Even Republicans think companies may have a responsibility to society

Now into a new way of thinking.
Now into a new way of thinking.
Image: Reuters/ Joshua Roberts
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Marco Rubio is generally a friend of business. But a raft of tweets from the Republican senator from Florida yesterday Feb. 12 suggested that on the issue of stock buybacks, he’s more closely aligned with prominent Democratic senators such as Elizabeth Warren, Bernie Sanders and Chuck Schumer than with many of his fellow conservatives.

When a company buys its own stock, it reduces the number of publicly traded shares on the market and boosts the value of their stock at the same time. (Unsurprisingly, shareholders tend to think it’s a good thing, and corporate boards and executives are among those who benefit the most.)

Republican-led cuts to the corporate tax rate in 2017 were intended to fuel investment by companies, to the benefit of workers and the American people more generally. The rate was slashed permanently from 35% to 21%, with tax breaks until 2022 for investment in equipment and property. Nonetheless, stock buybacks have soared, while capital investment has remained relatively unchanged. This is not, for the most part, useful for workers, particularly when the savings could be spent raising their wages or investing in job-creating expansion.

When changes to the tax code were initially introduced, Republicans rebuffed suggestions that money would be used in this way. Now that it is, senators across the board have suggestions for how to minimize buybacks. Schumer and Sanders, for instance, want to outright forbid the practice, unless a company “invests in workers and communities first, including things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.”

Rubio has a plan too: Rewriting the tax code to treat share buybacks and dividends in the same way, making them less lucrative. Today, profits realized by investors from buybacks are taxed as capital gains; by treating them as dividends paid by the company, investors would pay a higher rate, even if they don’t actually sell the stock. The change as he said in one tweet, would “give permanent preference to investments that will drive the creation of jobs & increase in wages.”

Because Republicans are in the senate majority, Rubio—unlike Sanders and Schumer—is actually in a position to do something about this. Markets were, accordingly, briefly ruffled—but not for long. “The fact is you have the senate controlled by the Republicans, so it’s hard to imagine you’re going to see a vote,” Prudential Financial analyst Quincy Krosby told US News. “Maybe that’s why the market is still up.”

One surprising aspect of this is that Rubio is suggesting businesses have a responsibility not just to their shareholders but to society at large, not traditionally a focus of Republican economic policies. It’s also a step away from the free market, and towards government intervention. Here, too, Rubio is clear on his position: while the market is “better than [the] government at encouraging investment [and] innovation needed for widespread prosperity,” he wrote, the “tax code discourages [the] best aspect of free market by giving buybacks a deferral advantage over dividends or investment.”

A not-so-shocking discovery: A permissive tax code doesn’t always encourage businesses to make life better for their labor force.