by Mitch Kokai
Senior Political Analyst, John Locke Foundation
As part of the cynically misnamed Inflation Reduction Act, Democrats propose to enact a new 1 percent tax on stock buybacks — the thing is, we already have a tax on stock buybacks, ranging from 15 percent to 37 percent. It’s called the “capital gains tax” or, for short-term gains, the “income tax,” and thanks to the presence of high inflation and the absence of indexation, it has become even more of a disincentive to investment than before.
The income tax — maybe you’ve heard of it?
Don’t let the financial jargon put you off — this isn’t all that complicated.
So, what’s a stock buyback, and why do companies undertake them? A stock buyback is, as the name suggests, what happens when a company finds itself sitting on a pile of extra cash and decides that the best use of that money is to give it back to investors — i.e., the people who own the company and who put up the money for its operations. Some of those investors are Wall Street types of the sort Democrats like to denounce when not shaking them down for donations, but many of them are (directly or indirectly) retired teachers and ordinary people of that sort — pension funds and retirement accounts are among the largest investors around. To be sure, gains that come into retirement accounts are tax-deferred, but when the money is eventually paid out to the retiree, the taxman will be waiting for his slice. …
… Democrats want to impose another tax on top of all that, charging companies a 1 percent tax on the value of shares acquired through a stock buyback. That doesn’t sound like very much, but it is, in fact, a relatively big bite: The current earnings yield for the S&P 500 is about 4.7 percent, and Goldman Sachs calculates that the new buyback tax could reduce earnings by as much as 0.5 percent per share.