A Different Tax on Stock Buybacks

Abstract

In the Inflation Reduction Act of 2022, the US enacted a 1% tax on stock buybacks by large publicly traded corporations. The rationale was that stock buybacks are used by management as a tool for increasing the value of the remaining shares (and their stock options) while enabling shareholders to escape taxation altogether (if they are tax exempt or foreign) or pay tax at a lower rate (23.8% instead of 37%). Arguably buybacks also reduce useful corporate investments and hiring. But in practice, a 1% tax on buybacks is unlikely to reduce buybacks, although it can raise revenue (but that itself proves that it does not deter buybacks). Instead, I would propose to treat buybacks as dividends, which would make them taxable to foreign shareholders and potentially subject to a higher tax rate if the dividend rate is raised above the capital gains rate, like it was before 2003.

Keywords: stock buybacks, excise tax, income tax

JEL Classification: H26