Taxing Stock Buybacks will Hurt Retirees, Investors & the Economy
The framework for President Biden’s multi-trillion tax and spend budget currently calls for financing his massive social agenda in part by an excise tax on share repurchases. What was once just a bad idea is now a proposal that, if enacted, will hurt retirees and the economy.
Stock buybacks return a company’s surplus cash to shareholders, many of whom in turn use the capital to invest in young, growing firms thereby supporting the innovation cycles that boost the economy and job creation. Critics claim businesses use buybacks to reduce capital expenditures or shortchange employees. This is simply not true, as a company will only buy back its shares after it has met its planned commitments to employees and funded its annual research and development budgets. Buybacks allow investors to put their money to its best use. We need to drive capital into innovation and entrepreneurship now more than ever, to secure America’s position in a hypercompetitive environment.
It’s also disingenuous to say that a new, 1% tax on buybacks will only impact companies; in reality, it is all investors who will bear this unnecessarily punitive tax payment. Dividends, which investors are taxed at a higher rate than selling stock, will become the primary way for companies to return value to their shareholders. In addition to reducing options for hardworking Americans, a buyback tax is misguided in its underlying goal of trying to influence how companies allocate their resources.
Moreover, as the global economy confronts the lingering uncertainty of an ongoing pandemic, evidence shows that buybacks contribute to market stabilization. A new report from the U.S. Chamber of Commerce finds that in periods of uncertainty, corporate managers strategically use stock buybacks to increase stock liquidity and reduce price volatility. The resulting stabilization allows institutional investors to better manage portfolios and allows retail investors to sell stocks for what they are worth. Efforts to reduce stock buybacks, via taxes or other methods, would also reduce this benefit shared by all investors when the company buys back stock, regardless of how they participate in the market or whether they choose to buy or sell stock. In crucial periods of uncertainty, buybacks can counteract potential harm to investors.
The Chamber report estimates that stock buybacks have saved retail investors, who make up as much as 23% of equity trades in the U.S., $2.1 to $4.2 billion in transaction and price impact costs since 2004. With 4 in 10 dollars invested in the stock market held in retirement funds, stock buybacks also give investors a return on their investment that allows them to decide how best to put their money to use. We need to preserve outcomes like these that further empower American households to achieve financial goals through reduced costs and increased choices.
Such drastic policy changes must be calibrated in full recognition of the costs and benefits, as pointed out in our letter to Congress opposing the reconciliation package being considered. Policymakers who pursue policies that would end or limit corporate share repurchase programs are themselves only thinking in the short-term. They should instead be looking to enact policies that aid the economic recovery and for businesses of all sizes to be able access capital to grow and innovate.
Tom Quaadman is executive vice president of the U.S. Chamber’s Center for Capital Markets Competitiveness.