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European and Asian markets have offered a muted reception to the passage of U.S. tax cuts as benefits to company bottom lines were already baked into stock prices, while bonds were spooked by the blowout in government debt needed to fund the giveaways
Are they shiny Christmas gifts that will soon lose their luster or a New Year’s turn toward social responsibility and economic growth?
Some large corporations’ vows to increase pay, give more to charity and boost investment amid a historic tax cut will help the workers affected and are generally drawing positive reviews from business experts.
But at least some of the moves appear designed to burnish corporate images, experts say, and they’ll do little to juice the economy unless they’re adopted by most U.S. businesses. And in an intensely competitive labor market, the firms may have taken some of the steps anyway.
“Overall, these are positive signs that corporate leaders are recognizing the importance of investing in other stakeholders in their business — the workers,” says Martin Whitaker, CEO of JUST Capital, which monitors the practices of America’s largest companies to ensure they’re good for employees, customers and society and not just for the bottom line.
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After Congress passed the sweeping tax cuts Wednesday, ATT and Comcast said they would award one-time $1,000 bonuses to a total of more than 300,000 non-management employees. Wells Fargo and Fifth Third Bancorp said they’ll raise their base pay to $15 an hour. Wells Fargo also is setting aside $400 million for charitable donations next year and 2% of its after-tax profit for philanthropy in 2019, while Fifth Third is tossing in a $1,000 bonus for workers. Boeing is moving ahead with $300 million in investments, including $100 million in corporate giving.
The companies were largely responding to widespread skepticism that the tax cuts would trickle down to workers and the broader economy. Under traditional economic theory, the companies would use their tax savings to buy labor-saving technology that increases each worker’s output, allowing the firms to fatten paychecks in several years.
“It’s for sure a PR move,” says Katie Bardaro, vice president of analytics for PayScale, a compensation software and consulting firm.
But is it a coincidence the companies that quickly announced plans after the tax bill passed have received presidential scrutiny?
President Trump has opposed ATT’s $85 billion deal to buy Time Warner, saying it’s “not good for the country” because prices are likely to go up. The Justice Department is suing to block the merger. The president also has taken aim at Wells Fargo with a tweet that suggested the bank, which has been dogged by a fake accounts scandal, could see its penalties “substantially increased.” And Trump, as president-elect, was critical of Boeing and threatened to cancel a deal for a new Air Force One due to cost concerns. The president also blasted Comcast/NBC Universal on the campaign trail for “trying to poison the mind of the American voter.”
“It is interesting to note that the tidal wave of such announcements are from employers under the gun from government scrutiny and which have been specifically targeted by the president,” Jeffrey Sonnenfeld, a professor of leadership at Yale School of Management, told USA TODAY.
A Bank of America-Merrill Lynch survey in the summer showed many companies plan to use tax savings to buy back shares to lift their stocks, increase dividends or pay down debt. Top corporations such as Cisco and Coca-Cola have affirmed as much in calls with analysts. Still, economists do expect the tax savings to provide a modest boost to business investment that eventually aids workers.
The sweeteners are unlikely to have any noticeable impact on the economy, economist Chris Lafakis of Moody’s Analytics says. “If the majority of U.S. small businesses and corporations all did this it would have a meaningful impact” on growth, he says.
To be sure, one-time payouts, such as the bonuses some of the companies promised, have previously juiced the economy — at least when done on a wide scale. A $600 tax rebate championed by President George W. Bush in 2008 did more than pay for itself in additional spending and economic growth, Moody’s Analytics says, but that was during a recession when Americans were hunkering down. The impact of bonuses, even by the vast majority of companies, would be somewhat less today, Moody’s economist Dan White says.
A more significant effect of the tax bill would be a big increase in investment by companies or a more upbeat outlook by consumers that gooses their spending over the long term, says Joseph LaVorgna, chief economist of the Americas at Natixis,
Whitaker notes the corporate giveaways “represent only a tiny fraction of the vast amounts of cash sitting on companies balance sheets, which will only grow from the tax windfall.” For Fifth Third Bank, the $13.5 million bonus payments to workers pales in comparison to the $1 billion in share buybacks the bank announced in the third quarter, and they account for 1.4% of company profits during that period.
Yet Whitaker says the initiatives are still commendable. “If you’re raising wages and you can see 3,000 people now earning a living wage — that’s a big deal,” he says. He adds that minimum wage hikes are far more meaningful than bonuses. “Handing out a bonus is not a systemic change … It needs to be sustainable.”
Bardaro says a growing number of companies are choosing to give bonuses instead of raises to retain employees as the low 4.1% unemployment encourages many workers to job hop. Bonuses, she says, are often one-time payouts that can promote loyalty without adding to costs long term. The companies giving both bonuses and raises may have done so anyway as the labor market tightens further next year, she says.
Despite any cynicism, there’s a camp that says this is just the start of a movement of employers sharing more of their newfound windfall with workers and the towns and cities they do business in. Wells Fargo already ranked first among financial companies in 2015, with $317.5 million in charitable donations, or 1% of its pretax profit, according to the Chronicle of Philanthropy. Now it’s aiming for 2%.
“It does give employees a pocketbook boost even at the margin, as well as bolstering a company’s philanthropic profile,” says Quincy Krosby, chief market strategist at Prudential Financial. “Expect to see a parade of businesses ‘giving back’ to the community and their workers. After all, it is the season of giving. And U.S. companies have just been given the gift they’ve been waiting for — a profound boost to their bottom line.”
Senate Minority Leader Chuck Schumer and other key Senate Democrats blasted the GOP tax legislation one day after President Donald Trump signed it into law.