After some leading companies promised to invest some of their expected windfall from tax reforms in the US, critics have questioned whether the changes would provide any long-term boost to growth.
President Donald Trump said in a statement that the shake-up of the tax system would mean “pouring rocket fuel into the engine of our economy”. But many analysts have suggested it will provide only a temporary boost to growth.
Ray Dalio, founder of Bridgewater Associates, the hedge fund, wrote in a blog post that the tax plan would “have some minor positive longer-term impacts”. However, he added: “By and large it doesn’t deal with the impediments that are holding back investment and productivity in the US economy”.
Within hours of the $1.5tn tax cut passing the Senate and the House of Representatives, several companies — some with an interest in winning support from the administration — had announced plans to pass on some of their gains. Two of the biggest US banks, Wells Fargo and Fifth Third, said they would reward thousands of employees through bonuses and pay rises.
AT&T, Boeing and Comcast were among those announcing investments in the US which they attributed to the tax overhaul, following a planned cut in the headline corporate income tax rate from 35 per cent to 21 per cent.
The amounts pledged were incremental rather than transformative. AT&T, which is pushing for government approval of its takeover of Time Warner, said it would pay 200,000 US employees $1,000 each, while increasing its budget for capital spending in the US next year by $1bn. That is less than 5 per cent of its budgeted capital spending of $22bn for 2017.
The company has also in the past suggested in would increase investment as a result of the end of net neutrality rules, which the Federal Communications Commission voted to scrap earlier this month.
Boeing, the defence contractor and aircraft maker involved in one of the White House’s most high profile tariff battles, pledged to spend an extra $100m on charity and another $200m on programmes to improve training and working conditions. Dennis Muilenburg, Boeing’s chief executive, said the tax changes would help it compete with global rivals while unleashing “economic energy” in the US.
Comcast, which is also a beneficiary of the end of net neutrality, said it expected to invest “well in excess” of $50bn over the next five years as a result of the rule change and the tax cut. Depending on its precise decisions on investment, that could mean a step up of about 5 per cent from its expected capital spending of about $9.5bn this year.
Often more quietly than the announcements of wage rises, bonuses and investment plans, companies have also been promising share buybacks and dividend payments as other uses for their tax windfalls. Boeing earlier this month raised its dividend by 30 per cent and announced a new $14bn share repurchase authorisation.
Pfizer on Monday added a further $10bn share repurchase authorisation to the $6.4bn that remained under its previous programme.
Wells, the third-biggest US bank by assets, said it would hand out restricted stock awards to about 250,000 employees, while boosting its minimum wage from $13.50 to $15 an hour, from March. The bank also said it would target $400m in charity donations next year, up about 40 per cent from this year.
Similarly, Fifth Third, a Cincinnati-based bank with $142bn in assets, said it would pay more than 13,500 employees a $1,000 bonus while raising its minimum wage to $15 an hour. Senior managers and top executives would not receive a special payment, it said.
Fifth Third stands to benefit from a bill which would lift the threshold for designating a bank as “systemically important”, a status which puts banks under heightened supervision from the Federal Reserve. The bill, which has been approved by the Senate banking committee, should be taken up by the full Senate in the first couple of months of 2018.
While Wells Fargo would be unaffected by that legislation, the bank remains keen to repair its image on Capitol Hill. Last year it paid a record fine to the Consumer Financial Protection Bureau for allowing staff to open millions of accounts that customers may not have authorised, and it has since been rapped by regulators over several other lapses.
Wells is set to be the biggest beneficiary of tax reform among the big US retail banks, according to Richard Ramsden, an analyst at Goldman Sachs. He expects the new regime will boost Wells’ earnings per share by 17 per cent next year, compared to 14 per cent for Bank of America, 12 per cent for JPMorgan Chase and 8 per cent for Citigroup.
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