Due to recent market turmoils caused by the Wuhan pneumonia, many companies are expected to lose the first and second quarter income. Boeing and the airline industries hit very hard by the pandemics. Some companies could be bankrupted in a few months is the situation with the pandemics continues, and the market is expecting the administration to bail out these companies.
The potential bailouts raise lots of concern from the public as the bail out during the financial crisis a decade ago still remembered by the people. The public is angered by the companies continuous share repurchases instead of paying their debt in the last decade. Many people want the government to ban future share repurchases if the company decided to accept bailout.
Let's take a step back first:
Why companies want to do share repurchases?
Business generates income and earnings, and intuitively, some part of the earnings go to stock investors as dividend. However, the tax on dividend is outrageously high in the US. For example, I am considered an alien in the US, and I have to pay 30% on the dividend. So I don't want the company to pay dividend because the tax is too expensive.
Consequently, companies repurchase common stocks. In addition to not paying tax on dividend, the companies can reduce the number of outstanding shares. This is important because even if the profit attribute to the shareholder remain the same as the previous year, the share repurchases would increase the earning per share (EPS). Pushing the EPS higher is a common goal for every companies' board, this way, the board can ask the shareholders for higher salary and benefits, as well as better career outlooks for the officers.
On the other hand, central banks remain their benchmark rate at historically low and provide ample cheap credits to companies during a good economic situation. Credits are so cheap, investment grade bonds in the EU can be trading at negative interest rate. This implies company could receive interest for borrowing money. In the US, the interest rate remains at around 2% in recent years despite a good employment and economic environment. In this situation, most companies have no incentive to deleverage, because the alternative is to earn more money.
It does not solve the problem if the government bans share repurchases, the companies would simply perform M&A, spin off, etc. My point is, bankers and companies' directors would alway find some holes in the taxation system, and repay the investors without paying tax. As long as the central bankers do not provide monetary incentives for companies to deleverage (i.e. raise interest rate), the companies would not deleverage, and we would be revisiting the debt crisis every now and then.
The public now expects the government to bail the public out by fiscal measures or helicopter money. These measures would widen the fiscal deficit significantly, and the government need to issue bonds to cover for that. Now, I am not against fiscal stimulus at the current situation and I believe it is appropriate to significantly increase government spending now. However, as can be seen worldwide (especially in Greece, Italy, Spain, UK, US), the public refuse to pay back the extra money (by reducing spending or increase tax) spent when the economy is good. Consequently, I don't believe the public has a moral ground to demand excessively from the public, because the public (consequently, also the politicians) don't want to pay it back either.
I think what the public most angry about is that the company finds lots of way to evade legitimate profit tax, and the governments turn a blank eye towards it. It is important for companies to pay more tax in order to ease the publicity crisis and fill the fiscal gap, or they risk someone like Bernie Sanders becoming the president.
To sum up,
QE kept the companies highly leveraged. There is no monetary policy response to deleverage the companies in the last decade, so they haven't.
Stopping share buybacks does not solve the problem of corporate debt.
Fiscal response is needed, but the public must be prepared to pay for it in the future. Otherwise, we risk a collapse of nation in the next Sovereign debt crisis. We can't just keep spending and not saving.
There are so many holes in profit taxation system, the government need to do something about it. The current system is not fair to those companies who pay the "right" amount of profit tax.
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