The recently passed Inflation Reduction Act -- which may as well be referred to as "The Unicorn and Leprechaun Full Employment Act" because it has as much to do with that as it does with reducing inflation -- includes an assault, small as it may seem, on stock buybacks in the form of a 1% corporate excise tax.
Senate Majority Leader Chuck Schumer, who has been in elected office in one form or another since 1975, has put his personal feelings about buybacks into action:
"I hate stock buybacks. I think they're one of the most self-serving things that corporate America does," Schumer said. "Instead of investing in workers and in training and in research and in equipment, they simply - they don't do a thing to make their company better and they artificially raise the stock price by just reducing the number of shares."
As politicians often do, he and others who voted for this bill, which sounds like something straight out of Ayn Rand's "Atlas Shrugged," are missing the mark. Stock buybacks help create and maintain liquidity in the markets through the repurchase and then retirement of stock owned by shareholders big and small. Buybacks allow companies to retire shares when management believes that shares are undervalued, which can send a signal of confidence to shareholders. To be honest, buybacks can be an astute move or terrible one, depending on the timing. But they can also be employed when companies don't have a better use for their capital.
So far, there has not been much of an outcry over this excise tax, likely because it is so small at 1%. The extent to which it will curb buybacks is unclear. However, to infer that it is the corporation that will pay this tax is disingenuous. It is the shareholders who will pay, and just like any other tax levied on corporations, it ultimately will be passed along to the consumer.
The danger here is that once enacted, taxes are difficult to get rid of. To pay for the next great idea, why not bump up the excise tax on buybacks to 2% or 3%? This move was seen as an easy way to raise some funds, one that would not get a great deal of pushback due to the relatively low tax rate. However, it does set a dangerous precedent.
Perhaps this move was made in an effort to try and entice companies to pay more out in the form of dividends, which are taxed twice, once at the corporate level and again at the shareholder level. Just thinking out loud here...