Dems’ Stock Buyback Tax Hits 401Ks, IRAs, and Pension Plans
President Biden and Congressional Democrats are backing a new excise tax on stock buybacks to fund their reckless tax and spend spree. Raising taxes and restricting stock buybacks harms the retirement savings of any individual with a 401K, IRA, or pension plan.
This same provision was included in Democrats’ House-passed “Build Back Better” bill and estimated by the Congressional Budget Office to be a $124 billion tax hike.
Democrats are pushing this massive tax increase during a recession and at a time when 401K plan participants and people with IRAs have lost roughly $1.4 trillion and $2 trillion, respectively, since the end of 2021.
Stock buybacks explained
Stock buybacks return value to shareholders.
Public companies will often use residual cash flow to repurchase shares of their own company in the market. This action provides a distribution of cash to shareholders by reducing the number of outstanding shares, driving up the share price, and increasing per-share earnings for remaining shareholders.
Buybacks are a signal that companies are willing to reinvest in themselves. The most common rationale for a stock buyback is that a company believes its stock is undervalued, reflecting confidence about its own future.
Additionally, a willing seller is required for a company to repurchase shares. After a buyback, those sellers can redirect investment toward other parts of the economy.
Democrats are taxing retirement savings
Stock buybacks help grow retirement accounts.
Raising taxes and restricting buybacks would harm the 58 percent of Americans who own stock and more than 60 million workers invested in a 401K. An additional 14.83 million Americans are invested in 529 education savings accounts.
Retirement accounts hold the largest share of corporate stocks, accounting for roughly 37 percent of the outstanding $22.8 trillion in U.S. corporate stock, according to the Tax Foundation.
In 2017, corporate-sponsored funds made up $4.45 trillion in market value; union-sponsored funds accounted for $409 billion; and public-sponsored funds, which benefits teachers and police officers, added up to $4.25 trillion.
When companies perform stock buybacks, these investors are the ones who benefit. A tax on buybacks could dissuade companies from conducting this action and negatively impact retirement savings.
Buybacks supplement investment
President Biden and Democrats are pushing a false narrative that stock buybacks are a windfall for corporate executives and come at the expense of productive investment. This ignores evidence that companies consider investment decisions first and engage in buybacks after investment alternatives have been exhausted.
As the Tax Foundation points out:
“A large body of evidence supports the idea that companies generally only consider stock buybacks when they have exhausted their investment opportunities and met their other obligations, meaning it is residual cash flow that is used for buybacks. In fact, stock buybacks can supplement capital investments, as they can help reallocate capital from old, established firms to new and innovative firms.”
Buyback tax would make the U.S. less competitive vs. China
A buyback tax would stifle U.S. employers and put Americans at a competitive disadvantage vs. China, which does not have a buyback tax.
When India imposed a buyback tax, they became less competitive with China as noted in this piece: “Buyback Tax Makes Chinese Equities More Attractive Than India.”
An analyst quoted in the piece said, “Overall, average investor return is likely to decline by around 1% due to this tax.”
Massive compliance costs will be borne by households
Democrats have not vetted the buyback tax and it will be a compliance nightmare for American companies. U.S. employers will have to spend significant time and money on white-shoe law firms in an attempt to comply. These costs will be passed on to households.
As noted by global tax law firm Skadden:
“Because of how the provision defines a ‘repurchase,’ the excise tax could be triggered in many mergers and acquisitions that do not appear to involve stock repurchases as that term is commonly understood.”
Democrats will impose this tax in a hurry, and it will leave U.S. companies in the lurch as it will take Treasury many years to iron out legal guidance.