5 ms·

Time to Ban Stock Repurchases

32 points by Zweihander 7y ago

deleted 7y ago
[deleted]
vearwhershuh 7y ago
It is time to make dividends, rather than capital gains, tax advantaged. They should be deductible against the companies income (akin to LLCs) and shouldn't incur payroll taxes but otherwise should be taxed as income. This would make them more valuable for lower income citizens who suffer under the payroll tax setup, and less valuable for the wealthy since they would be paying a high marginal tax rate on them. It would distribute capital ownership more widely and make planning a retirement income stream much easier to accomplish. Capital gains should be taxed at windfall rates, say income + 10%. Prioritize repeatable, stable profits over swing-for-the-fences highly-leveraged moonshots, and watch how many of these problems disappear.
- deleted 7y ago
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  - deleted 7y ago
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- cletus 7y ago
  > It is time to make dividends, rather than capital gains, tax advantaged. So this is another example of the US being unable to find solutions to problems only it has. This came up with the whole passthrough preferential treatment. The argument for it was that dividends were essentially double-taxed. So you end up creating a whole new set of complexity (eg what qualifies for it) when the solution is remarkable simple. In Australia, dividends issued by companies come with franking credits. That means you get credit for any taxes already paid. The vast majority of dividends are fully-franked, meaning all funds have paid the 30% tax rate. Much less common are unfranked (no taxes paid) or partially-franked. To give you an example. Say a company makes a profit of $10,000 and wants to pay it as a dividend. It pays 30% tax on it ($3000) and disburses $7000. Alice owns 10% of the company so she receives $700 (10% of $7000, being $10000 - the $3000 tax) and $300 in franking credits. If Alice's marginal tax rate is 30% she has paid all her taxes. If it's 40% then she owes 40% x $1000 = $400 - $300 in franking credits = $100 in extra taxes. If her marginal tax rate is 15% she gets a refund ($1000 x 15% = $150 is her liability so her refund is $300 - $150 = $150). So no double taxation and all the recipients pay their marginal rates of tax on the income. Easy. This is also a far cleaner way to deal with foreign withholding taxes. Let's say the dividend recipient is a foreign corporation, should they pay taxes on the income? Well, they already have. it's a policy decision as to whether they should get the taxes back or not. But again, it's handled by that system without having to create a foreign withholding taxes regime. > Capital gains should be taxed at windfall rates, say income + 10%. Yeah so you lose me here. I don't see the justification for this. Investment is typically in already-taxed dollars.
  - alasdair_ 7y ago
    >Investment is typically in already-taxed dollars. A huge portion of investment in publicly-traded companies comes from funds like pension funds which don't use after-tax dollars.
  - majormajor 7y ago
    Neither "double-taxed" nor "already-taxed" make sense to me as phrases. From the "regular person" side of the world - dividends vs capital gains vs estate tax, how I would've loved to have such problems for most of my life - I've always seen it as transactions that are taxed, not dollars. I pay income tax. I pay sales tax. That's about it (property tax would be something entirely different, but requires owning real property), but how is it not "double tax" by the same logic? Why all this consternation about "double taxing" in certain investment circles, but not around sales tax? Just because it matters less to the super-wealthy?
    - nemothekid 7y ago
      >"but how is it not "double tax" by the same logic?" It's not really the same logic. If I own 100% of the shares of company A, and I make a profit of $100, I have to pay a tax on that profit. Now I have $75. Now I want to use that money to buy an XBox, so I move that money from my company account to my bank account (again, I own the company, the money is already mine), but I have to pay another "income" tax. This is the "double" tax, there is no "transaction". But lets ignore that, if you could avoid sales tax, wouldn't you? This is how shopping online worked pretty much up until 2016. IMO, we should just get rid of the corporate tax and simply tax cap gains and dividends more. It would solve the issue of corporations parking money in Ireland and loading up on debt domestically.
      - majormajor 7y ago
        The single-100%-owner scenario seems like a meaningfully different case here. But: no, I wouldn't lobby that I should be exempt from sales tax just becaues it's "double taxation." I certainly don't think tax is something to always be avoided when possible, I think it's a tool of government, and that eliminating variou taxes is rarely discussed for truly useful reasons vs just individual selfishness. (On that note: if I were going to argue against sales tax it would be on grounds of regressiveness. It's not something that has much of a noticable impact on my own lifestyle, though.)
- alasdair_ 7y ago
  Dividends are charged at 0%, 15% or 20% depending on capital gains tax brackets. (https://www.nerdwallet.com/blog/taxes/dividend-tax-rate/ https://www.nerdwallet.com/blog/taxes/dividend-tax-rate/) The reason that stock repurchases are better than dividends for most tax purposes is that the owner can elect to sell or not sell their stock rather than rely on the forced timing of a dividend.
  - vearwhershuh 7y ago
    I wasn't clear: they should be tax advantaged, particularly for companies, relative to capital gains. If you tax capital gains at the marginal tax rate + 10%, they are unattractive in relative terms in most cases, even when deferred. And then letting companies deduct them against their profits encourages the companies to pay out profits (and to attempt to be profitable.)
    - alasdair_ 7y ago
      I wasn’t sure if you were aware of this already or not but capital gains are not taxed at a marginal tax rate plus anything, they are taxed at 0%, 15% or 20%. However, it’s worth noting that in terms of market volume, most entities that buy shares (like pension funds) don’t pay any taxes on their dividends or stock sales, so your scheme won’t make dividends attractive to these entities and indeed would likely raise the price, making them even less interesting to those entities. This is why pension funds don’t buy (many) munis or TIPS etc. - they gain nothing from the tax advantages.
- deleted 7y ago
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deleted 7y ago
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nodesocket 7y ago
Why should there be a blanket ban on stock repurchases? If a company has excess cash, you're advocating they can't put that cash to work "betting" on their future performance? I however do agree if a company takes a recent government "bailout" they should be restricted from buybacks until they payback the loan/bailout.
- Infinitesimus 7y ago
  I'd could argue that the "excess" cash might be better used to raise employee wages, reduce work hours, etc. etc. All those things that make human workers a bit happier but c'est la vie
  - bradlys 7y ago
    One could argue that a stock buyback does that for employees who get stock.
  - Gibbon1 7y ago
    Exactly stock buyback are a 'too easy' way of driving up stock prices. You want companies to use their capital to increase the real value of the company. At the same time you want to discourage CEO's and stockholders from looting the corporate till.
alasdair_ 7y ago
One option could be to restrict repurchases (and dividends) that would take the company below some threshold of savings, based on expenses. For example: any company worth over $X needs to hold a years worth of expenses in hand at all times - if they go below, they cannot issue a dividend or buy back any stock. Of course, the details matter enormously here, including how things like debt factor into the equation.
cletus 7y ago
So I don't get why stock repurchases are being singled out here. The original model for corporations was that companies make a profit, pay taxes on that and then either retain those profits, return them to the shareholders in the form of dividends or both. This model has disadvantages. Not every shareholder wants to receive a dividend they then have to pay taxes on. The company also drops in value by the amount of money disbursed, which has its own issues (eg triggering wash sale rules). Share buybacks are an alternative to returning money to investors. You use that same pool of money to buy shares on the open market. The company has lost that same asset (the disbursed cash) to those investors who want to receive that money (ie by choosing to sell) and the stock price remains unchanged. So this is (IMHO) concentrating on the wrong problem. The real problem is that companies can borrow money to return to shareholders through dividends or buybacks rather than repatriating foreign profits, which would otherwise make those profits subject to US taxes. So this is a near-indefinite deferral of US taxes. In my opinion, we need to treat any form of borrowing as effective repatriation of retained foreign profits that then get taxed accordingly. As for bailout funds, I'm totally fine with all of these restrictions until the loan has been repaid: 1. Any borrowed funds are treated as repatriation of foreign profits as per above. Why bailout companies who are choosing not to pay US taxes? 2. A freeze on executive compensation, including no extraordinary bonuses, additional stock grants and so forth. Additionally, all such compensation from the previous 12 months needs to be clawed back. 3. No disbursement of any kind to investors while the bailout loan remains unpaid. This includes dividends and buybacks. Focusing solely on stock buybacks is misguided.

32 points by Zweihander 7y ago

deleted 7y ago

[deleted]

It is time to make dividends, rather than capital gains, tax advantaged. They should be deductible against the companies income (akin to LLCs) and shouldn't incur payroll taxes but otherwise should be taxed as income. This would make them more valuable for lower income citizens who suffer under the payroll tax setup, and less valuable for the wealthy since they would be paying a high marginal tax rate on them. It would distribute capital ownership more widely and make planning a retirement income stream much easier to accomplish. Capital gains should be taxed at windfall rates, say income + 10%. Prioritize repeatable, stable profits over swing-for-the-fences highly-leveraged moonshots, and watch how many of these problems disappear.

deleted 7y ago
[deleted]
- deleted 7y ago
  [deleted]
cletus 7y ago
> It is time to make dividends, rather than capital gains, tax advantaged. So this is another example of the US being unable to find solutions to problems only it has. This came up with the whole passthrough preferential treatment. The argument for it was that dividends were essentially double-taxed. So you end up creating a whole new set of complexity (eg what qualifies for it) when the solution is remarkable simple. In Australia, dividends issued by companies come with franking credits. That means you get credit for any taxes already paid. The vast majority of dividends are fully-franked, meaning all funds have paid the 30% tax rate. Much less common are unfranked (no taxes paid) or partially-franked. To give you an example. Say a company makes a profit of $10,000 and wants to pay it as a dividend. It pays 30% tax on it ($3000) and disburses $7000. Alice owns 10% of the company so she receives $700 (10% of $7000, being $10000 - the $3000 tax) and $300 in franking credits. If Alice's marginal tax rate is 30% she has paid all her taxes. If it's 40% then she owes 40% x $1000 = $400 - $300 in franking credits = $100 in extra taxes. If her marginal tax rate is 15% she gets a refund ($1000 x 15% = $150 is her liability so her refund is $300 - $150 = $150). So no double taxation and all the recipients pay their marginal rates of tax on the income. Easy. This is also a far cleaner way to deal with foreign withholding taxes. Let's say the dividend recipient is a foreign corporation, should they pay taxes on the income? Well, they already have. it's a policy decision as to whether they should get the taxes back or not. But again, it's handled by that system without having to create a foreign withholding taxes regime. > Capital gains should be taxed at windfall rates, say income + 10%. Yeah so you lose me here. I don't see the justification for this. Investment is typically in already-taxed dollars.
- alasdair_ 7y ago
  >Investment is typically in already-taxed dollars. A huge portion of investment in publicly-traded companies comes from funds like pension funds which don't use after-tax dollars.
- majormajor 7y ago
  Neither "double-taxed" nor "already-taxed" make sense to me as phrases. From the "regular person" side of the world - dividends vs capital gains vs estate tax, how I would've loved to have such problems for most of my life - I've always seen it as transactions that are taxed, not dollars. I pay income tax. I pay sales tax. That's about it (property tax would be something entirely different, but requires owning real property), but how is it not "double tax" by the same logic? Why all this consternation about "double taxing" in certain investment circles, but not around sales tax? Just because it matters less to the super-wealthy?
  - nemothekid 7y ago
    >"but how is it not "double tax" by the same logic?" It's not really the same logic. If I own 100% of the shares of company A, and I make a profit of $100, I have to pay a tax on that profit. Now I have $75. Now I want to use that money to buy an XBox, so I move that money from my company account to my bank account (again, I own the company, the money is already mine), but I have to pay another "income" tax. This is the "double" tax, there is no "transaction". But lets ignore that, if you could avoid sales tax, wouldn't you? This is how shopping online worked pretty much up until 2016. IMO, we should just get rid of the corporate tax and simply tax cap gains and dividends more. It would solve the issue of corporations parking money in Ireland and loading up on debt domestically.
    - majormajor 7y ago
      The single-100%-owner scenario seems like a meaningfully different case here. But: no, I wouldn't lobby that I should be exempt from sales tax just becaues it's "double taxation." I certainly don't think tax is something to always be avoided when possible, I think it's a tool of government, and that eliminating variou taxes is rarely discussed for truly useful reasons vs just individual selfishness. (On that note: if I were going to argue against sales tax it would be on grounds of regressiveness. It's not something that has much of a noticable impact on my own lifestyle, though.)
alasdair_ 7y ago
Dividends are charged at 0%, 15% or 20% depending on capital gains tax brackets. (https://www.nerdwallet.com/blog/taxes/dividend-tax-rate/ https://www.nerdwallet.com/blog/taxes/dividend-tax-rate/) The reason that stock repurchases are better than dividends for most tax purposes is that the owner can elect to sell or not sell their stock rather than rely on the forced timing of a dividend.
- vearwhershuh 7y ago
  I wasn't clear: they should be tax advantaged, particularly for companies, relative to capital gains. If you tax capital gains at the marginal tax rate + 10%, they are unattractive in relative terms in most cases, even when deferred. And then letting companies deduct them against their profits encourages the companies to pay out profits (and to attempt to be profitable.)
  - alasdair_ 7y ago
    I wasn’t sure if you were aware of this already or not but capital gains are not taxed at a marginal tax rate plus anything, they are taxed at 0%, 15% or 20%. However, it’s worth noting that in terms of market volume, most entities that buy shares (like pension funds) don’t pay any taxes on their dividends or stock sales, so your scheme won’t make dividends attractive to these entities and indeed would likely raise the price, making them even less interesting to those entities. This is why pension funds don’t buy (many) munis or TIPS etc. - they gain nothing from the tax advantages.
deleted 7y ago
[deleted]

deleted 7y ago

[deleted]

nodesocket 7y ago

Why should there be a blanket ban on stock repurchases? If a company has excess cash, you're advocating they can't put that cash to work "betting" on their future performance? I however do agree if a company takes a recent government "bailout" they should be restricted from buybacks until they payback the loan/bailout.

Infinitesimus 7y ago
I'd could argue that the "excess" cash might be better used to raise employee wages, reduce work hours, etc. etc. All those things that make human workers a bit happier but c'est la vie
- bradlys 7y ago
  One could argue that a stock buyback does that for employees who get stock.
- Gibbon1 7y ago
  Exactly stock buyback are a 'too easy' way of driving up stock prices. You want companies to use their capital to increase the real value of the company. At the same time you want to discourage CEO's and stockholders from looting the corporate till.

alasdair_ 7y ago

One option could be to restrict repurchases (and dividends) that would take the company below some threshold of savings, based on expenses. For example: any company worth over $X needs to hold a years worth of expenses in hand at all times - if they go below, they cannot issue a dividend or buy back any stock. Of course, the details matter enormously here, including how things like debt factor into the equation.

cletus 7y ago

So I don't get why stock repurchases are being singled out here. The original model for corporations was that companies make a profit, pay taxes on that and then either retain those profits, return them to the shareholders in the form of dividends or both. This model has disadvantages. Not every shareholder wants to receive a dividend they then have to pay taxes on. The company also drops in value by the amount of money disbursed, which has its own issues (eg triggering wash sale rules). Share buybacks are an alternative to returning money to investors. You use that same pool of money to buy shares on the open market. The company has lost that same asset (the disbursed cash) to those investors who want to receive that money (ie by choosing to sell) and the stock price remains unchanged. So this is (IMHO) concentrating on the wrong problem. The real problem is that companies can borrow money to return to shareholders through dividends or buybacks rather than repatriating foreign profits, which would otherwise make those profits subject to US taxes. So this is a near-indefinite deferral of US taxes. In my opinion, we need to treat any form of borrowing as effective repatriation of retained foreign profits that then get taxed accordingly. As for bailout funds, I'm totally fine with all of these restrictions until the loan has been repaid: 1. Any borrowed funds are treated as repatriation of foreign profits as per above. Why bailout companies who are choosing not to pay US taxes? 2. A freeze on executive compensation, including no extraordinary bonuses, additional stock grants and so forth. Additionally, all such compensation from the previous 12 months needs to be clawed back. 3. No disbursement of any kind to investors while the bailout loan remains unpaid. This includes dividends and buybacks. Focusing solely on stock buybacks is misguided.