Paul L. Caron

Tuesday, November 23, 2021

NY Times: Companies Love To Buy Back Their Stock. A Tax Could Deter Them.

New York Times, Companies Love to Buy Back Their Stock. A Tax Could Deter Them.:

Supporters of the Biden buyback tax say it will be good for the economy. Skeptics say it will hurt investment.

Corporate America has been feeding a stock buyback boom for decades, with companies spending trillions of dollars to repurchase their shares without paying any taxes on those transactions.

That could soon change.

In President Biden’s roughly $2 trillion Build Back Better Act, which narrowly passed the House on Friday but faces a tough fight in the Senate, Democrats have proposed a 1 percent tax on stock buybacks. Although it may not seem like much, the tax is a way to raise as much as $124 billion over 10 years, according to government estimates, and could help pay for the social spending and climate package.

Both supporters and critics of the proposed surcharge say it could alter the behavior of companies, but in ways that would have very different consequences for the economy.

To carry out a buyback, a company typically uses its excess cash — or even borrows — to repurchase shares from investors. The goal is to lift the price of a stock by reducing the number of shares outstanding, which rewards existing shareholders.

Supporters hope the tax will make buybacks less attractive and instead nudge companies toward investing their excess cash in their business and their work force. That, in turn, could provide a boost to the wider economy.

“There is good evidence that stock buybacks have been used in ways that are contrary to the health of firms and the health of the economy and workers,” said David Kamin, a deputy director of the National Economic Council in the White House. ...

Dividends are typically subject to a 23.8 percent tax, but it’s the recipient of the dividend, and not the company, who pays it. So to some, a buyback tax would be a way to make things consistent.

“Buybacks aren’t evil; they’re just undertaxed relative to dividends,” said Daniel Hemel, a professor at the University of Chicago Law School.

And a switch by companies to dividends might lead to something that some Democrats have long yearned for: a way to get billionaires to pay more tax. Since the ultrawealthy rarely sell their stock, they don’t pay large sums in capital gains taxes, and fund their lifestyles by instead borrowing against the immense stakes they hold in their firms. But if companies shift to paying more out in dividends, the billionaires will face taxes on the dividends from the shares they hold.

“If corporations respond to the excise tax by paying dividends rather than doing buybacks, their billionaire founders and major shareholders will start paying taxes on those dividends,” Mr. Hemel said.

(Hat Tip: Ted Seto)

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