Share Buybacks and Corporate Tax Cuts

Juin-Jen Chang, Chun-Hung Kuo, Hsieh-Yu Lin, and Shu-Chun S. Yang

IEAS Working Paper No. 22-A005, November 2022

Since the mid-1980s, U.S. corporate tax cuts have become less expansionary and increasingly associated with rising share buybacks. Using dynamic general equilibrium models with corporate financial allocations, we show that buybacks render a corporate tax cut less expansionary. Simulations based on the Tax Cuts and Jobs Act have the optimal buyback response much smaller than that observed. This implies that restricting buybacks is likely to enhance the expansionary effects of a corporate tax cut. Both shareholders and non-shareholders enjoy higher income from a corporate tax cut, but most of the income increases accrue to shareholders. Whether non-shareholders enjoy higher consumption depends on the fiscal adjustment mechanism.