Jennifer's avatar
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Buybacks in the Bill
Stock-Buyback Tax Revival in Senate Bill Leaves Wall Street Unfazed

A vote on the Senate Democrats' tax and climate bill is expected this weekend. Late Thursday, after negotiations to get Senator Krysten Sinema on board, a new levy was unexpectedly added.

Stock buybacks, a beloved tactic by companies & investors to boost share prices, could be facing a tax. Though analysts consider it negative, the impact on markets is not expected to be detrimental.

The proposed measure levies a 1% excise tax on the value of corporate stock buybacks, which Democrats are hoping will slow their use because they produce capital gains but no immediate tax bills. The tax would also potentially shift some companies to opt instead for dividends, which are taxed when issued.

Tina Teng, a markets analyst at CMC Markets Plc:

“To avoid the tax, companies may choose to increase dividends payout to shareholders but it will also cause a price drop and burden investors with more tax.”

Sam Stovall, chief investment strategist at CFRA:

“Investors buy stocks because they want a cut of the action. The action is corporate profits, earnings, and a way that investors will benefit from those earnings is an increase in share price or an increase in dividend payout. Share buybacks can also help with share prices. So I think what this does is sort of remove the incentive offered through share buybacks. The cut of the action would then come simply in price increases or dividend payout increases.”

Ben's avatar
I really hope this doesn’t go through. It’s a misunderstanding on how share holders are rewarded. No difference then if you bought out a partner of a small private business. You use free cash flow to increase your ownership stake in both cases
Jennifer's avatar
@rpinvestments 'The proposed measure levies a 1% excise tax on the value of corporate stock buybacks' Given that it's only 1%, I can't see it having a large impact - what are your thoughts? I'm not sure if 1% would be enough to disincentivize corporations from continuing the practice and the amount it would harm shareholders seems negligible?
Ben's avatar
@jennymanydots as with all taxes, once you start them they are much more likely to increase then go away. To answer your question, this year or next, no I don’t think stock buybacks will change with a 1% tax. But a 5% tax later may have an impact
Sachiv's avatar
  1. A buyback is made with a company’s equity- on which taxes were paid
  1. The seller to the company (mostly) pays a capital gains tax
  1. Now they add a 1% levy to the that buyback…

To me a buyback levy makes sense because it doesn’t go into investments that create something…but @rpinvestments comments above about it “just being the beginning, and they can always go up” are also valid!

Let’s see if they roll back taxes on an individual level(since votes matter more, and elections are being fought as we speak)!!!
Jennifer's avatar
@passiveinvestor It would be interesting to know if voters that don't invest are even aware of this in the bill. It's certainly not attracting those votes if that's the case, while on the flip-side, those that do invest are likely put off by it. Though it could influence their decision in the upcoming mid-terms, I really believe it will have minimal impact both politically and market-wise...unless as @rpinvestments mentioned, they increase it in the future.