Stock Buyback Tax

The Inflation Reduction Act was passed by the Senate on August 7, 2022. The legislation did not contain many of the proposed tax increases for individuals and corporations. It did, however, contain a new 1% tax that would apply to corporate stock buybacks. Corporations typically use a stock buyback strategy when they believe that their shares are undervalued. To increase value, they buy their own corporate shares to decrease the number of shares that are available on the market. The provision could raise significant revenue if enacted because major corporations have spent billions in recent years buying back their own shares.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the newly proposed stock buyback tax.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: This proposed stock buyback tax targets some of the most abusive practices that big corporations use to avoid paying their fair share of income taxes. Allowing corporations to purchase their own stock to drive up the price of that stock without tax consequences is patently unfair and actually discourages companies from paying dividends. This is one of many tax loopholes that we need to focus on eliminating so that we can generate the revenue necessary for legislative changes designed to benefit hardworking Americans.

Byrnes: Stock buybacks are completely legal. This latest proposed tax on stock buybacks punishes successful taxpayers and corporations for taking advantage of completely legitimate strategies. I also don't think that this new law will have any impact on whether or not corporations choose to engage in stock buybacks. It'll also have very little impact on investor valuation.

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Bloink: This 1% excise tax on stock repurchases ensures that profits on corporate stock buybacks are subject to some type of income tax, more similarly to the way that dividends are taxed. This is just one step toward ensuring that CEOs and other wealthy taxpayers are paying their fair share.

Byrnes: Stock buybacks are just a way to maximize after-tax returns for all share holders--not just wealthy CEOs and multimillionaires. A tax on stock buybacks could diminish returns for retirement savers at a time when their portfolios have already been hit hard. In reality, stock buybacks are a great way to generate value for investors and discouraging their use will result in a situation where average American investors will see slower growth.

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Bloink: The bottom line is that big corporations could put the money used in the stock buyback process to better use—for example, by creating jobs and growing their business. These buyback plans merely boost stock prices over the short-term but do nothing to improve the company’s long-term growth prospects or performance to benefit average American investors over the long-term.

Byrnes: Corporations should be able to decide how and where to use their own capital. Discouraging stock buybacks isn’t going to create a benefit for average American investors. On the contrary, it could cause CEOs and high-paid executives to demand even higher salaries in today’s already challenging labor market because they’re no longer able to benefit from the stock buyback strategy. In the end, this tax isn’t going to create the results that the Democrats seem to envision.