One reason that reduced taxes might not result in substantial job creation in this economic environment is that many firms that already had excess cash were not using that excess cash to expand operations and hire additional workers. Giving them more cash through tax reductions would not necessarily prod them to expand and hire more workers. A firm with excess cash has several options: hold the cash; increase dividends to stockholders; buy back its stock; buy another company; or use it to expand operations.
In 2011, General Electric indicated that it expected to generate $100 billion in excess cash from 2012 to 2016. According to a company spokesman, these funds will be used for “dividends, stock buybacks, acquisitions, and other initiatives.” There was no mention of expansion and additional hiring.
Since 2011, Bank of America has shown consistent profit increases; its profit in 2013 was the largest since 2007. This large profit increase, however, has not increased Bank of America’s hiring. Actually, Bank of America has recently cut 46,000 jobs and closed over 700 branches, including several in North Carolina. Bank of America is in a cost cutting mode, which means cutting jobs; it is not likely that giving the bank more cash through a tax reduction would lead it to hire more workers or open more branches or hire more workers.
Pfizer, Inc., the large pharmaceutical firm, had about $3.7 billion in cash and cash equivalents plus $25.3 billion in short-term investments, which can readily be converted into cash, in October 2011. The firm announced that this excess cash would be used to finance a 10 percent dividend increase to stockholders and a stock repurchase plan of up to $10 billion. This new repurchase program was in addition to the $6.5 billion of shares repurchased in 2011. But Pfizer also announced plans to lay off 16,500 employees because of an expected drop in sales of its best-selling cholesterol product, Lipitor because the patent for Lipitor expired on November 30, 2011. Giving Pfizer more cash through a tax reduction would not change the reality of its business situation and prompt lead it to hire more employees.
McGraw-Hill Companies, Inc. also announced that it will use some of its excess cash to implement a share buyback program, and it will cut jobs. About 550 positions, including both executive and lower level personnel, will be cut, and $1.5 billion will be used to repurchase shares of the firm’s outstanding common stock. Campbell Soup Company and Best Buy Company, Inc. are two other well-known companies that have recently announced share repurchase programs ($1 billion and $5 billion, respectively.
Using excess cash to repurchase outstanding shares, rather than expanding operations, has become a common practice for companies today. Companies in the S&P 500 Index spent a total of $109.2 billion on stock buybacks during the second quarter of 2011 and $118.4 billion during the third quarter.
The Board of Directors of Belk, headquartered in Charlotte, recently authorized a stock repurchase of up to 2,080,000 shares of the company’s common stock. Cree, Inc., located in Durham, recently repurchased 2.1 million shares of its common stock at an average price of $47.11 per share, with an aggregate value of $99.6 million. And the company has recently approved an increase in the amount of the company’s stock repurchase program; it is now authorized to repurchase shares of its common stock having an aggregate purchase price of up to $300 million.
The use of excess cash to increase dividend payments to stockholders and to buy back stock from stockholders are certainly legitimate uses of a firm’s cash. But the transfer of funds from North Carolina (through tax decreases) to these stockholders, most of whom live in other states or other countries, will not create jobs in North Carolina.
Thus, a reduction in taxes provides firms with additional cash, but that additional cash does not necessarily lead to substantial job creation.
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