Companies facing first tax on stock buybacks in Biden bill
Under the bill President
Buybacks have ballooned in recent years — they’re forecast to reach
Investors, including pension and retirement funds, like the buybacks. But fiery critics of big corporations and
Centrist
But some experts are skeptical that the tax will work as intended. They note that businesses have other methods for rewarding shareholders, raising the prospect that legislation aimed at halting one corporate stock practice could instead facilitate another, with new and unpredictable effects on the economy.
How it all plays out could be significant for the future landscape of big
Where stock buybacks stand as the Democratic bill becomes law:
BUYBACK BONANZA
The major companies in the S&P 500 index bought a record amount of their own stock last year,
Among the biggest repurchasers of stock are Big Tech companies such as Apple, Facebook parent Meta and Google parent Alphabet.
Companies have been plowing more of their cash into buying their own stock even as they’ve grappled with rising inflation, higher interest rates and the potential for stunted economic growth. They’ve faced higher expenses for raw materials, shipping and labor. Companies have largely been able to pass those costs on to their customers, but higher prices for food, clothing and everything else could threaten consumer spending — with resulting crimped sales growth for many companies. Americans are still spending, though more tepidly, the latest government reports show.
Buybacks can increase companies’ earnings per share because there are fewer shares universally held by shareholders. The buybacks can also signal confidence from executives about a company’s financial prospects.
WHAT HAPPENS AFTER THE TAX?
“I hate stock buybacks,” Schumer, D-
That makes for appealing election-year rhetoric, but whether the
It's an admirable policy goal, says
But will the goal be achieved? Rosenthal noted that in the wake of the 2017 Republican tax law, which gave companies a cash windfall by slashing the corporate tax rate from 35% to 21%, a wave of buybacks ensued. After the new excise tax goes into effect, companies might use some of the money they would have spent on buybacks to pay more dividends to shareholders instead, he suggested. The new tax puts buybacks closer to an equal tax footing with dividends.
Rosenthal doesn't rule out, though, that companies decide to put some of the saved money into raising workers' pay or investing in the business.
Counterpoint: The tax “is not going to translate into higher pay for workers,’’ said
In the end, Fried expects that most of the money not spent on buybacks would end up being added to the pile of some
A MODEST HIT?
Because the new excise tax will be calculated on the smaller, net amount of a company’s buybacks — total repurchases minus shares issued during the year — some companies may see it as modest hit worth taking and continue purchasing stock.
The tax won’t apply to stock contributed to retirement accounts, pensions and employee stock-ownership plans.
After surveying its analysts about the tax,
One thing is all but certain: With the new tax scheduled to take effect
Follow
Adora Whitaker to Join MetLife as Head of Mergers & Acquisitions
Medicare chief vows to implement drug pricing reforms on time
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News