Big Corporations are misusing their newfound Pocket-Money

This one is short and to the point.

I want you to imagine that you’re a 12-year-old with a younger brother - we’ll call him Mozzy (he’s 8). You currently have an allowance of $10. You give Mozzy $3, and you keep $7 for yourself because middle school expenses far exceed elementary school purchases.

One day, Mozzy complains to your parents because $3 just simply isn’t enough to keep buying snacks at school.

Your parents think it through and decide that an allowance increase is in order (Great news, I know!). Your allowance is now increased to $15, with the implicit understanding that some of that increase will trickle down to your little brother.

Your little brother is elated as well - Mozzy doesn’t expect the full $5 to go to him, nor even half. He’s just excited that he’s finally getting the extra pocket money he so desperately needs.

A few days later, once the allowance increase had gone into effect, when Mozzy goes to check his backpack - he only finds the original $3 along with an extra $0.25.

To be fair, an increase in Mozzy’s pocket money was just an implicit expectation - not a contractual obligation, and an increase was provided. And, on the side, you managed to sneak in a slight increase for yourself as well.

A win-win.

Why did I give you this primitive example - well, because it’s true for the 2018 Tax Plan that was approved in December of last year.

Amongst hundreds of changes, one of the most notable ones was a massive decrease in the corporate tax rate from 35% to a surprising low of 21%.

Here are some beautiful depictions (yes, I drew them myself) explaining the change:

Taxes before-after.jpg

The green portion is the newly added savings due to the decreased corporate tax rate. Now here’s another beautiful image that breaks down how those green savings were expected to be used by companies versus how they’re actually being used.

Profit breakdown.jpg

Companies (aka you) were expected to give their employees (little brother) a fair share of the allowance increase [left]. In reality, companies only passed on $0.25 out of the $5 increase to their employees [right].

So what are companies spending that money on, if not giving it to the employees who need the money the most?

Share buyback programs.

A lot of the companies who benefited from the tax decrease are publicly traded Fortune 500 companies - think Apple, Alphabet (Google), Amazon, Exxon, etc.

Let’s say Apple has earnings of $10 and has a 100 shares - they have an EPS of $10/100, or $0.10 per share.

So what companies are doing are buying back shares to reduce the number of outstanding shares. With the added ~$5 that Apple got with their allowance increase (tax cut), they decide to buy some of their shares back from the public. There are now 50 outstanding Apple shares.

Their EPS has now become $10/50, or $0.20 per share, almost overnight. A lot of analysts use EPS as a metric for how well a company is doing - and as seen above, it isn’t that hard to amp that number.

So who’s ultimately benefiting from the allowance increase?

Companies (you) and company shareholders (your five closest friends).

What do you think about the 2018 Tax Cuts?