first quarter, among S&P companies, capital expenditures are up 39 percent. That’s a seven-year high. That’s far higher than a lot of us thought. Stock buybacks, which is just giving people — to shareholders, that’s only 16 percent. So the evidence from just the first quarter seems to be that what the Trump people told us would happen is happening, that companies are reinvesting the money. … And so, it’s important to oppose what’s opposable and what’s reprehensible and offensive. And we’ve been doing that, as I say, for three years. But it’s also important to see reality. And the more serious opposition will, frankly, be on disastrous policies or not disastrous policies.”

Very, very,wrong. The capital is directly reflected in each share being worth more. A smaller number of liquid, public shares of the same value company makes each share worth more. The wealth is evenly distributed to shareholders.

Mostly wrong. The shareholders who receive cash no longer have the shares. So if the price received is less than the value, then the shareholders profit. But if the price paid is greater than the value, the shareholders lose. Since 2013, 60-90% of buybacks are at prices higher than value, depending on company and price.

Many buybacks are done with borrowed money. The interest rate on the buyback is usually short-term, say three years. If the interest rate rises during those three years, then the company will (assuming not enough cash to pay the principal) roll over the loan at a higher rate. Interest rates have been rising for two years now, and the Federal Reserve intends to keep raising rates until the Dims control Congress/White House again. Virtually all public companies in 2018 have more debt than cash/short-term investments. Dividends go to all shareholders, although some pay current income taxes on dividends.

Buybacks are similar to buying expensive machinery. The company is out the cash. Different, because the company has no asset to show for the outlay. So a company valued at $1 billion that does a $100 million buyback should afterwards be valued at $900 million, with about 10% fewer shares. If the business generates profits at a rate greater than the interest rate (paid or received), this can be a plus. But if it misses the chance to buy a better business, then a minus.

Wow, you went all the way around the block to get to the same wrong answer. We are not talking about all hypotheticals of stock buybacks. The discussion at hand is companies, right now, who are flush with cash due to the new tax law change. When they repurchase shares on the open market the stockholders (key word there...not people who have sold their stock) own shares that are proportionately worth more, not counting fluctuations of value from other variables. To say that the value of the company would decrease in that scenario is laughable. The value of the company would be exactly the same, but the value of each share still outstanding will have increased.

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