Why do Democrats hate buyouts so much? The antipathy goes back at least in part to Trump’s tax cuts.
In 2017, there was a debate about reducing corporate tax rates. Proponents argued that the tax cuts would attract more capital to U.S. markets, which companies would then use to finance new investments in plant, equipment and technology. These investments would make workers more productive, proponents said, which would ultimately lead to a growth in gangbusters and higher wages. This miraculous phenomenon was called “capital deepening.”
At the time, some of us argued that access to capital was not the issue holding back investment. Interest rates had been low since Great Recession, and stock market valuations were high. Most companies had little difficulty finding financing. What mattered was the availability of profitable things to invest in. Without stronger demand and additional customers, some of us predicted, the extra cash flowing back to businesses through tax cuts would likely be returned to investors in the form of redemptions (and dividends).
That’s pretty much what happened.
After the Republican bill passed, there was no sudden explosion of investment – but there was a unprecedented wave share buybacks. If the purpose of corporate tax reduction was really to encourage corporations to invest in new ventures (and not a fig leaf for upward redistribution of wealth), then corporations using the money to buy back shares was a political failure. The government gave up much of the tax revenue and budget deficits widened, with little business investment in return.
Somewhere along the way, the Democrats lost the plot.
Instead of being simply a symptom of failed fiscal policy, buyouts themselves has become the villain of many Democrats. Soon they proposed legislation prohibit redemptions. they excoriated companies for returning money to shareholders at the start of the pandemic (when some of these companies could not operate legally), and they have done so again since the economy has largely reopened.
Stock buybacks themselves aren’t necessarily bad – especially when the alternative is to waste investors’ money on private jets, wild parties or terrible acquisitions.
Democrats insist, however, that there is another worthwhile use of growing corporate profits: investment! In a Chamber Hearing On Wednesday, lawmakers chastised oil executives for (you guessed it) too high profits and too many buybacks. Democrats have complained that these companies should channel their money into increasing production.
It makes about as little sense as when Republicans promised “capital deepening” in 2017.
The question is not whether oil executives deserve sympathy. (They don’t.) It’s that – as in 2017 – it’s hard to convince companies to undertake risky investments that they don’t think will be profitable.
As I’ve written before, there are real barriers to investing in fossil fuels (unrelated to President Biden’s climate agenda). The number of platforms in operation was rising, but there are still not enough. It will take months to get more into position and eventually pump oil. By then, prices may have collapsed, making these investments unprofitable.
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This is precisely what happened in several bust cycles – including in 2020, when prices briefly turned negative. And that’s why investors are lobby businesses to be cautious about their pace of expansion today.
screams in companies for stop their takeovers will not lead them to increase their investments or their oil production. In fact, some policy moves Democrats are considering, ostensibly to discourage companies from returning so much money to shareholders, would do the opposite.
Progressives have been threatening to impose an “excess profits” tax. They have offers a “windfall tax” which effectively functions as an excise tax. It would be take half the difference between the price of a barrel of Brent crude today and the inflation-adjusted average price from 2015 to 2019. With prices hovering around $100 a barrel, that would effectively add about $17 at the cost of each barrel to oil producers.
This kind of thing makes investments risky even less attractive and could lead producers to reduce oil outlet. This is what happened on last time Congress has enacted a “windfall tax” of similar structure. It is also the opposite of what is needed to drive prices down today.
White House officials sometimes seem to understand that energy producers are looking greater certainty that they will no longer lose their shirts in a few months if they invest in expanding production. Sometimes, however, the administration joins in the populist chorus of denouncing corporations hungry for “profits”, takeovers or otherwise. If they really want to bring down exorbitant gas prices, they better stop encouraging confused populists.