Yes, I think this is the real issue. There are valid corporate finance arguments that the trade offs between stock buy backs vs. dividends are all just logical conclusions of a tax and investor incentive system and there’s nothing untoward about stock buy backs. But it’s hard to avoid the fact that stock buybacks on a large scale seem to be symptoms of deeper structural problems with large corporations, which employ legions of tax optimizing lawyers and financial analysts to do all this work of creating dozens to hundreds of global legal entities and moving revenue all around the world to attribute revenue to low corporate tax havens and doing financial engineering math to make money by issuing debt solely for the purpose of the improving the balance sheet and income statement. It all just begs the question - why do we have corporations and what is their purpose in society? They are supposed to take investor capital to generate goods and services at a profit so everyone wins. Corporate finance teams that just move money around for tax arbitrage don’t add any value to anyone but the shareholders (and themselves, as they are handsomely compensated). If the tax code and regulation subsidizes the existence of these cancerous leeches on society* then I say fuck 'em.
Not sure where your confusion is on dividends vs buybacks, but you are going wrong somewhere.
Dividends are taxed as ordinary income. Assume the stockholders of a corporation have a weighted average marginal tax rate of 25%. If the company pays out $100mm in dividends then $25mm of that is being paid in taxes. If the stockholders’ tax rate is 15%, then $15mm is paid, etc.
There is no equivalent taxable event on buybacks and this is why buybacks can be intelligently criticized.
Mosdef says not taxing unrealized gains is a policy choice but the rationale [made by corporate lobbyists to sympathetic politicians in the first instance] behind such a choice is to allow the business to invest in things like R&D, expanding manufacturing, etc. Clearly this rationale doesn’t apply in the case of $$$ being distributed to shareholders in stock buybacks. Thus, it is correct to demonize buybacks until they are put on square footing with dividends.
Qualified dividends issued by corporations in Canada are taxed at a rate more favorable than the income tax rate (there’s a dividend tax credit resulting in a lower net tax rate on the dividends). I think the US also subsidizes the taxes on corporate dividends, but I don’t file taxes in the US so I don’t know exactly how it works. I think they use the long term capital gains tax rate.
I don’t understand what’s wrong (let alone rage-inducing) with taxing share buybacks at some % unless you are coming from some kind of ‘all taxation is theft’ angle. Also don’t see an issue with the ’ Pigouvian’ (had to look that up) nudge to impact corporate behavior.
Let’s define D = total dividends paid, B = total buybacks, C = amount held in cash+equivalents
I don’t think it’s unreasonable to hypothesize that
If you introduce a new tax on B, that the total sum of (D+B+C) might go down slightly as certain marginal projects now become more attractive relative to choosing D, B, C.
That if (D+B+C) did not in fact go down, that means you can consider pushing the tax on B a little further.
That (D+B+C) going down a bit is good policy because that money is now being reinvested in jobs, wages, or capital investment rather than (on average) wealthy shareholders.
There’s nothing wrong with harmonizing the taxation scheme between buybacks and dividends. That should obviously be the goal. That Democrats don’t frame the discussion this way gives away the game here. Indeed, they don’t even mention dividends at all in their criticism of buybacks. It’s all just demagoguery.
The thing about dividends is that they get taxed. Capital gains get taxed “in theory” when the capital is sold but what if it’s never sold? What if it’s donated or borrowed against for generations. It seems like there’s whole industries built around strategies to avoid capital gains taxes, but with dividends it’s different because the taxable event is forced. So in that sense, it is good government policy to give dividends preferential treatment.
edit: Pigouvian also a new word for me. I can’t wait to find a way to use this in real life with a person who is dumb enough to be not quite sure if I am implying they are pig-like
Because the criticism of buybacks from the political left has nothing to do with the differing tax treatment with respect to dividends, so it would be odd to “frame the discussion” that way.
What’s it about? I’m saying it’s cheap, cynical demagoguery. Sounding tough on corporations while doing nothing to actually cost their corporate masters any money.
It’s about corporations saying they need favorable policies so that they can help Americans by creating more jobs, raising wages, and increasing capital investments, and then when they get said policies, they instead return the surplus to shareholders.
Buybacks get focused on because (presumably) they are a more significant way of returning capital (both in terms of magnitude and rate of growth), and people have a more positive association with dividends. Tax parity with dividends aside, creating tax drag on buybacks should result in favorable incentives for business reinvestment rather than return of capital.
Yes! I think politically Biden wants the jerb creators to spend their excess money on creating jobs (business investment) rather than returning it to shareholders. Like yeah smart people will say “if buybacks are no longer attractive companies will just issue dividends,” but many people are not smart enough to even get to that part, and to those people Biden can just say “we’ll raise taxes on those too if companies keep giving all their money back the shareholders and then coming to the government for a bailout next recession”
Its actually a winning message if you’re trying to peel “moderate” Trump supporting “swing voters”
The thing is, it’s a completely correct and popular position to say “this is bullshit they enrich shareholders and executives then come for a bailout when times are tough.”
So stop doing the bailouts unless you get equity, dummies.
Buybacks get focused on because they “sound” bad. A company buying back its own stock a concept that seems strange to most people, but if you think about it for five seconds it’s indistinguishable in effect from dividends, ignoring tax treatment. Of course people expect companies to return profits to shareholders in some way, so outlawing dividends along with buybacks would make no sense, what the hell is the point of a corporation if you’re outlawing dividends. These companies exist to return profits to shareholders. So what the buyback discussion really is is boring tax policy question but it’s being framed as a naughty corporation doing shady things…like paying dividends and buying back stock.
Outlawing dividends and buybacks? We’re talking about a tax policy that rationally would be expected to nudge corporations towards reinvesting in the business relative to returning capital. To call that demagoguery is a stretch.
Yeah absolutely. This applies to dividends just as much as buybacks, and that buybacks get harped on while dividends never gets mentioned is very telling. Also applicable are capital reinvestments and acquisitions.
