
Time to Ban Stock Repurchases - Zweihander
https://www.tbwns.com/2020/03/30/the-bears-lair-time-to-ban-stock-repurchases/
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vearwhershuh
It is time to make dividends, rather than capital gains, tax advantaged. They
should be deductible against the companies income (akin to LLCs) and shouldn't
incur payroll taxes but otherwise should be taxed as income. This would make
them more valuable for lower income citizens who suffer under the payroll tax
setup, and less valuable for the wealthy since they would be paying a high
marginal tax rate on them. It would distribute capital ownership more widely
and make planning a retirement income stream much easier to accomplish.

Capital gains should be taxed at windfall rates, say income + 10%.

Prioritize repeatable, stable profits over swing-for-the-fences highly-
leveraged moonshots, and watch how many of these problems disappear.

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cletus
> It is time to make dividends, rather than capital gains, tax advantaged.

So this is another example of the US being unable to find solutions to
problems only it has.

This came up with the whole passthrough preferential treatment. The argument
for it was that dividends were essentially double-taxed. So you end up
creating a whole new set of complexity (eg what qualifies for it) when the
solution is remarkable simple.

In Australia, dividends issued by companies come with franking credits. That
means you get credit for any taxes already paid. The vast majority of
dividends are fully-franked, meaning all funds have paid the 30% tax rate.
Much less common are unfranked (no taxes paid) or partially-franked.

To give you an example. Say a company makes a profit of $10,000 and wants to
pay it as a dividend. It pays 30% tax on it ($3000) and disburses $7000. Alice
owns 10% of the company so she receives $700 (10% of $7000, being $10000 - the
$3000 tax) and $300 in franking credits. If Alice's marginal tax rate is 30%
she has paid all her taxes. If it's 40% then she owes 40% x $1000 = $400 -
$300 in franking credits = $100 in extra taxes. If her marginal tax rate is
15% she gets a refund ($1000 x 15% = $150 is her liability so her refund is
$300 - $150 = $150).

So no double taxation and all the recipients pay their marginal rates of tax
on the income. Easy.

This is also a far cleaner way to deal with foreign withholding taxes. Let's
say the dividend recipient is a foreign corporation, should they pay taxes on
the income? Well, they already have. it's a policy decision as to whether they
should get the taxes back or not. But again, it's handled by that system
without having to create a foreign withholding taxes regime.

> Capital gains should be taxed at windfall rates, say income + 10%.

Yeah so you lose me here. I don't see the justification for this. Investment
is typically in already-taxed dollars.

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majormajor
Neither "double-taxed" nor "already-taxed" make sense to me as phrases.

From the "regular person" side of the world - dividends vs capital gains vs
estate tax, how I would've loved to have such problems for most of my life -
I've always seen it as transactions that are taxed, not dollars. I pay income
tax. I pay sales tax. That's about it (property tax would be something
entirely different, but requires owning real property), but how is it not
"double tax" by the same logic? Why all this consternation about "double
taxing" in certain investment circles, but not around sales tax? Just because
it matters less to the super-wealthy?

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nemothekid
>"but how is it not "double tax" by the same logic?"

It's not really the same logic. If I own 100% of the shares of company A, and
I make a profit of $100, I have to pay a tax on that profit. Now I have $75.
Now I want to use that money to buy an XBox, so I move that money from my
company account to my bank account (again, I own the company, the money is
already mine), but I have to pay another "income" tax. This is the "double"
tax, there is no "transaction". But lets ignore that, if you could avoid sales
tax, wouldn't you? This is how shopping online worked pretty much up until
2016.

IMO, we should just get rid of the corporate tax and simply tax cap gains and
dividends more. It would solve the issue of corporations parking money in
Ireland and loading up on debt domestically.

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danaris
...Are you saying that if you own _shares_ of company A, the value of those
shares is extracted from the company's _bank account_?

That...doesn't sound right. I mean, I know I'm not really much of an investor,
but my understanding is it works more like this:

If I own 100% of the shares of company A, and the company makes a profit of
$100, the company pays a tax on that profit, then has $75 in its bank account.

Separately, when the company reports those earnings, its stock price rises 5%.
Now, if I want to realize the value of my stock appreciation, I have to sell
shares of stock, which is a completely separate, taxed, transaction.

I can only transfer money from company A's bank account to my own _because I
own 100% of the shares, and control the entire company_. I also know that
treating the company like my own personal piggy bank is frowned upon (at least
by people with scruples and sense), and the much more reasonable thing to do
is have the company pay me a salary out of its profits. Which is another,
separate, taxed, transaction. Which also makes perfect sense, because in the
general case where I am not the only employee, payroll taxes are a perfectly
reasonable thing, and in the more specific case where I am, I'm paying for the
protection of having the corporation to take liability.

~~~
nemothekid
> _Are you saying that if you own shares of company A, the value of those
> shares is extracted from the company 's bank account?_

Like the sibling comment said, thats how stocks are _supposed_ to work. The
entire reason stocks have value is because you were entitled to a dividend. So
that $75 would be shared among the people who own the stock.

Now if the stock entitles you to a dividend of $5/year of the company's
profits, you then might say that the company's stock is with $25 (just an
example). If you think the company may become _more_ profitable, and start
paying $6, you may decide the stock is worth $26, and the inverse is true as
well. Transferring that ownership of the stock is taxed, naturally.

Now we now live in a world where the largest companies don't pay a dividend,
and I'm not sure how much "potential dividend revenue" factors into company
valuation, but, as I understand it, this is the "backbone" of how stocks work.

> _and the much more reasonable thing to do is have the company pay me a
> salary out of its profits. Which is another, separate, taxed, transaction._

This is taxed separately however. There is no "double-tax" here as payments to
employees aren't considered the company's profit. When the company pays its
employees, it's taxed once (payroll tax). When the company pays it's owners
it's taxed twice (Corporate tax, then dividend tax).

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cletus
So I don't get why stock repurchases are being singled out here. The original
model for corporations was that companies make a profit, pay taxes on that and
then either retain those profits, return them to the shareholders in the form
of dividends or both.

This model has disadvantages. Not every shareholder wants to receive a
dividend they then have to pay taxes on. The company also drops in value by
the amount of money disbursed, which has its own issues (eg triggering wash
sale rules).

Share buybacks are an alternative to returning money to investors. You use
that same pool of money to buy shares on the open market. The company has lost
that same asset (the disbursed cash) to those investors who want to receive
that money (ie by choosing to sell) and the stock price remains unchanged.

So this is (IMHO) concentrating on the wrong problem. The real problem is that
companies can borrow money to return to shareholders through dividends or
buybacks rather than repatriating foreign profits, which would otherwise make
those profits subject to US taxes. So this is a near-indefinite deferral of US
taxes.

In my opinion, we need to treat any form of borrowing as effective
repatriation of retained foreign profits that then get taxed accordingly.

As for bailout funds, I'm totally fine with all of these restrictions until
the loan has been repaid:

1\. Any borrowed funds are treated as repatriation of foreign profits as per
above. Why bailout companies who are choosing not to pay US taxes?

2\. A freeze on executive compensation, including no extraordinary bonuses,
additional stock grants and so forth. Additionally, all such compensation from
the previous 12 months needs to be clawed back.

3\. No disbursement of any kind to investors while the bailout loan remains
unpaid. This includes dividends and buybacks.

Focusing solely on stock buybacks is misguided.

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nodesocket
Why should there be a blanket ban on stock repurchases? If a company has
excess cash, you're advocating they can't put that cash to work "betting" on
their future performance?

I however do agree if a company takes a recent government "bailout" they
should be restricted from buybacks until they payback the loan/bailout.

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Infinitesimus
I'd could argue that the "excess" cash might be better used to raise employee
wages, reduce work hours, etc. etc. All those things that make human workers a
bit happier but c'est la vie

~~~
Gibbon1
Exactly stock buyback are a 'too easy' way of driving up stock prices. You
want companies to use their capital to increase the real value of the company.
At the same time you want to discourage CEO's and stockholders from looting
the corporate till.

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alasdair_
One option could be to restrict repurchases (and dividends) that would take
the company below some threshold of savings, based on expenses. For example:
any company worth over $X needs to hold a years worth of expenses in hand at
all times - if they go below, they cannot issue a dividend or buy back any
stock.

Of course, the details matter enormously here, including how things like debt
factor into the equation.

