Buyback tax proposal could blunt a major driver of stock market
Democrats in Congress are racing to find ways to raise money to pay for an ambitious agenda of social spending on programs ranging from a monthly child tax credit to two free years of community college for all Americans, and one proposal that has gotten attention in recent days is a new 2% excise tax on corporate stock buybacks.
Democratic Sens. Sherrod Brown of Ohio and Ron Wyden of Oregon unveiled the proposal on Friday, estimating that the new levy would raise $100 million over 10 years, but rumors that Washington would target the cash-distribution strategy had been circulating in the weeks before, and investors have been listening.
“Stocks with the largest buybacks have lagged peers in recent weeks, potentially reflecting concern about the recent proposals to impose an excise tax on share repurchases,” wrote Goldman Sachs analysts led by David Kostin in a weekend note to clients. Kostin argued that a 2% tax would not likely have a major impact on earnings-per-share for the S&P 500
SPX,
broadly, but that it could be disruptive nonetheless. “Such a tax could affect equity supply and demand, given that U.S. corporates have been the largest buyers of U.S. equities during the past decade.”
It was once rare that public companies in the U.S. would repurchase shares of their own stock for fear of shareholder lawsuits, but a 1982 rule adopted by the Securities and Exchange Commission created a safe harbor that paved the way for a surge in the practice, which enables companies to manage their earnings-per-share metric and return cash to shareholders in a way that doesn’t trigger a tax liability, as dividends do.
Following the passage of President Donald Trump’s 2017 corporate tax cut, share buybacks became national news as the nation’s largest companies used their tax savings to buy back shares to the point that corporations became the largest source of demand for U.S. equities, when compared with foreign investors, households, mutual funds and pension funds, according to Goldman.
“Rather than investing in their workers, megacorporations 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 a press release. “Stock buybacks are currently heavily favored by the tax code, despite their skewed benefits for the very top and potential for insider game-playing. Our bill simply ends this preferential treatment and encourages megacorporations to invest in their workers.”
Critics of stock buybacks, however, say the proposal doesn’t go far enough. “I don’t think companies should be allowed to do buybacks at all,” said William Lazonick, a University of Massachusetts economist.
Lazonick’s pioneered research into the impact of stock buybacks on the U.S. economy, arguing that they drain corporate coffers and divert investment away…
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