Michael Taylor concludes that the new excise tax on share repurchases, which takes effect...
Senate Majority Leader Chuck Schumer, D-N.Y., gives a thumbs up on Aug. 7 as he leaves the U.S. Senate Chamber after passage of the Inflation Reduction Act, which included a tax on share buybacks. In 2019, Schumer was among those who introduced legislation to curb share buybacks.The Inflation Reduction Act that Congress passed in August introduced a new source of federal revenue, a 1 percent tax on public company share buybacks that takes effect in January.
Spurred by such advantages, share buybacks — which were illegal from 1934 to 1982 — have become widely popular in the past 25 years. Since 1997, more public company capital was spent on share buybacks than on dividends. As we consider whether it’s reasonable to apply such rationale in the taxing of share buybacks, a few historical examples suggest it’s time to do so.
Given that major airlines are either bankrupted or bailed out en masse every decade or so, share buybacks in that industry seem particularly unhelpful and ill-considered. Another issue is whether executives have a short-term incentive to implement buybacks, which boost share prices and their own short-term interest, instead of making long-term investments.Share buybacks aren’t always a bad idea, but when they crowd out prudent investment or savings, companies that do them may put themselves at greater risk unnecessarily. And as untaxed buybacks far exceed taxable dividends, they result in lost tax revenue for the government.
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