Democrats imposed a 1% stock buyback tax on January 1. Now just 37 days later, President Biden wants to quadruple the tax, the burden of which hits every American with a 401k, IRA, or union pension.
The U.S. stock market just had its worst year since 2008 – ending the year 2022 down 20%. Biden’s answer is higher taxes.
“Joe Biden has declared war on your life savings. He signed a stock tax into law and now wants to quadruple it. The cost of this tax will be passed directly to you. Your 401k and IRA will be worth less,” said Grover Norquist, president of Americans for Tax Reform.
“Note to Biden: China does not have such a tax, and you are once again disadvantaging American workers by reducing American competitiveness.
All taxes start small and then grow, like tapeworms. Democrats imposed this tax 37 days ago and they are already trying to quadruple it.”
President Biden and Congressional Democrats imposed the new tax to fund their reckless spending spree. Raising taxes and restricting stock buybacks harms the retirement savings of any individual with a 401(k), IRA or pension plan.
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 are now able to 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 401(k). 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 benefit teachers and police officers, added up to $4.25 trillion.
When companies perform stock buybacks, these investors 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
Quadrupling the buyback tax, as Biden supports, 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
The buyback tax 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.”
But before these companies have experienced a single tax season dealing with the tax, Biden is already calling to quadruple the size of the tax.
Democrats imposed this tax in a hurry, and it leaves U.S. companies and household nest eggs in the lurch.