Hemel: Should An Excise Tax On Stock Buybacks Also Apply To Cash M&A Deals?

Daniel Hemel (Chicago; Google Scholar), Should an Excise Tax on Stock Buybacks Also Apply to Cash M&A Deals?:

Senators Sherrod Brown (D-Ohio) and Ron Wyden (D-Oregon) introduced legislation this morning to impose a 2 percent excise tax on stock buybacks—a proposal that could serve as a significant “payfor” in the budget reconciliation bill moving through Congress now. An important decision in designing the excise tax is whether the tax should apply to transactions in which one corporation purchases another corporation’s stock (rather than repurchasing its own stock). The late William Andrews, a Harvard Law School professor and leading corporate tax scholar, considered this question in the early 1980s and concluded that the answer is “yes”—at least when the acquiring corporation ends up with majority control of the target. The current text of the legislation would not apply the tax to those transactions, though hopefully Andrews’s argument will persuade lawmakers to make a change.

Note to congressional Democratic staffers in search of budget reconciliation payfors: A lot of money rides on the answer to Andrews’s question. According to Federal Reserve data, “retirements” of equities by U.S.-domiciled nonfinancial corporations averaged $866 billion per year over the five-year period ending in 2020. Of that amount, slightly more than half (51 percent) was attributable to buybacks, and slightly less than half (49 percent) was attributable to cash acquisitions. Back-of-the-envelope calculation: If equity retirements over the next decade stay at 2016-2020 levels, the revenue haul over the budget window would be $173 billion if the tax applies to buybacks and cash acquisitions, but only $88 billion if it’s limited to buybacks (an $85 billion delta!).

The back-of-the-envelope calculation in the previous paragraph is very back-of-the-envelope. Retirements of equities might rise—both because of overall asset appreciation and because corporations are now holding a lot of cash that they’ll ultimately look to unload. Or retirements of equities might fall because of the disincentive effect of an excise tax. Also note that the figures in the previous paragraph don’t include financial corporations. But even on the back of the envelope, it’s already clear that whether to apply the excise tax to cash acquisitions is a really big question that will have multibillion-dollar budgetary implications.

Aside: The current text of the legislation limits the tax to publicly traded corporations. It’s really hard to see why large private corporations (e.g., Cargill, Mars, and Fidelity Investments) should be exempt from the tax. Buybacks by those corporations raise the same tax policy problems as buybacks by publicly traded corporations. The $1 million-per-year exemption in the legislation should be enough to spare small enterprises that take the corporate form.