What a tax on stock buybacks would mean for the bull market

In 2016, a notable member of the Democratic Party took to the Op-ed section of the Wall Street Journal to explain how “short-termism” was bad for the economy.

“The notion that companies forgo long-run investment to boost near-term stock price — is one of the greatest threats to America’s enduring prosperity,” wrote then vice-president Joe Biden. “Private investment — from new factories, to research, to worker training — is perhaps the greatest driver of economic growth … Yet all too often, executives face pressure to prioritize today’s share price over adding long-term value.”

Biden criticized buybacks on 2020 campaign trail, too, and now, Democrats have a plan. But it is not from the White House and it stops far short of a ban: a 2% excise tax on stock buybacks proposed in the Senate as part of the corporate tax proposals to help pay for Biden’s still-evolving trillions in spending.

Buybacks continue to be a polarizing way to view corporate influence over the economy. To critics of buybacks, the 2% tax does not go nearly far enough. To investors like Warren Buffett, buybacks are a good thing you can never get enough of — one of the many reasons he is the No. 1 investor in the market’s No. 1 share repurchasing company, Apple. To many free-market economists, buybacks were never the problem nor any regulation targeting them an economic solution.

But the 2% tax proposal could, in fact, have an influence on companies’ willingness to buy back shares in the future, and that would have consequences for the stock market. Just how much, though, isn’t clear.

Over half (55%) of U.S. CFOs surveyed by CNBC say that the 2% stock buyback tax would cause
their company to buy back less of their own shares, while 40% of U.S. CFOs say that such a tax would have “no impact” on their buyback plans. That’s according to the CNBC Global CFO Council Q4 2021 survey, conducted among 20 U.S.-based CFOs between Sept. 20 and Sept. 29. The CNBC Global CFO Council represents corporations with a combined market value of roughly $4.5 trillion.

The division among CFOs is a good starting point for understanding where buybacks go from here. Buybacks have had a huge impact on the market, with record-low interest rates in recent years leading companies to even issue debt to buy back shares and, in particular, after the 2017 tax cuts freed up a lot of corporate capital, record buyback years in 2018 and 2019. That’s a talking point buyback critics have focused on, especially as supply chain bottlenecks around the globe intensify the political and economic debate over the reshoring of industry.

Jurrien Timmer, director of global macro at Fidelity Investments, recently noted that since 2004, U.S. companies have spent $11 trillion on buybacks.

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