Paul L. Caron

Tuesday, June 15, 2021

Why The Apple-Led Stock Buyback Boom May Get Caught In Biden's Tax-Hike Net

Investor's Business Daily, Why The Apple-Led Stock Buyback Boom May Get Caught In Biden's Tax-Hike Net:

IBDHours before President Joe Biden's April 28 primetime pitch for $4.5 trillion in infrastructure and social spending, Apple (AAPL) wowed Wall Street with its own big-spending plan — $90 billion in Apple stock buybacks.

But Apple was hardly the first big company to use fat recent profits to repurchase shares from investors. Just a day before Apple's news, Google parent Alphabet (GOOGL) teed up a $50 billion buyback. Among others, JPMorgan Chase (JPM) set plans to buy back $30 billion in shares. ...

Yet a possible pitfall lies ahead. An under-the-radar proposal to tax stock buybacks as if they were dividends could reel in huge sums from investors, providing needed cash for Biden's government expansion. That might quiet the stock buyback boom and weigh on foreign demand for U.S. equities. The approach to taxation also may stir controversy. It's already taking flack for taxing "phantom income" and micromanaging corporate finances. ...

Corporate cash spent on buybacks buoys earnings per share by reducing share counts, contributing to higher stock prices. Stockholders who sell their shares back to the company may pay capital gains on the proceeds. For those who don't redeem their shares, buybacks will result in a bigger capital-gains tax bill, but only when they sell their stock — if they sell.

That ability to defer taxes is likely the biggest reason that buybacks have become the preferred way of distributing capital to shareholders for many of America's biggest and most successful companies.

Apple spent more than five times as much on Apple stock buybacks ($72.5 billion) in fiscal 2020 as it paid out in dividends ($14.1 billion). ...

Up until the late 1990s, S&P 500 companies spent more on dividends than on buybacks. But in 2019, buybacks totaled $729 billion, 50% more than the $485 billion distributed as dividends. 

Now all that buyback cash is getting attention as a potential avenue to fund Biden's spending plans.

The liberal Center on Budget and Policy Priorities last month highlighted a proposal to tax stock buybacks like dividends. Chuck Marr, director of federal tax policy for the influential group, told IBD that the current "tax bias in favor of buybacks" could grow wider if Biden hikes the dividend tax rate. "It seems you should correct that flaw."

The proposal, advanced this year by law professors Daniel Hemel of the University of Chicago and Gregg Polsky of the University of Georgia [Taxing Buybacks, 38 Yale J. on Reg. 246 (2021)], could raise more than $500 billion over a decade, they "conservatively" estimate. [See also Equalizing The Tax Treatment Of Stock Buybacks And Dividends] ...

[W]hy have Wall Street policy handicappers overlooked the possibility of a buyback tax? As Hemel and Polsky explain, the "emerging anti-buyback movement" has focused on legal restrictions, not taxes. ...

[T]he idea of taxing buybacks like dividends isn't new. Yale Law School professor Marvin Chirelstein proposed it in 1969 [Optional Redemptions and Optional Dividends: Taxing the Repurchase of Common Shares, 78 Yale L.J. 739 (1969)].

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