Author: Alpert, Bill
Barron's (Online) ; New York (Sep 10, 2021).
Senate Democrats proposed Friday a tax on corporate stock buybacks to help finance $3.5 trillion in new spending programs. The tax would be levied on buybacks that have helped propel the long bull market and enrich America's share-compensated executives.
Under the proposal, the 2% excise tax would only apply to shares bought back and retired. It would exempt repurchased shares used to fund employee stock ownership plans. Democrats said the excise tax would bring in about $100 billion in tax revenue over 10 years.
"Instead of spending billions driving up their own stock prices to line executives' pockets, Wall Street should be reinvesting in workers," said Sherrod Brown, the Democratic senator from Ohio who introduced the bill with Senate Finance Committee Chairman Ron Wyden, an Oregon Democrat.
"Mega-corporations used the windfall from Republicans' 2017 tax cuts to juice their stock prices and reward their wealthiest investors and their executives through massive stock buybacks," Wyden said in the senators' announcement.
In recent decades, cash-rich companies have used buybacks to reward stockholders and share-incented employees. Apple (ticker: APPL) spent over $400 billion on buybacks in the last 10 years, while Microsoft (MSFT) spent nearly $130 billion. Since 2017, annual spending on buybacks by companies in the S&P 500 index totaled $650 billion each year, on average, according to an Aug. 6 report by J.P. Morgan quant analyst Dubravko Lakos-Bujas. Some 20% to 30% of those buybacks were funded with debt—the rest with corporate cash.
"[Congress] desperately need revenues," said Yardeni Research's Ed Yardeni. "They are going to tax whatever they can." Yardeni expects the 2% tax will be opposed by corporations and Wall Street for fear that it could open the door to additional taxes on financial transactions .
If enacted, a 2% tax on buybacks wouldn't have much impact on buybacks or the market, Yardeni said. Buybacks have been a smaller driving force behind the bull market than earnings growth and valuation, he said. While buybacks reduce a company's share count and boost its earnings per share, a 2019 Yardeni Research study concluded they added 1% to the S&P 500's growth in earnings per share over an 8-year stretch.
Critics of buybacks say they widen the pay gap between American executives and workers, enriching the likes of Warren Buffett and Jeff Bezos with capital gains that are only taxed when they sell their stock. Meanwhile, they can borrow tax-free against their large stockholdings. Yardeni points out that top executives aren't the only beneficiaries of buyback gains: About two-thirds of shares bought back are used to fund corporate stock compensation plans.
Brown and Wyden said the 2% excise tax would make corporations think twice about allocating capital to buybacks, instead of hiring or capital investment. Spending by the S&P 500 companies on buybacks rose 11% from this year's March to June quarters, said J.P. Morgan's Lakos-Bujas. Capital expenditures rose 6%. Spending on dividends slipped 3%.
A separate proposal would change taxation of business partnerships to bring in an estimated $170 billion over 10 years. Other tax changes under discussion include raising the corporate tax rate to 25% from 21%, boosting the top individual tax rate to 39.6% from 37%, and introducing a tax on unrealized capital gains at death.
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Senate Democrats Propose Taxing Stock Buybacks. What It Means for the Market.
Credit: Bill Alpert