Wall Street brushes off Democrats' 'piddling' tax on stock buybacks

“That’s a ridiculous increase,” said Ed Yardeni, president of Yardeni Research, a stock market research firm. “One percent won’t do much.”

The proposal comes amid a frenzy of share buybacks, with a long list of companies announcing plans to buy back shares. Analysts expect total buybacks this year to hit levels not seen since shortly after the Republicans cut the corporate tax rate as part of their 2017 tax cuts.

The increase is largely back before the tax proposal that Democrats are now turning to after Senator Kyrsten Sinema (D-Ariz.) Opposed theirs. has resisted plans to increase the company tariff.

Share buybacks became a powerful political symbol, especially among progressives, in the wake of the 2017 Republican tax reform.

A spate of buybacks followed this law as corporations – fed up with cash from corporate tax cuts – bought back a record amount of stock for the benefit of wealthy shareholders. The Democrats complained that the buybacks were doing little for the average American.

So there is also an element of revenge with their tax proposal being projected according to official estimates, generate 124 billion US dollars in the next ten years. Overall, the Democrats are proposing $ 1.5 trillion in tax hikes for businesses and high earners to help cover the cost of their next major spending package.

Corporate executives use “too often” [buybacks] to enrich themselves instead of investing in workers and expanding their businesses, “the White House said in a summary of the tax.

Asked if the levy is too small to contain buybacks, a spokesman for Sen. Sherrod Brown (D-Ohio), who sponsors the proposal, emphasized the importance of just getting it into the books.

“It would be the first major step Congress has taken in recent years to curb buybacks,” she said.

“If CEOs want to keep filling their own pockets at the expense of the workers, they have to pay for the Democratic investment.”

It’s about what big companies do when they have money to spare.

You can put it into research and development and other investments. You can pay the workers more. You can buy other companies. You can issue dividends, which are payments to shareholders. And they can buy back shares.

Companies often choose buybacks because they can make the remaining stocks more valuable and increase their earnings per share ratio, a key metric on Wall Street. And executive pay is often tied to a company’s stock price – although when the market is up and stocks are expensive, as they are now, buying back stocks is less of a way to drive prices up.

Buybacks are also easy to disable for companies. In contrast, once they commit to paying a dividend, shareholders expect these payments to continue and grow.

Senate Democrats had proposed a 2 percent buyback tax before agreeing to cut it in half.

That won’t look like much for companies buying back shares in the open market, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Especially when the market is choppy, companies can see their stock prices fluctuate more than that every day. In comparison, he says, a 1 percent fee seems small.

“Do you want to pay? No, ”he said. “But if you keep buying stocks, your stock price will move more than 1 percent, and very often it will move more than 1 percent – up or down – in one day.”

If a 1 percent tax is enough to make a company rethink its plans, it could be a sign it can’t afford to buy back shares.

“If 1 percent means so much, one has to wonder if they should do it when they are so tight on cash,” he says.

The real meaning of the Democratic proposal, some say, is that it would be a foot in the door.

It would be a new source of revenue for the Treasury, and once passed, it would be politically easier for Democrats to come back later and increase it.

At some point, higher government tax rates would generate less revenue for the government because companies find the tax too expensive and do other things with their money – though, if that would happen is unclear.

Buybacks are now booming after collapsing in the wake of the pandemic.

Companies like Google, Home Depot, Bank of America, and Microsoft have all announced plans to retire shares.

And overall buybacks should approach levels last seen after the 2017 tax cuts, said Ken Johnson, investment strategy analyst at Wells Fargo.

“We’re well on our way to getting close to that,” said Johnson. “We have seen a great boom.”

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