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The budget reconciliation legislation working its way through Congress now contains a 1 percent excise tax on corporate stock buybacks.
As my colleague Bob Kuttner explains today, Sen. Kyrsten Sinema (D-AZ) shielded the private equity industry from the crippling burden of minor taxation in the Inflation Reduction Act. Kuttner is right that tax policy isn’t really a good way to deal with the scourge of private equity; repealing the exemptions to the Investment Company Act of 1940 and ending the use of investment fund leverage would do the job much more cleanly. Fortunately, the industry is getting weaker amid sell-offs, so there may be a better time to deal with private equity down the road.
As a replacement to taxing fund managers, Sinema deigned to approve a 1 percent excise tax on stock buybacks. This creates a non-trivial financial transaction tax at the federal level for the first time in the U.S. since the mid-1960s. (There’s a tiny financial transaction tax currently in operation that funds the Securities and Exchange Commission.) In theory, getting Wall Street and CEOs who profit from buybacks to pay some of the freight for investing in the energy economy is a nice win.
But this is another scenario where taxation is a miscast solution to the problem. Most researchers who have studied buybacks, which involve companies using earnings to buy back their own stock in a manner that increases the share price, believe they manipulate markets, stifle innovation, dampen corporate investment and worker wages, and serve mainly to enrich shareholders, particularly insider executives. If you think this should be verboten—as they were in the U.S. until 1982—I’m afraid that taxing buybacks will probably have the opposite effect.
A tax designed to discourage activity can work. Taxing cigarettes has led to lower consumption. But such Pigouvian taxes only succeed if they are high enough to change behavior. A 1 percent excise tax on buybacks doesn’t seem to meet that threshold. Indeed, business groups were largely untroubled by the change: The most they could muster was a sigh that it was “the least bad tax” under consideration. “I do not see the 1 percent tax inhibiting corporate buybacks,” S&P analyst Howard Silverblatt told The Wall Street Journal.
Democrats estimate that the buyback tax will raise $74 billion over ten years. “The reason it raises revenue is that it will not deter buybacks,” said Reuven Avi-Yonah, a law professor at the University of Michigan and a corporate tax expert. Indeed, if you work backwards from the 1 percent levy, you see that the revenue projection presumes $7.4 trillion in buybacks over the next decade. That’s roughly equivalent, adjusted for inflation, to the amount of buybacks over the last decade: From 2010 to 2019, there were around $6.3 trillion in share repurchases, according to a 2021 Roosevelt Institute report. (Buybacks have risen of late; $1 trillion are expected this year, and because this tax doesn’t go into effect until 2023, there will probably be more, as the tax change pulls activity forward.)
I don’t think budget scorekeepers have any special insight into whether the excise tax will discourage corporations from buybacks; they probably just derived their score from the previous decade’s level of activity. Lenore Palladino, assistant professor of economics and public policy at UMass Amherst and co-author of that Roosevelt Institute paper, told the Prospect that she was “curious what the actual effect will be,” but she acknowledged that, while “it’s great to raise $74 billion, you’re still propping up the stock market.”
Giving the government a financial incentive to enable share repurchases is a kind of kickback in itself, and one that’s hard to end.
The bigger problem is that the excise tax cuts the government in on the buyback scam. Not only will shareholders and executives continue to benefit over workers and capital investment, but so will the U.S. Treasury. Henceforth, if you try to limit buybacks—which the Biden administration proposed in its 2023 budget—that will cost the government money. If you try to ban them, which the SEC could do simply by removing the safe harbor put in place in 1982 that effectively decriminalized the practice, that would cost the government even more.
The peculiarities of legislative PAYGO rules would mean that any change to the treatment of buybacks now must make up for the lost tax revenue. And if the executive branch sets rules to stop buybacks on their own, Congress could opt to kill that rule, and use the revenue boost as a “pay-for” to offset spending.
We have an example of this in the Inflation Reduction Act, actually. In 2019, the Trump administration enacted a “rebate rule,” ending the safe harbor for pharmacy benefit managers to take rebates from drug companies without being subject to anti-kickback laws. (This, by the way, is directly analogous to the SEC potentially eliminating the safe harbor on buybacks.) The Congressional Budget Office claimed that removing this kickback to PBMs would somehow end all efforts to negotiate drug prices on behalf of Medicare and Medicaid entirely, and cost the government $187 billion.
This was a shortsighted estimate by CBO: PBM rebates raise list prices (because the higher the list price, the higher the rebate that they skim off the top) and harm patients. But regardless, reversing the rebate rule subsequently became a useful pay-for. In three separate major bills in the Biden era—the bipartisan infrastructure law, the bipartisan gun safety bill, and the Inflation Reduction Act—Congress either delayed or repealed the rebate rule to pay for its priorities. (Biden should probably enact the rebate rule again just to give Congress another $200 billion in free money to play with.)
That could easily happen with buybacks as well: If the government tried to regulate them out of existence, Congress would restore the status quo, and reap the financial windfall. Giving the government a financial incentive to enable share repurchases is a kind of kickback in itself, and one that’s hard to end.
Palladino and William Lazonick’s Roosevelt paper, which offered a number of ways to curb buybacks, did not include excise taxes, perhaps because of this dynamic. Lazonick, who is the nation’s leading critic buybacks, told the Prospect in an email, “The 1 percent tax on buybacks in effect says: ‘We will let financial interests who want to use corporate cash to manipulate stock prices so that they can realize personal income gains when they sell their shares continue to loot the corporations—provided that they give one penny of every dollar looted to the federal government.’”
Palladino offered a slightly more optimistic case. The SEC has proposed more detailed disclosure rules for buybacks, after previously admitting that it wasn’t monitoring the current weak limitations on how much stock corporations actually buy back. The Commerce Department, in guidance last week, said that in determining the recipients of the recently passed CHIPS Act, which offers subsidies to semiconductor manufacturers for domestic production, it would give preference to companies that do “not engage in stock buybacks.”
“Policymakers are recognizing that buybacks are a waste that move us away from innovation,” Palladino said. She added that giving buybacks their moment of attention might lead toward more change. But she agreed that the excise tax “is not a structural solution to the harms of stock buybacks … It’s not the right solution to deal with the problem of shareholder primacy.”
The other issue with taxing buybacks is that, even if it successfully discourages companies from repurchasing their own shares, they can still disgorge cash to shareholders through raising dividends. Indeed, though Intel’s new CEO Pat Gelsinger said publicly last May that his company would focus less on buying back stock, just last week Intel announced that it would increase its dividend in the coming year, and pay for it by reducing its buildout of semiconductor facilities by $4 billion—precisely the opposite of what U.S. policy has pushed for in the CHIPS Act.
A scenario where buybacks drop at the same rate that dividends rise does nothing to change corporate America’s preference to giving shareholders funding rather than investing in their core business. Tax policy is not well equipped to do that. Meanwhile, to the extent that the buyback excise tax actually helps cement buybacks as a feature of American corporate life, it’s unwise policy, even if it raises a little bit of federal green capital spending.
