
Why Stock Buybacks Are Dangerous for the Economy - wwwdonohue
https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy
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seibelj
Corporate buybacks are dangerous when _when the taxpayer bails out the
shareholders_.

Major companies loaded up on debt because a decade of low interest rates made
it cheap to do so, then purchased stock because shareholders wanted them to
(paper gain and get taxed later on sale, so more flexibility for taxation
timing).

So companies have no wiggle room in a crisis. So what? Bankruptcy, hose the
shareholders, sell the assets to a new company, and the market will learn. But
no - bailouts for everyone! The Fed buys their old junk bonds and even new
ones! No one ever feels any pain. The government isn’t allowing natural
business processes to happen and then some dumb idea like “ban stock buybacks!
That will solve everything!” is promoted.

The government has trained the market so that if a recession happens, it will
backstop everything. It’s ridiculous.

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mindslight
Yeah, stock buybacks aren't really problematic as a mechanism. The root
problem is ZIRP, which pushes companies to take on as much debt as possible.
It leaves companies without a reserve to weather changing conditions, and debt
that needs to be rigidly serviced on a model from the past.

I too wish that overleveraged companies wouldn't get bailed out when the house
of cards comes tumbling down every decade, but I don't see how that's prudent
or politically palatable. It's a spiteful desire that comes from being told
that nothing can be done to reign in the bad behavior during the good times,
while bogus inflation metrics are used to keep the party going.

Interest rates need to go up and stay there, as they haven't been allowed to
do for the past few decades. Of course that is problematic as the mound of
existing debt becomes more expensive. Which is why these conditions form a
spiral that will end up destroying the dollar. But given USD's status as
reserve currency, I don't know how to time this.

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kyboren
> but I don't see how that's prudent or politically palatable.

It is prudent because it prevents this moral hazard that reduces efficiency
and increases systemic risks. Yes, there will be short term turmoil as
companies and their operations are restructured. But it is a long-term
imperative. Companies must be allowed to die.

It is politically palatable because rich capitalists are getting bailed out
with an unlimited backstop while mom n' pop got a measly $1200 one-off
payment.

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mindslight
I agree with where you're coming from, and I don't really want to be arguing
against just deserts of bankruptcies.

I'm just saying that looking at the big picture, choosing the catastrophic
option is not productive. And so it will never have political buy in (politics
is driven by business, not voters), even from businesses that don't need a
bailout.

Letting bad behavior continue to occur for long stretches with the idea that
there's going to be some eventual reckoning just isn't realistic.
Fundamentally, even if a bunch of companies do go bankrupt, the executive
compensation won't be clawed back - so the looters _still_ make out. Rather,
the bad practices need to be reigned in when they're occurring. And those bad
practices run far deeper than the simple technique of stock buybacks.

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georgeecollins
The best excuse for buybacks are that they are "tax efficient" which is
another way of saying they are about tax evasion. I don't care how you feel
about tax rates, if you think corporations should pay less taxes lower the
rates. We just did that in the US.

Less legitimate (but I would argue as common) reasons are to prevent excessive
dilution from stock compensation plans and to prop up the value of shares tied
to compensation packages. Studies show that companies buy shares when the
price is high, so I doubt on the whole shareholders benefit. It feels good to
see a stock go up, but dividends are nice too.

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downerending
_Tax evasion_ is a crime. This is _tax avoidance_ , which is not, and which we
all do to varying degrees.

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valuearb
Yawn. If you look at why companies like Apple use debt for buybacks, it’s
because the US corporate tax system traps earnings overseas. Sure the Trump
tax cuts made things slightly better, but returning foreign profits still
cedes about half of them to the tax man.

Buybacks are just dividends with a more tax efficient method of distribution.

I still don’t understand why we tax savings and investment, which is what
corporate income taxes do. Make the corporate rate zero, and compensate by
raising capital gains and dividend tax rates to individual income rates. That
rewards reinvesting into American production and pulls back all those foreign
profits.

~~~
rmrfstar
I'm not sure how taking the corporate rate to zero addresses any of the issues
raised here.

The 16th amendment only authorizes an income tax. A tax on unrealized gains
would likely be a "direct" tax, which makes it a non-starter.

So, if you take the corporate rate to zero and raise the capital gains rate,
you will push any remaining dividends into buybacks. Because most equities are
ultimately owned by households that don't need to sell shares to finance
consumption, the result will be a dramatic reduction in tax revenues.

It is perfectly legitimate to argue that the US should collect less taxes, but
if that's your point you should just come out and say it.

I agree with your broader point that buybacks are themselves neutral.
Corporate leverage, however, is a serious problem that needs to be addressed.

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valuearb
Sorry, confused. I didn’t propose any tax on unrealized gains.

Raising capital gains and dividend rates to ordinary income rates should favor
neither, with one exception. Capital gains would need to be indexed against
inflation, otherwise in any high inflationary period they could produce
effective tax rates over 100%.

And investors require dividends and buybacks, or their is no reason to own
stocks. So both will continue and most stock owners will pay significantly
higher tax rates on them, partially offsetting their higher dividends and
returns.

But you are correct that this will probably lower tax receipts in the near
term, but it will also increase investment and R&D, which will help tax
receipts catch up over time.

And of it does lower tax receipts it’s also evidence we have been eating our
own seed corn, capital wise.

