3 ms·

Can't group #2 sell 4% of their holdings, thereby remaining shareholders, and delivering to themselves the tax-advantaged equivalent of a 4% dividend?

• nyeah 1y ago
  If I'm reading it right, group #2 plan to sell 100% of their holdings during times of heavy buybacks. I think they intend to benefit as much as possible from whatever price increase might be driven by the buyback demand.
• terminalshort 1y ago
  Yes. This is correct. Share buybacks are financially equivalent to a dividend from the company's perspective, and slightly better from the shareholder's perspective because they can choose when to take the dividend and pay capital gains tax instead of income tax on it.
  • triceratops 1y ago
    Qualified dividends (stock held more than 60 days) and long term capital gains are taxed at the same rate.
    • terminalshort 1y ago
      Good point, but that only applies to individual, not corporate shareholders.
    • barchar 1y ago
      At any given point in time for an individual yes, but your cap gains rate can vary substantially over time. Also trusts are taxed fairly punitively. So it's still better for everyone since only those who need or want the income have to take it.
      • triceratops 1y ago
        > Also trusts are taxed fairly punitively That only reinforces my viewpoint that buybacks advantage rich shareholders. > your cap gains rate can vary substantially over time It is 0% (up to like $100k for a couple filing jointly), 15% (up to about $580k), and 20% above that. Income tax has many more brackets than that and they kick in at way lower incomes. It's true that your income can vary substantially over time. It might be nice to do earn all your capital gains and dividends in retirement. You will likely need less income then to live on and can incur $100k/year in gains and dividends tax-free. On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify. And finally, if we want companies to improve productivity (read: fewer employees) then we can't solely tax labor to fund everything. We have to tax the part of the pie that's actually growing: this is represented by stock prices and dividends.
        • labcomputer 1y ago
          > On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify. This really undercuts your previous argument that only certain classes of shareholders benefit from buybacks. Now you are assuming that everyone falls into one of the classes anyway. So we're back where we started: Buybacks benefit all shareholders equally.
          • triceratops 1y ago
            > This really undercuts your previous argument that only certain classes of shareholders benefit from buybacks. If you have so much of a stock that you need to sell to diversify you're still rich.
• triceratops 1y ago
  > delivering to themselves the tax-advantaged equivalent of a 4% dividend? Long-term gains and qualified dividends (shares held longer than 60 days) are taxed at the same rate. What's the tax advantage here?
  • nradov 1y ago
    The tax advantage of stock buybacks is that investors aren't forced to immediately realize gains. They have the freedom to time sales to minimize overall income tax liability, for example by harvesting losses in other investments in a future year.
    • triceratops 1y ago
      This is true. I'd still file tax-loss harvesting under "advanced maneuvers employed by high net worth people". At a societal level, and I understand this is a completely different point, I also question whether it's prudent to allow tax dodging this way. We already tax labor heavily and at the same time we incentivize companies to improve productivity (read: use less labor). How do we pay for society without taxing some of the productivity (read: profits) or taxing labor even more? You can only cut so many services.
      • barchar 1y ago
        Even folks who are just saving for retirement benefit, since they need not take any income on top of their normal employment income. They may be in a lower bracket when they sell. Also the reality is that its somewhat rare for retirees to spend down their entire portfolios.
  • slavik81 1y ago
    That is US-specific tax policy, but many international companies are listed on US exchanges and purchased by international investors. As a Canadian, my retirement savings in my TFSA are subject to 15% taxes on dividends and 0% taxes on capital gains (for US-listed stocks).