O
n December 22, 2017, the sweeping tax legislation known as The Tax Cuts and Jobs Act, was signed into law. The tax reforms included a reduction to income tax rates for most individual tax brackets and a significant reduction in the corporate tax rate. Lawmakers had a desire to move the US corporate tax system in line with foreign competitors. They lowered the corporate rate from 35% to 21%. So what have business been doing with all that extra cash? A large chunk of it has gone into buying their own company stock (as depicted by the orange bars in the chart above).
According to Ned Davis Research, the money these corporations have poured back into their own stocks - a process known as share buybacks - has propped up stock market returns. Their research says that without the buybacks, the S&P 500 would be a full 19% lower than it is today.
The buyback process is unpopular with politicians from both sides of the aisle. They argue that excess cash shouldn't be used to inflate stock prices just to enrich those at the top. However, Ned Davis Research estimates that if companies spent the excess cash on dividends, the broad index would be 10% lower; if companies simply held onto their cash it would be 5% lower; and if companies used the money for corporate reinvestment, the S&P 500 would be 2% lower than it is today.
