Magic Number

The $1,000 Answer to the Tax Question

Everyone's situation is different, but the outcome isn't.
Photographer: Andrew Harrer/Bloomberg
ALASKA AIR GROUP INC
+0.81
At Closing, February 23th
64.98 USD

Dozens of large companies have announced the results of their tax-cut number crunching, and many of them have oddly arrived at the same conclusion: $1,000.

Consider Alaska Air Group Inc. The company could save as much as $135 million next year from the change in the tax law, which reduced the corporate income rate to 21 percent from 35 percent, based on the fact that the airline has paid an average of 30 percent over the past three years. As a result, in early January, the company said it was paying its employees a $1,000 bonus. Lowe's Companies Inc., on the other hand, by the same math (neither company has fully detailed their expected tax savings) could save more than $700 million a year from the tax change. On Thursday, it became the latest large company to announce what it would do with its savings: Pay its employees a -- you guessed it -- one-time $1,000 bonus.

Pick a Number

A surprising number of companies have decided to pay the same four-figure bonus in the wake of the tax law

Source: Bloomberg, company reports

Some companies have announced more than one action and are counted twice.

Lowe's has 290,000 employees, and Alaska Air has 22,000, so the cost of their bonuses will be different. But still, the similarity is odd given that their tax math is most likely vastly different, particularly given how similar it is to what other companies have been announcing. Of the 51 companies in the S&P 500 that have detailed through Thursday evening how they will spend their tax windfall, 23 have announced $1,000 one-time bonuses. Just four have said they will hire more workers.

It's not clear why $1,000 became the going rate. Some observers have pointed to Gary Cohn. In late September, Cohn, one of the president's chief economic advisers, in trying to sell the tax cut, said that an average American family could expect to see additional income of $1,000 from the president's tax plan. Cohn was mocked for saying that they could use the money to "renovate their kitchen, or buy a new car."

Cohn appears to have been talking about tax savings, not wage increases. Nonetheless, companies could be rushing in to fill the void, effectively proving the administration correct and winning points with President Trump at the White House's preset price.

Another answer could be that companies are paying bonuses because they are worried that if they don't they may lose employees to others that do. If that's the case, the similar bonuses could be signaling that the labor market is a lot tighter than many think it is, or perhaps more monopolistic than we like to admit. But the companies announcing the bonuses range from banks to retailers to railroads. Those companies most likely pay different wages to start with and require a different skill sets from their employees. Still, Home Depot Inc., Lowe's and Walmart Inc., all $1,000 bonus payers, may have reason for concern.

Spreading the Wealth

Alaska Air appears to be spending 16% of its first-year tax savings on employee bonuses; Lowe's, 40%

Source: Bloomberg, company announcements

Tax savings based on Bloomberg calculation.

Perhaps the best answer is a giant case of what economists call anchoring. In mid-December, just days after the tax law was passed, AT&T Inc. became the first big company out of the gate with its tax plans, which was a one-time $1,000 bonus to 200,000 employees. Despite the added cost, AT&T's shares rose that day and the next, which may have signaled that $1,000 was the sweet spot for employees and investors. And so other companies either consciously or not followed suit, even though the total cost of those bonuses will be different and most likely don't reflect the actual impact of the tax law.

Then again, maybe $1,000 just rolls trippingly off the tongue and into Trump's good graces. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Stephen Gandel in New York at sgandel2@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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