Avi-Yonah: Taxing Stock Buybacks As Dividends

Reuven S. Avi-Yonah (Michigan; Google Scholar), A Different Tax on Stock Buybacks:

In the Inflation Reduction Act of 2022, the US enacted a 1% tax on stock buybacks by large publicly traded corporations. The rationale was that stock buybacks are used by management as a tool for increasing the value of the remaining shares (and their stock options) while enabling shareholders to escape taxation altogether (if they are tax exempt or foreign) or pay tax at a lower rate (23.8% instead of 37%). Arguably buybacks also reduce useful corporate investments and hiring. But in practice, a 1% tax on buybacks is unlikely to reduce buybacks, although it can raise revenue (but that itself proves that it does not deter buybacks). Instead, I would propose to treat buybacks as dividends, which would make them taxable to foreign shareholders and potentially subject to a higher tax rate if the dividend rate is raised above the capital gains rate, like it was before 2003.

Conclusion
The excise tax on stock buybacks is useful because it raises revenue from the rich (both domestic and foreign) and as a symbolic measure. But it is unlikely to reduce buybacks, and the main tax problem with buybacks is not that they occur but that they are tax exempt to foreigners. Therefore, while it is useful to keep the excise tax or even increase it, I would argue that a future Congress should focus on treating buybacks as dividends to foreign as well as perhaps domestic shareholders.