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Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is

Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items on the agenda that it knows need capital, namely infrastructure and healthcare. Thought that was an interesting take. Edit: here is the link but it may be behind a paywall. https://americanaffairsjournal.org/2018/12/share-buybacks-and-the-contradictions-of-shareholder-capitalism/ https://americanaffairsjournal.org/2018/12/share-buybacks-an...

rjkennedy98 7y ago
At the very minimum it should be taxed the same as dividends. Essentially tax buybacks are a tax loophole for giving money back to the shareholder.
- pc86 7y ago
  What would this look like from a practical standpoint, though? Dividends are a taxable event because you're giving someone money. In a buyback, the value of the stock simply goes up, which isn't a taxable event. How do you determine the cost basis on something like that? If there's a stock buyback over the course of 6 months, how do you determine which proportion of the price increase is due to the buyback, as opposed to inflation or normal growth?
  - entropicdrifter 7y ago
    You tax the buyback itself, right? You tax the money the company is spending on its own stock. That's the only step of the transaction where money is changing hands
    - pc86 7y ago
      I'm not trying to be obtuse, I'm genuinely curious how this would work and what changes to tax law would need to be made. Would you tax the entity buying the stock (in case always a company since it's a buyback; which I think would be the only example of taxing a stock purchase), or the entity selling the stock (either an individual or a company, which is already potentially taxed as capital gains)? If the goal is to tax it similar to dividends you would tax the person selling the stock but it's already taxed as capital gains, either long term (0%/15%/20%) or short term (marginal bracket rate).
    - brianwawok 7y ago
      Isn’t that a double tax? Taxed at buyback time, and taxed when shareholder cashes out and realizes their gain? Though I guess a small (10%??) tax could still make buyback tax + dividend long term gains is still less than normal income tax.
      - zaroth 7y ago
        Triple actually. Corporate profits tax, new hypothetical buyback tax, and then again as capital gains when the shareholder sells.
        take_a_breath 7y ago
        I pay taxes on my income, on my purchases, on my property and again on my property’s appreciation when I sell.
        frockington1 7y ago
        Get ready for the wealth tax, now the politicians will be able to grab you're money in the intermediate steps as well
      - shantly 7y ago
        Everything's a "double tax", but people only care sometimes, for whatever reason.
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  - ISL 7y ago
    In a buyback, a shareholder must sell shares back to the company. When they do, the shareholder's gains are taxed with capital-gains tax. Furthermore, whenever shareholders sell shares after the buyback, their shares are generally worth more, so they pay increased capital gains, too. I don't know which yields more tax revenue in the long run, but buybacks definitely generate some tax income. The only time I could see a "buyback" influencing share price without taxation is if the buyback has a price cap, and every shareholder believes that the company is worth more, so they don't sell any shares back. This is exceedingly unlikely unless the company is very thinly traded. From my perspective, the key difference with a buyback is the winnowing of shareholders to those who believe more-strongly in the company's future. With a dividend, every shareholder gets a small amount of cash. With a buyback, some shareholders get cash for their shares, and every other shareholder gets a bigger slice of a company that is worth less (total) money. If the market is efficient (and it isn't, but it can be) then following a buyback, one would expect the market capitalization of the company to be smaller, as the company has paid out money. After 6 months, if the market cap of the company, plus the funds expended in the buyback, is greater than the inflation-adjusted pre-buyout market-cap, then the company has created shareholder value through some other mechanism (even if the mechanism is pure psychology).
    - 6gvONxR4sf7o 7y ago
      >one would expect the market capitalization of the company to be smaller, as the company has paid out money This doesn't make sense to me. If I spend $X to buy a widget worth $X, I've paid out money, but I haven't net lost anything. I'm worth the same in total. If the widget is a share in a company, even my own, that shouldn't change the fact that the net change in total value is zero.
      - ISL 7y ago
        Are shares in Apple or Berkshire worth the same to you without the companies' cash hoards?
      - kgwgk 7y ago
        When a company buys its own shares it’s essentially cancelling them: they become essentially worthless. Look at if from a different angle: the ones selling the shares to the company are the shareholders. In aggregate, the shareholders own the company valued at $B (market cap) before the buyback, and the company valued at $A plus the cash paid $X after the buyback. If $A=$B they are creating $X out of thin air. Even simpler to grasp: you have a business 50/50 with a partner. There is $1m in the company account, you reach an agreement and he will sell his interest back to the company for $1mn in cash. You are sole owner now. The company doesn’t have the cash anymore. How much was the company worth before? How much is it worth now?
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- twoodfin 7y ago
  It is taxed the same as dividends, just deferred until the outstanding equity is sold, no?
  - usaar333 7y ago
    Basically, which is very advantageous, because you continue to reinvest otherwise paid taxes. To say nothing of the fact that the stock might never be sold. Or the fact that capital losses can offset a gain from a buyback, unlike dividends.
    - cma 7y ago
      So it’s like a 401K with no contribution limit, but taxed twice (second time at cap gains rate). Too good to be true for billionaires.
  - anotherman554 7y ago
    No because inheritances can have stepped up basis. It may never be taxed.
    - toast0 7y ago
      The basis step up on death is a byproduct of going through the estate tax. Yes, for the vast majority, the estate tax is $0, but it's not untaxed.
      - anotherman554 7y ago
        The first 11.4 million of an inheritance would be untaxed.
        toast0 7y ago
        It's taxed, and the rate is $0. If it were untaxed, like when the estate tax expired, you wouldn't get the step up in basis.
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- mrep 7y ago
  No it's not as investors will have to pay taxes on any gains when they sell there stock which should happen in proportion to the buyback all else being equal. Buybacks just allow them to defer realizing those gains and paying taxes on them until they finally decide to sell.
- andrewmutz 7y ago
  This is correct. Stock buybacks are just a way of doing dividends that is more tax advantaged. The right answer isn't to introduce new forms of buyback taxes with unknown second-order effects (who would you tax? if the shareholder is avoiding dividend taxation, taxing the corporation isn't a great solution). The solution is to just improve the way we tax dividends and capital gains.
  - Enginerrrd 7y ago
    I agree with this entirely. If you tried to tax buybacks, you'd likely be inadvertently taxing a ton of the corporate infrastructure used for administrative purposes. In this case, the buyback is clearly like a tax-advantaged dividend, but with a key difference: it's not liquid. Dividends cross that critical threshold of spendable cash that triggers taxation.
    - useful 7y ago
      I don't. If only 20 widgetshares exists in the world and we each have 50% (you have 10 and I have 10) and the market for widgetshares is $200. Should you be taxed for your theoretical $5.26 gain if I destroy 1 widgetshare but you haven't sold any. Buy backs are no different. You will pay taxes if you sell. Personally, I think you should pay taxes if you take out a loan using the market value of the shares as collateral. This is where everything starts getting funny and companies and individuals start being able to avoid taxes forever.
      - andrewmutz 7y ago
        Why not just fix inheritance issues? At the time of death, either make the estate pay capital gains taxes on the market value of the assets, or just don't give the heirs a stepped-up basis. It will catch up eventually.
- friedman23 7y ago
  You understand that when a company does a stock buyback, somebody is selling their stock and that stock they sell is taxed with capital gains?
  - CuriouslyC 7y ago
    Or they could buy a different stock and pay nothing.
    - xadhominemx 7y ago
      No, you have to pay for each individual stock
      - CuriouslyC 7y ago
        I true for large or institutional investors, but not with 401ks and IRAs though. Also, for large institutional investors, they can time sales to use capital losses to avoid tax burden.
        newfangle 7y ago
        Ok so your original response to the comment is factually incorrect. Unless you think deducting capital losses and retirement accounts should be gotten rid of.
- bduerst 7y ago
  Not really. Dividends are payments, whereas buybacks are assets changing hands. There's a difference from both a finance and accounting side. Simple example: Dividends can be made ad nauseum; Buybacks can only be made as long as there are outstanding shares.
- drelihan 7y ago
  Buybacks are effectively taxed at the same rate as dividends, at least qualified dividends, just timing differs: Simple case with a corporation worth $200 with two equal shareholders, who each paid $100 for their half of the company and are in 20% capital gains tax bracket, ignoring net investment tax of 3.8%: Dividends: Corporation pays $100 in qualified dividends, $50 to each shareholder. Each shareholder pays their capital gains tax rate on the $50. If that rate is 20% for each, then a total of $20 is collected by the US Treasury. Each shareholder then reinvests or spends the remaining $80 in the economy, while the government puts the $20 to work. Buy Back Case: Corporation buys back $100 of shares from 1 shareholder. No taxes were due there as there were no capital gains for shareholder 1. Shareholder 2 now owns 100% of the corporation, so their investment is now, all other thing equal, worth $200. When shareholder 2 sells, a bill for $20 is due ( $100 in capital gains x capital gains rate ). Shareholder 1 reinvests/spends $100 in economy, government gets no additional cash now, but will eventually when Shareholder 2 sells. In the end, government gets the same $20 in tax. Benefits of the buy back are that investors are able to choose whether or not they want to cash out, whereas a dividend forces it on all investors. Downside is that government has to wait for the $20 in capital gains taxes. However, if shareholder 1 owed capital gains on the buy back ( perhaps they bought their share for $50, so would owe $10 in the $50 it made on the sale ), the government would get $10 from that sale + $20 down the road when shareholder 2 sold.
  - cjlars 7y ago
    Option three would be to not distribute cash through dividends or buy backs and reinvest directly in the business. In that case the net result and tax treatment is about the same as buying back shares. Trying to treat buy backs as a special case would just result in a defacto incentivization of conglomerates.
    - drelihan 7y ago
      I’d rather invest in just that company, one that can continue reinvesting profits in itself at attractive returns year in and out. I can sit back and let compounding work it’s magic ( although at some point in my life I will switch from a net producer to a net consumer and opt for cash ). In cases where a company does not need all the cash it generates to continue its growth or does not have growth prospects ( not necessarily a bad thing), then I’d rather have cash to invest more productively elsewhere.
- JackFr 7y ago
  Another word for "a tax loophole" is "the tax law". The fact that ham fisted bureaucrats and legislators create unintended consequences with every "incentive" they put in the code makes it no less binding.
  - throwaway2048 7y ago
    Guess who lobbies for these "unintended" consequences...
  - Sohcahtoa82 7y ago
    > unintended consequences If you think those consequences are unintended, then I have a bridge to sell you.
- tzs 7y ago
  I don't remember what section of the IRS code or regulations cover it, but there are rules to prevent disguising a dividend as a stock buyback. They provide a good illustration of why the tax code is complicated. (All numbers in the following are made up). Some major company a long time ago was going to pay out a dividend, and then their accountants had a great idea. Instead of a dividend, they would first do 100 for 99 stock split. Then they would do a 1% stock buyback. The shareholders would be taxed at capital gains rates instead of ordinary income rates on this. Note that for any shareholder, the result afterward is that for every 99 shared they owned before the split and buyback they still own 99 shares. No one's actual percentage ownership of the company has changed--but they have received money from the company. The code and/or regulations were updated to fix this. But then buybacks that were not hidden dividends were getting classified as ordinary income, too, and so further code and/or regulation changes were made to further refine this. What it eventually ended up with is rules that looked at how ownership was distributed among the shareholders before the buyback and after the buyback, and decided if it was a disguised dividend or a legitimate buyback based on how that distribution changed. (I haven't followed tax law for several years. Anyone happen to know if this is still there after the Trump tax changes?) This sort of thing is a large part of why tax codes and regulations tend to be big and complicated. Even if they start out fairly simple, people find holes like that split/buyback trick, and closing those holes adds complexity. The result is that you only generally will see either very simple tax systems (like sales taxes) or very complex systems. Systems that start out in between end up moving toward very complex.
- dehrmann 7y ago
  At which rate? Dividends are taxed at each shareholder's marginal rate.
mrep 7y ago
The government already gets first dibs through corporate income taxes. Buybacks aren't deductible from that.
- jjoonathan 7y ago
  Isn't corporate income tax the one that can be dodged by just shifting profit offshore? Or did they close that loophole?
  - rayiner 7y ago
    Very few companies (mostly tech companies) can take advantage of those tricks. Exxon can’t assign all its oil fields to an Ireland subsidiary to inflate expenses and reduce profits in the US. The median effective tax rate for the S&P 500 in 2018 is 21%. That’s the same as or higher than the statutory tax rate in Canada, the U.K., Sweden, Norway, and Germany.
- papito 7y ago
  Yeah, Amazon paid $0 last year.
  - ChrisLomont 7y ago
    Since 2019 is not yet filed I assume you mean 2018 as "last year". Here's Amazon's SEC filing for 2018 [1]. They paid 1+ billion on income taxes (page 37) on 11B in profits. They paid billions more in property taxes and other regulatory taxes. Note that annual taxes also are affected by previous year issues. This is why from the same document, same page, you see them paying 1.4B on 3.9B of profit. So getting upset about a year of no taxes with profits, when it truly does happen, is missing important nuance on what companies do pay. Check surrounding years, and read the SEC filings to see the reasons, which I've always found to be quite reasonable. It's not as bad as the pop press would have you believe when they cherry pick the outliers from one year or another. And the pop press usually ignores all the other taxes that corporations also pay, focusing solely on income taxes, as if that were the only tax. [1] https://ir.aboutamazon.com/static-files/ce3b13a9-4bf1-4388-89a0-e4bd4abd07b8 https://ir.aboutamazon.com/static-files/ce3b13a9-4bf1-4388-8...
ENOTTY 7y ago
Wouldn't buybacks be taxed when the investor cashes out?
- SifJar 7y ago
  The buybacks themselves would also presumably result in capital gains for the sell side (ideally) & thus taxation?
  - gtfratteus 7y ago
    Yeah, buybacks don't affect tax revenue at all. They're just a Boogeyman for unintelligent liberals.
- zebrafish 7y ago
  I'm thinking probably not because the investors, who are either High Net Worth Individuals or investment banks, should be hedging their tax exposure appropriately.
kolbe 7y ago
Here's the problem: you're asking governments to have first dibs over the actual owners of the capital. The whole reason that companies are doing buybacks is that they cannot turn all of their money from $1 into $1.05 anymore, and they give it back to shareholders to go figure out how to get returns. When the government uses it, they turn $1 into somewhere between -$0.20 (wars) and 0.10 (infrastructure with myriad bribes/kickbacks along the way). I don't think it's a good idea to encourage the later over having people who stand to experience the consequences of making bad investments (the rightful owners of the money) make investing decisions.
- baq 7y ago
  That money doesn’t just disappear, right? It gets spent to private contractors on all too often outrageous terms but it goes back into the economy, too.
  - kolbe 7y ago
    The velocity of MZM sits at around 1.3 right now, so it goes back after almost a year of being wasted. But who it goes to after that year matters as well. I would prefer Larry Page get the money because he will be able to intelligently allocate it. Or a productive poorer citizen get it to consume wisely. The myriad rent seeking morally defunct (and likely intellectually defunct) people who receive the government kickbacks are a bad set of people to end up with the money after a year. They invest poorly and spend frivolously. But sure, after several years, the money that didn't end up in the China's and the Cartels' pockets will probably back in circulation among the intelligent members of the economy.
mrfusion 7y ago
I’m confused. Companies are using profits for the buy backs. Corporate profits are already taxed.
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- mountainofdeath 7y ago
  Not profits but debt. With the ultra-low interest rates of the last ten years, companies could finance bonds at rates just above inflation. However, instead of using those funds to grow the business (e.g. R&D), they simple bought back shares, increasing the price of the stock.
  - ailideex 7y ago
    Can you cite? What companies are using debt to finance repurchases? Also the person you responded to probably meant that they profit in a technical bookkeeping sense not. You can still have profit while having debt and profit will be taxed in a certain way.
    - rezistik 7y ago
      https://fortune.com/2019/08/20/stock-buybacks-debt-financed/ https://fortune.com/2019/08/20/stock-buybacks-debt-financed/ https://www.cnbc.com/2019/07/29/buybacks-companies-increasingly-using-debt-to-repurchase-stocks.html https://www.cnbc.com/2019/07/29/buybacks-companies-increasin...
ww520 7y ago
The buyback money presumably is the money after corporate tax so it has gone through one round of taxation. The stock holders selling the stock will pay capital gain tax again, so the money will go through another round of tax.
- loourr 7y ago
  I think the money is often debt, which would make it untaxed.
crazygringo 7y ago
That doesn't make any sense. The market is the most efficient capital allocator because shareholders are the market, not companies. Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is equally true for both buybacks and dividends. This is because most companies have no wish to operate like broad VC firms or investment firms. While plenty of shareholders do. The government has all the infinite "dibs" it wants, they're called taxes. If the government wants to tax buybacks further it doesn't need any particular logic of "dibs" to do so. And right now buybacks are taxed in exactly the same way as capital gains, which is the same way qualified dividends are taxed too. And corporate profits are already taxed too.
- tw04 7y ago
  The point is both the companies in question and the ultra-wealthy that are the beneficiaries of the vast majority of these buybacks AREN'T paying taxes, so it's another way for the government to at least attempt to capture the $$ that should already be going into the treasury instead of offshore accounts/subsidiaries/whatever double dutch triple lux tax evasion scheme of the month they're using.
  - mrep 7y ago
    How are they not paying taxes? The people selling their stock to the company in the buyback have to pay taxes on any gains and the people holding onto the stock long term will eventually have to pay taxes on any gains when they finally do sell (they're not going to hold onto a stock until the heat death of the universe so they are going to realize their gains and pay taxes on them at some point).
    - jf22 7y ago
      I believe your comment is referencing normal people paying taxes, where the comment you are replying too is referencing the ultra-wealthy and corporations paying taxes. The ultra-wealthy and big corporations take advantage of schemes to lower their taxes.
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duelingjello 7y ago
$1T would be enough seed money to get an international effort moving to solve climate change using emissions targets, ferrous phytoplankton seeding like IRONEX I and/or kelp blooming/capture/sequestration. Much cheaper than the inflated numbers thrown around as arguments for doing nothing / delaying longer that ignore the $200+ trillion destroyed by doing nothing. Deny -> extinction Complain about costs -> extinction Do nothing -> extinction Do too little -> mass deaths, world war Act decisively -> enough of us would likely survive
- MrFantastic 7y ago
  Global warming will not cause humans to go extinct. We are adaptable and most will just move to better locations. Polluting our water supply definitely will kill most land based species. Don't waste your time fighting for something is an inconvenience. Fight for clean water and minimizing pollution.
- thehappypm 7y ago
  I have never heard of extinction as a possible consequence of climate change. Care to elaborate how that might be possible? Even if society crumbles due to unrest, the Earth will be inhabitable in at least some areas. It's hard to imagine that every single human being on Earth will die.
  - pinkfoot 7y ago
    > I have never heard of extinction as a possible consequence of climate change If things get nasty, the nuclear-armed folk might just light up the 14,000 nukes lying around. That could do it.
    - thehappypm 7y ago
      Still, how would that kill everyone? Small pockets of humanity would still hang on.
      - pinkfoot 7y ago
mathattack 7y ago
They are taxed. If there’s a capital gain when BigCorp buys my stock back, I pay taxes on it. You can argue whether or not Capital Gains is too high or low but the mechanism is there. Then there’s the question of what I do with the money. If I invest it in government bonds, they get the remainder. Otherwise the money gets recirculated through consumption or other investment. If you really think companies are too eager to return money to shareholders, take away deductibility of interest. This would dissuade companies from borrowing money to buy shares. (Effectively creating debt from equity)
topkai22 7y ago
We don't need a new tax, just a fix to an old tax- tax all capital gains the same as normal income. Even better if we enabled a refund of some sort in years with negative capital gains to act as an automatic stimulus.
CharlesColeman 7y ago
> Read an idea in American Affairs in support of taxing buybacks. Honestly, at their most supportable, share buybacks seem to be just dividends in all but name with different tax consequences (i.e. they're a tax dodge). I'd support a law that declared the only legal way to intentionally return cash to shareholders is via dividends, to close the loophole and increase tax revenues. In other cases, they just seem like financial engineering employed by CEOs and other interested parties to game their personal job performance metrics.
- bluecalm 7y ago
  But why do that? We accept that if I hope a stock or any other asset which value increases I am not liable to pay the tax until I actually realize that profit by selling. It makes sense to do it this way as well as otherwise you would be losing money to taxes just because the price fluctuates (one year it increase, another it decreases). When the company buy backs stock it actually triggers the tax event: people who sold the stock to the company are now paying tax on capital gains.
  - CharlesColeman 7y ago
    > It makes sense to do it this way as well as otherwise you would be losing money to taxes just because the price fluctuates I'm unsure how you're reaching this conclusion. I said nothing about eliminating capital gains and moving to some kind of system where investors are taxed on yearly stock price fluctuations. All I proposed was to forbid companies from purchasing their own stock for the purpose of manipulating its price upward. Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity.
    - bluecalm 7y ago
      The point is that purchasing their own stock is not for the purpose of manipulating its price. The price increase is a natural consequence of there being less outstanding shares. Less outstanding share = one share is worth more. >>Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity. Buybacks has many advantages though. The biggest one is that if you want to reinvest dividends into stock you would have to pay taxes which creates a situation where you are liable for taxes even if you didn't make any money (if the price fluctuates). Buyback is like automatically reinvested dividend. I don't think it should be taxable for the reasons outlined above.
zacharytelschow 7y ago
> THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. You're essentially saying companies are choosing to do the wrong thing with their money therefore we're entitled to seize it. If that were a compelling argument, why wouldn't we treat individuals the same? And who do you think stock prices affect, with virtually all of society in the stock market either directly or through pension funds? By keeping interest rates artificially low, stock buybacks are more appealing than capital investment or labor force expansion. It's simply a logical outcome of the policy our government is pursuing.
todipa 7y ago
Why tax buybacks? Just tax the individual benefiting from that buyback at the appropriate rate. Taxing buybacks essentially means that you are taxing poor shareholders and rich shareholders the same.
georgeburdell 7y ago
When one has a hammer, everything seems a nail. Taxes are not money looking for something to spend it on. I could argue that corporate taxes are redundant because people ultimately run and benefit from corporations so tax them instead. In reality it doesn’t matter because the government needs $X to fund its obligations and will get it however it can
- Consultant32452 7y ago
  The federal government doesn't need to raise any taxes to pay bills, it can just create currency. Once you realize the primary purpose for taxes is social policy, it makes more sense.
aidenn0 7y ago
Why not just tax capital gains at the same rate as dividends?
bluecalm 7y ago
Even if we accept that companies returning money to shareholders means that they can't find good use for the capital doesn't mean the government will. If anything maybe the shareholders themselves can find better use for the money. After all they have wider avenue of possible investments (things outside of the scope of what the company is doing). There is also the whole fairness side of things: even if it's a bit less efficient for shareholders to have the money or even if they want to spend it for consumption doesn't mean the government should take it.
formercoder 7y ago
Why should we get all excited about giving the government more money to spend? They are terrible at spending it effectively.
dehrmann 7y ago
I'd rather just have a corporate tax rate of 0% and shift the tax to people. That's who (eventually) gets the profits, anyway. It would also create a level playing field for larger corporations and pass-through entities.

rjkennedy98 7y ago

At the very minimum it should be taxed the same as dividends. Essentially tax buybacks are a tax loophole for giving money back to the shareholder.

pc86 7y ago
What would this look like from a practical standpoint, though? Dividends are a taxable event because you're giving someone money. In a buyback, the value of the stock simply goes up, which isn't a taxable event. How do you determine the cost basis on something like that? If there's a stock buyback over the course of 6 months, how do you determine which proportion of the price increase is due to the buyback, as opposed to inflation or normal growth?
- entropicdrifter 7y ago
  You tax the buyback itself, right? You tax the money the company is spending on its own stock. That's the only step of the transaction where money is changing hands
  - pc86 7y ago
    I'm not trying to be obtuse, I'm genuinely curious how this would work and what changes to tax law would need to be made. Would you tax the entity buying the stock (in case always a company since it's a buyback; which I think would be the only example of taxing a stock purchase), or the entity selling the stock (either an individual or a company, which is already potentially taxed as capital gains)? If the goal is to tax it similar to dividends you would tax the person selling the stock but it's already taxed as capital gains, either long term (0%/15%/20%) or short term (marginal bracket rate).
  - brianwawok 7y ago
    Isn’t that a double tax? Taxed at buyback time, and taxed when shareholder cashes out and realizes their gain? Though I guess a small (10%??) tax could still make buyback tax + dividend long term gains is still less than normal income tax.
    - zaroth 7y ago
      Triple actually. Corporate profits tax, new hypothetical buyback tax, and then again as capital gains when the shareholder sells.
      - take_a_breath 7y ago
        I pay taxes on my income, on my purchases, on my property and again on my property’s appreciation when I sell.
        frockington1 7y ago
        Get ready for the wealth tax, now the politicians will be able to grab you're money in the intermediate steps as well
    - shantly 7y ago
      Everything's a "double tax", but people only care sometimes, for whatever reason.
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- ISL 7y ago
  In a buyback, a shareholder must sell shares back to the company. When they do, the shareholder's gains are taxed with capital-gains tax. Furthermore, whenever shareholders sell shares after the buyback, their shares are generally worth more, so they pay increased capital gains, too. I don't know which yields more tax revenue in the long run, but buybacks definitely generate some tax income. The only time I could see a "buyback" influencing share price without taxation is if the buyback has a price cap, and every shareholder believes that the company is worth more, so they don't sell any shares back. This is exceedingly unlikely unless the company is very thinly traded. From my perspective, the key difference with a buyback is the winnowing of shareholders to those who believe more-strongly in the company's future. With a dividend, every shareholder gets a small amount of cash. With a buyback, some shareholders get cash for their shares, and every other shareholder gets a bigger slice of a company that is worth less (total) money. If the market is efficient (and it isn't, but it can be) then following a buyback, one would expect the market capitalization of the company to be smaller, as the company has paid out money. After 6 months, if the market cap of the company, plus the funds expended in the buyback, is greater than the inflation-adjusted pre-buyout market-cap, then the company has created shareholder value through some other mechanism (even if the mechanism is pure psychology).
  - 6gvONxR4sf7o 7y ago
    >one would expect the market capitalization of the company to be smaller, as the company has paid out money This doesn't make sense to me. If I spend $X to buy a widget worth $X, I've paid out money, but I haven't net lost anything. I'm worth the same in total. If the widget is a share in a company, even my own, that shouldn't change the fact that the net change in total value is zero.
    - ISL 7y ago
      Are shares in Apple or Berkshire worth the same to you without the companies' cash hoards?
    - kgwgk 7y ago
      When a company buys its own shares it’s essentially cancelling them: they become essentially worthless. Look at if from a different angle: the ones selling the shares to the company are the shareholders. In aggregate, the shareholders own the company valued at $B (market cap) before the buyback, and the company valued at $A plus the cash paid $X after the buyback. If $A=$B they are creating $X out of thin air. Even simpler to grasp: you have a business 50/50 with a partner. There is $1m in the company account, you reach an agreement and he will sell his interest back to the company for $1mn in cash. You are sole owner now. The company doesn’t have the cash anymore. How much was the company worth before? How much is it worth now?
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twoodfin 7y ago
It is taxed the same as dividends, just deferred until the outstanding equity is sold, no?
- usaar333 7y ago
  Basically, which is very advantageous, because you continue to reinvest otherwise paid taxes. To say nothing of the fact that the stock might never be sold. Or the fact that capital losses can offset a gain from a buyback, unlike dividends.
  - cma 7y ago
    So it’s like a 401K with no contribution limit, but taxed twice (second time at cap gains rate). Too good to be true for billionaires.
- anotherman554 7y ago
  No because inheritances can have stepped up basis. It may never be taxed.
  - toast0 7y ago
    The basis step up on death is a byproduct of going through the estate tax. Yes, for the vast majority, the estate tax is $0, but it's not untaxed.
    - anotherman554 7y ago
      The first 11.4 million of an inheritance would be untaxed.
      - toast0 7y ago
        It's taxed, and the rate is $0. If it were untaxed, like when the estate tax expired, you wouldn't get the step up in basis.
- 7y ago
mrep 7y ago
No it's not as investors will have to pay taxes on any gains when they sell there stock which should happen in proportion to the buyback all else being equal. Buybacks just allow them to defer realizing those gains and paying taxes on them until they finally decide to sell.
andrewmutz 7y ago
This is correct. Stock buybacks are just a way of doing dividends that is more tax advantaged. The right answer isn't to introduce new forms of buyback taxes with unknown second-order effects (who would you tax? if the shareholder is avoiding dividend taxation, taxing the corporation isn't a great solution). The solution is to just improve the way we tax dividends and capital gains.
- Enginerrrd 7y ago
  I agree with this entirely. If you tried to tax buybacks, you'd likely be inadvertently taxing a ton of the corporate infrastructure used for administrative purposes. In this case, the buyback is clearly like a tax-advantaged dividend, but with a key difference: it's not liquid. Dividends cross that critical threshold of spendable cash that triggers taxation.
  - useful 7y ago
    I don't. If only 20 widgetshares exists in the world and we each have 50% (you have 10 and I have 10) and the market for widgetshares is $200. Should you be taxed for your theoretical $5.26 gain if I destroy 1 widgetshare but you haven't sold any. Buy backs are no different. You will pay taxes if you sell. Personally, I think you should pay taxes if you take out a loan using the market value of the shares as collateral. This is where everything starts getting funny and companies and individuals start being able to avoid taxes forever.
    - andrewmutz 7y ago
      Why not just fix inheritance issues? At the time of death, either make the estate pay capital gains taxes on the market value of the assets, or just don't give the heirs a stepped-up basis. It will catch up eventually.
friedman23 7y ago
You understand that when a company does a stock buyback, somebody is selling their stock and that stock they sell is taxed with capital gains?
- CuriouslyC 7y ago
  Or they could buy a different stock and pay nothing.
  - xadhominemx 7y ago
    No, you have to pay for each individual stock
    - CuriouslyC 7y ago
      I true for large or institutional investors, but not with 401ks and IRAs though. Also, for large institutional investors, they can time sales to use capital losses to avoid tax burden.
      - newfangle 7y ago
        Ok so your original response to the comment is factually incorrect. Unless you think deducting capital losses and retirement accounts should be gotten rid of.
bduerst 7y ago
Not really. Dividends are payments, whereas buybacks are assets changing hands. There's a difference from both a finance and accounting side. Simple example: Dividends can be made ad nauseum; Buybacks can only be made as long as there are outstanding shares.
drelihan 7y ago
Buybacks are effectively taxed at the same rate as dividends, at least qualified dividends, just timing differs: Simple case with a corporation worth $200 with two equal shareholders, who each paid $100 for their half of the company and are in 20% capital gains tax bracket, ignoring net investment tax of 3.8%: Dividends: Corporation pays $100 in qualified dividends, $50 to each shareholder. Each shareholder pays their capital gains tax rate on the $50. If that rate is 20% for each, then a total of $20 is collected by the US Treasury. Each shareholder then reinvests or spends the remaining $80 in the economy, while the government puts the $20 to work. Buy Back Case: Corporation buys back $100 of shares from 1 shareholder. No taxes were due there as there were no capital gains for shareholder 1. Shareholder 2 now owns 100% of the corporation, so their investment is now, all other thing equal, worth $200. When shareholder 2 sells, a bill for $20 is due ( $100 in capital gains x capital gains rate ). Shareholder 1 reinvests/spends $100 in economy, government gets no additional cash now, but will eventually when Shareholder 2 sells. In the end, government gets the same $20 in tax. Benefits of the buy back are that investors are able to choose whether or not they want to cash out, whereas a dividend forces it on all investors. Downside is that government has to wait for the $20 in capital gains taxes. However, if shareholder 1 owed capital gains on the buy back ( perhaps they bought their share for $50, so would owe $10 in the $50 it made on the sale ), the government would get $10 from that sale + $20 down the road when shareholder 2 sold.
- cjlars 7y ago
  Option three would be to not distribute cash through dividends or buy backs and reinvest directly in the business. In that case the net result and tax treatment is about the same as buying back shares. Trying to treat buy backs as a special case would just result in a defacto incentivization of conglomerates.
  - drelihan 7y ago
    I’d rather invest in just that company, one that can continue reinvesting profits in itself at attractive returns year in and out. I can sit back and let compounding work it’s magic ( although at some point in my life I will switch from a net producer to a net consumer and opt for cash ). In cases where a company does not need all the cash it generates to continue its growth or does not have growth prospects ( not necessarily a bad thing), then I’d rather have cash to invest more productively elsewhere.
JackFr 7y ago
Another word for "a tax loophole" is "the tax law". The fact that ham fisted bureaucrats and legislators create unintended consequences with every "incentive" they put in the code makes it no less binding.
- throwaway2048 7y ago
  Guess who lobbies for these "unintended" consequences...
- Sohcahtoa82 7y ago
  > unintended consequences If you think those consequences are unintended, then I have a bridge to sell you.
tzs 7y ago
I don't remember what section of the IRS code or regulations cover it, but there are rules to prevent disguising a dividend as a stock buyback. They provide a good illustration of why the tax code is complicated. (All numbers in the following are made up). Some major company a long time ago was going to pay out a dividend, and then their accountants had a great idea. Instead of a dividend, they would first do 100 for 99 stock split. Then they would do a 1% stock buyback. The shareholders would be taxed at capital gains rates instead of ordinary income rates on this. Note that for any shareholder, the result afterward is that for every 99 shared they owned before the split and buyback they still own 99 shares. No one's actual percentage ownership of the company has changed--but they have received money from the company. The code and/or regulations were updated to fix this. But then buybacks that were not hidden dividends were getting classified as ordinary income, too, and so further code and/or regulation changes were made to further refine this. What it eventually ended up with is rules that looked at how ownership was distributed among the shareholders before the buyback and after the buyback, and decided if it was a disguised dividend or a legitimate buyback based on how that distribution changed. (I haven't followed tax law for several years. Anyone happen to know if this is still there after the Trump tax changes?) This sort of thing is a large part of why tax codes and regulations tend to be big and complicated. Even if they start out fairly simple, people find holes like that split/buyback trick, and closing those holes adds complexity. The result is that you only generally will see either very simple tax systems (like sales taxes) or very complex systems. Systems that start out in between end up moving toward very complex.
dehrmann 7y ago
At which rate? Dividends are taxed at each shareholder's marginal rate.

mrep 7y ago

The government already gets first dibs through corporate income taxes. Buybacks aren't deductible from that.

jjoonathan 7y ago
Isn't corporate income tax the one that can be dodged by just shifting profit offshore? Or did they close that loophole?
- rayiner 7y ago
  Very few companies (mostly tech companies) can take advantage of those tricks. Exxon can’t assign all its oil fields to an Ireland subsidiary to inflate expenses and reduce profits in the US. The median effective tax rate for the S&P 500 in 2018 is 21%. That’s the same as or higher than the statutory tax rate in Canada, the U.K., Sweden, Norway, and Germany.
papito 7y ago
Yeah, Amazon paid $0 last year.
- ChrisLomont 7y ago
  Since 2019 is not yet filed I assume you mean 2018 as "last year". Here's Amazon's SEC filing for 2018 [1]. They paid 1+ billion on income taxes (page 37) on 11B in profits. They paid billions more in property taxes and other regulatory taxes. Note that annual taxes also are affected by previous year issues. This is why from the same document, same page, you see them paying 1.4B on 3.9B of profit. So getting upset about a year of no taxes with profits, when it truly does happen, is missing important nuance on what companies do pay. Check surrounding years, and read the SEC filings to see the reasons, which I've always found to be quite reasonable. It's not as bad as the pop press would have you believe when they cherry pick the outliers from one year or another. And the pop press usually ignores all the other taxes that corporations also pay, focusing solely on income taxes, as if that were the only tax. [1] https://ir.aboutamazon.com/static-files/ce3b13a9-4bf1-4388-89a0-e4bd4abd07b8 https://ir.aboutamazon.com/static-files/ce3b13a9-4bf1-4388-8...

ENOTTY 7y ago

Wouldn't buybacks be taxed when the investor cashes out?

SifJar 7y ago
The buybacks themselves would also presumably result in capital gains for the sell side (ideally) & thus taxation?
- gtfratteus 7y ago
  Yeah, buybacks don't affect tax revenue at all. They're just a Boogeyman for unintelligent liberals.
zebrafish 7y ago
I'm thinking probably not because the investors, who are either High Net Worth Individuals or investment banks, should be hedging their tax exposure appropriately.

kolbe 7y ago

Here's the problem: you're asking governments to have first dibs over the actual owners of the capital. The whole reason that companies are doing buybacks is that they cannot turn all of their money from $1 into $1.05 anymore, and they give it back to shareholders to go figure out how to get returns. When the government uses it, they turn $1 into somewhere between -$0.20 (wars) and 0.10 (infrastructure with myriad bribes/kickbacks along the way). I don't think it's a good idea to encourage the later over having people who stand to experience the consequences of making bad investments (the rightful owners of the money) make investing decisions.

baq 7y ago
That money doesn’t just disappear, right? It gets spent to private contractors on all too often outrageous terms but it goes back into the economy, too.
- kolbe 7y ago
  The velocity of MZM sits at around 1.3 right now, so it goes back after almost a year of being wasted. But who it goes to after that year matters as well. I would prefer Larry Page get the money because he will be able to intelligently allocate it. Or a productive poorer citizen get it to consume wisely. The myriad rent seeking morally defunct (and likely intellectually defunct) people who receive the government kickbacks are a bad set of people to end up with the money after a year. They invest poorly and spend frivolously. But sure, after several years, the money that didn't end up in the China's and the Cartels' pockets will probably back in circulation among the intelligent members of the economy.

mrfusion 7y ago

I’m confused. Companies are using profits for the buy backs. Corporate profits are already taxed.

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mountainofdeath 7y ago
Not profits but debt. With the ultra-low interest rates of the last ten years, companies could finance bonds at rates just above inflation. However, instead of using those funds to grow the business (e.g. R&D), they simple bought back shares, increasing the price of the stock.
- ailideex 7y ago
  Can you cite? What companies are using debt to finance repurchases? Also the person you responded to probably meant that they profit in a technical bookkeeping sense not. You can still have profit while having debt and profit will be taxed in a certain way.
  - rezistik 7y ago
    https://fortune.com/2019/08/20/stock-buybacks-debt-financed/ https://fortune.com/2019/08/20/stock-buybacks-debt-financed/ https://www.cnbc.com/2019/07/29/buybacks-companies-increasingly-using-debt-to-repurchase-stocks.html https://www.cnbc.com/2019/07/29/buybacks-companies-increasin...

ww520 7y ago

The buyback money presumably is the money after corporate tax so it has gone through one round of taxation. The stock holders selling the stock will pay capital gain tax again, so the money will go through another round of tax.

loourr 7y ago
I think the money is often debt, which would make it untaxed.

crazygringo 7y ago

That doesn't make any sense. The market is the most efficient capital allocator because shareholders are the market, not companies. Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is equally true for both buybacks and dividends. This is because most companies have no wish to operate like broad VC firms or investment firms. While plenty of shareholders do. The government has all the infinite "dibs" it wants, they're called taxes. If the government wants to tax buybacks further it doesn't need any particular logic of "dibs" to do so. And right now buybacks are taxed in exactly the same way as capital gains, which is the same way qualified dividends are taxed too. And corporate profits are already taxed too.

tw04 7y ago
The point is both the companies in question and the ultra-wealthy that are the beneficiaries of the vast majority of these buybacks AREN'T paying taxes, so it's another way for the government to at least attempt to capture the $$ that should already be going into the treasury instead of offshore accounts/subsidiaries/whatever double dutch triple lux tax evasion scheme of the month they're using.
- mrep 7y ago
  How are they not paying taxes? The people selling their stock to the company in the buyback have to pay taxes on any gains and the people holding onto the stock long term will eventually have to pay taxes on any gains when they finally do sell (they're not going to hold onto a stock until the heat death of the universe so they are going to realize their gains and pay taxes on them at some point).
  - jf22 7y ago
    I believe your comment is referencing normal people paying taxes, where the comment you are replying too is referencing the ultra-wealthy and corporations paying taxes. The ultra-wealthy and big corporations take advantage of schemes to lower their taxes.

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duelingjello 7y ago

$1T would be enough seed money to get an international effort moving to solve climate change using emissions targets, ferrous phytoplankton seeding like IRONEX I and/or kelp blooming/capture/sequestration. Much cheaper than the inflated numbers thrown around as arguments for doing nothing / delaying longer that ignore the $200+ trillion destroyed by doing nothing. Deny -> extinction Complain about costs -> extinction Do nothing -> extinction Do too little -> mass deaths, world war Act decisively -> enough of us would likely survive

MrFantastic 7y ago
Global warming will not cause humans to go extinct. We are adaptable and most will just move to better locations. Polluting our water supply definitely will kill most land based species. Don't waste your time fighting for something is an inconvenience. Fight for clean water and minimizing pollution.
thehappypm 7y ago
I have never heard of extinction as a possible consequence of climate change. Care to elaborate how that might be possible? Even if society crumbles due to unrest, the Earth will be inhabitable in at least some areas. It's hard to imagine that every single human being on Earth will die.
- pinkfoot 7y ago
  > I have never heard of extinction as a possible consequence of climate change If things get nasty, the nuclear-armed folk might just light up the 14,000 nukes lying around. That could do it.
  - thehappypm 7y ago
    Still, how would that kill everyone? Small pockets of humanity would still hang on.
    - pinkfoot 7y ago

mathattack 7y ago

They are taxed. If there’s a capital gain when BigCorp buys my stock back, I pay taxes on it. You can argue whether or not Capital Gains is too high or low but the mechanism is there. Then there’s the question of what I do with the money. If I invest it in government bonds, they get the remainder. Otherwise the money gets recirculated through consumption or other investment. If you really think companies are too eager to return money to shareholders, take away deductibility of interest. This would dissuade companies from borrowing money to buy shares. (Effectively creating debt from equity)

topkai22 7y ago

We don't need a new tax, just a fix to an old tax- tax all capital gains the same as normal income. Even better if we enabled a refund of some sort in years with negative capital gains to act as an automatic stimulus.

CharlesColeman 7y ago

> Read an idea in American Affairs in support of taxing buybacks. Honestly, at their most supportable, share buybacks seem to be just dividends in all but name with different tax consequences (i.e. they're a tax dodge). I'd support a law that declared the only legal way to intentionally return cash to shareholders is via dividends, to close the loophole and increase tax revenues. In other cases, they just seem like financial engineering employed by CEOs and other interested parties to game their personal job performance metrics.

bluecalm 7y ago
But why do that? We accept that if I hope a stock or any other asset which value increases I am not liable to pay the tax until I actually realize that profit by selling. It makes sense to do it this way as well as otherwise you would be losing money to taxes just because the price fluctuates (one year it increase, another it decreases). When the company buy backs stock it actually triggers the tax event: people who sold the stock to the company are now paying tax on capital gains.
- CharlesColeman 7y ago
  > It makes sense to do it this way as well as otherwise you would be losing money to taxes just because the price fluctuates I'm unsure how you're reaching this conclusion. I said nothing about eliminating capital gains and moving to some kind of system where investors are taxed on yearly stock price fluctuations. All I proposed was to forbid companies from purchasing their own stock for the purpose of manipulating its price upward. Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity.
  - bluecalm 7y ago
    The point is that purchasing their own stock is not for the purpose of manipulating its price. The price increase is a natural consequence of there being less outstanding shares. Less outstanding share = one share is worth more. >>Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity. Buybacks has many advantages though. The biggest one is that if you want to reinvest dividends into stock you would have to pay taxes which creates a situation where you are liable for taxes even if you didn't make any money (if the price fluctuates). Buyback is like automatically reinvested dividend. I don't think it should be taxable for the reasons outlined above.

zacharytelschow 7y ago

> THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. You're essentially saying companies are choosing to do the wrong thing with their money therefore we're entitled to seize it. If that were a compelling argument, why wouldn't we treat individuals the same? And who do you think stock prices affect, with virtually all of society in the stock market either directly or through pension funds? By keeping interest rates artificially low, stock buybacks are more appealing than capital investment or labor force expansion. It's simply a logical outcome of the policy our government is pursuing.

todipa 7y ago

Why tax buybacks? Just tax the individual benefiting from that buyback at the appropriate rate. Taxing buybacks essentially means that you are taxing poor shareholders and rich shareholders the same.

georgeburdell 7y ago

When one has a hammer, everything seems a nail. Taxes are not money looking for something to spend it on. I could argue that corporate taxes are redundant because people ultimately run and benefit from corporations so tax them instead. In reality it doesn’t matter because the government needs $X to fund its obligations and will get it however it can

Consultant32452 7y ago
The federal government doesn't need to raise any taxes to pay bills, it can just create currency. Once you realize the primary purpose for taxes is social policy, it makes more sense.

aidenn0 7y ago

Why not just tax capital gains at the same rate as dividends?

bluecalm 7y ago

Even if we accept that companies returning money to shareholders means that they can't find good use for the capital doesn't mean the government will. If anything maybe the shareholders themselves can find better use for the money. After all they have wider avenue of possible investments (things outside of the scope of what the company is doing). There is also the whole fairness side of things: even if it's a bit less efficient for shareholders to have the money or even if they want to spend it for consumption doesn't mean the government should take it.

formercoder 7y ago

Why should we get all excited about giving the government more money to spend? They are terrible at spending it effectively.

dehrmann 7y ago

I'd rather just have a corporate tax rate of 0% and shift the tax to people. That's who (eventually) gets the profits, anyway. It would also create a level playing field for larger corporations and pass-through entities.