Stock buybacks, when a corporation repurchases previously issued stock shares from investors, are a favorite progressive bugaboo. But despite all that they’re blamed for, stock buybacks are a fairly innocuous corporate activity that are not responsible for all the supposed economic woes attributed to them.
Stock buybacks have received special attention over the past year. As part of the Inflation Reduction Act (IRA), Congress passed into law a one percent excise tax on stock repurchases. As that has seemingly failed to dissuade corporations from repurchasing shares, President Biden announced during his State of the Union address his intention to seek to quadruple the tax rate that stock buybacks face.
Progressives argue that stock buybacks are a corporate activity that prioritizes shareholder value over economic growth, allowing corporations to inflate the value of shares and keep shareholders happy instead of making more productive investments elsewhere. Excise taxes on them, therefore, are intended not just to raise tax revenue off of an easy target but also to encourage better corporate behavior.
The problem with this is that there is no evidence that corporations are foregoing investment opportunities in order to focus on their shareholders. Instead, evidence points to corporations making productive investments first, then buying back stock shares after those investment opportunities are exhausted.
Stock buybacks are, in a rough sense, the corporate equivalent of stashing your savings in a bank account. Buybacks create value for shareholders, yes, but they also give corporations extra room to reissue those shares in the future should they need to raise investment capital. In that sense, they’re actually a pretty responsible activity.
What’s more, that value returned to shareholders doesn’t just disappear. One corporation buying back its shares because it does not need to fund investments thereby allows investment capital to be shifted to other areas of the market that do need help funding investments. Buybacks can be a very efficient method of getting investment funds from where they’re not needed to where they are.
Progressive dismissal of “shareholder value” as economic waste speaks to a broader misunderstanding of who “shareholders” are. Should a buyback tax succeed in preventing corporations from buying back stock, it likely would reduce shareholder value. But that would mean not just hedge funds and the stock portfolios of the ultra-wealthy, but also average Americans with savings in stocks, mutual funds, and retirement accounts.
The most recent Federal Reserve Survey of Consumer Finances (from 2019) found that 53 percent of Americans hold publicly-traded stock, roughly equivalent to the percentage of Americans who owed no federal income tax that same year (56 percent). It’s not an inconsiderable amount, either — the median value of stock holdings for those who had them was $40,000, while the median value of retirement accounts was $65,000.
And even aside from being misguided, an excise tax on stock buybacks sets up an interesting conundrum: though billed as disincentivizing buybacks and raising revenue, it can hardly do both well. If it succeeds at bringing a halt to buybacks, the revenue raised would plummet. And if it raises a great deal of revenue, that means it has done nothing to discourage buybacks.
When it comes down to it, targeting stock buybacks for a special tax makes no more sense than taxing any other corporate activity. Taxpayers shouldn’t be fooled — the justifications for an increased buybacks tax are just window-dressing for an administration that will always choose more tax hikes over badly-needed spending cuts.
Andrew Wilford is a senior policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax and fiscal policy research and education at all levels of government.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.
