What Investors Need to Know About the Inflation Reduction Act & Taxed Stock Buybacks
Mike Obel
August 19, 2022·5 min read
The Inflation Reduction Act of 2022 levies a 1% excise tax on corporate stock buybacks, beginning in 2023. It was added by senators in exchange for not eliminating the carried interest loophole. The tax is expected to boost federal revenue by five times as much as would have been raised by closing the carried interest loophole. How this tax affects corporations – and thus their current and prospective shareholders – depends on how actively corporations buy back their own shares. Consider working with a financial advisor as you build or modify your investment portfolio.
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https://www.yahoo.com/now/inflation-reduction-act-taxing-stock-185855351.html
The 1% Tax on Stock Buybacks Is Just the Start
Although small now, the levy will surely increase over time until it becomes too costly for companies to repurchase their shares.
By Jared Dillian
August 17, 2022 at 6:00 AM EDT
One of the provisions of the Biden administration’s Inflation Reduction Act is a small 1% tax on stock buybacks. The idea of a tax on buybacks is a bipartisan issue that has been around for a while. Florida Republican Senator Marco Rubio in 2019 proposed a plan to tax buybacks on equal footing with dividends, but that didn’t go anywhere.
The tax, however, is currently small enough that it is unlikely to deter buybacks or raise much in the way of revenue for the federal government. Considering that about $850 billion in buybacks were conducted in 2021, such a tax would have resulted in only about $8.5 billion in revenue, which is not remotely close to funding the government for a day.
Regardless, the bigger issue is that the horse has left the barn and taxes on buybacks will surely increase over time until it becomes too costly for companies, taking away what has been a major tailwind for the market. The S&P 500 Buyback Index, which seeks to track the 100 companies in the S&P 500 Index with the highest buyback ratio in the trailing 12-month period, is up 231% the past 10 years and 692% the last 20 years, topping gains of 198% and 427% for the S&P 500.
Buybacks are generally viewed two ways. The first is that they are a form of stock manipulation that enriches corporate executives who control a lot of shares. The second more benign view is that they are simply a way to increase financial leverage and earnings per share. There’s probably some truth to both opinions but, nevertheless, when a company finds that it has too much in cash and has little in the way of investment opportunities, it can return cash to shareholders through dividends or buybacks.
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https://www.bloomberg.com/opinion/articles/2022-08-17/inflation-reduction-act-the-1-tax-on-stock-buybacks-is-just-the-start
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