Remember, in a perfectly liquid market without taxes, a company which executes a share buyback will have no change in its stock price, since the shared redeemed will be exactly balanced by a reduction in the value of the company; and this is also exactly equivalent to distributing profits in the form of a dividend.
On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on corporate dividends, it's advantageous to pay out surplus cash in the form of capital gains by executing a share buyback. This also provides a tax-planning benefit to shareholders: Everybody is forced to realize a dividend (and pay tax on it) but some shareholders will prefer to realize more or less capital gains in a given year.
In Canada we have rules which sometimes reclassify capital gains as "deemed dividends" to prevent this sort of maneuver. A far better solution would be to simply fix the tax system so that economically equivalent actions get taxed identically in the first place.
> a company which executes a share buyback will have no change in its stock price... this is also exactly equivalent to distributing profits in the form of a dividend
This is false (conditionally). Most valuations look something like: earnings x growth + cash. If you have cash that you cannot reinvest at the same ROI that you have been growing at, you can increase shareholder value by removing the cash element, since it's dead weight. A buy back is a way to invest that cash at the same ROI that your company is growing at. A dividend would require the investors to re-invest that cash and get the same ROI that the company is growing at.
This is why it make sense for large, fast growing companies to buy back their shares and for large, slow-growing companies to issue dividends.
A dividend lets the investors choose if they want to buy more shares (from the same sellers who would sell in a buyback) or mix their current shares with the cash.
Investors buying more shares with dividends doesn't decrease the number of shares outstanding. If you increase the share price without decreasing the share count, you have created value out of thin air and are saying the company was more valuable without the cash than it was with it.
The key is the asymmetry of information. The market price should reflect all public information. However the company has non-public information, which puts them in the best position to judge if money is best invested inside the company or out. Share buybacks are a legal form of insider-trading.
Number of shares doesn't matter, enterprise value does and it doesn't change. Your implying that there would be a further equity issuance which doesn't routinely happen on buybacks.
Reducing shares increases the price (while keeping market cap the same). Share splits increases the shares outstanding and decreases the price. So... yes, shares outstanding does matter.
Whether the company destroys the shares or retains them as treasury stock is irrelevant. Investors don't care if their share price went up by 10%, or if they effectively have 1.10 shares.
> Investors buying more shares with dividends doesn't decrease the number of shares outstanding. If you increase the share price without decreasing the share count, you have created value out of thin air and are saying the company was more valuable without the cash than it was with it.
You're wrong. When the company issues the dividend, the share price falls for precisely the amount issued. So if everybody used that money to buy the shares again, the share price should return (roughly) to the value before the dividend was paid. The number of shares outstanding wouldn't change.
You're wrong. The market cap already had the cash priced into it, regardless of how it was used (as a dividend or re-invested). By your logic, a company whose profits remained flat and issued a dividend would become less valuable every year until it was worthless.
There is a value in a future dividend. On the ex-dividend date, the share becomes less valuable because the new holder will not receive a dividend in X days. This X is usually very small, so a share that goes from paying you $5 in two weeks to not paying you has clearly lost value close to $5.
The market cap already reflects the value of all future earnings discounted to the present. The timing of dividend payments is irrelevant.
If your argument was true, that a stock's price predictably fell the day after the dividend, investors could simply short the stock and get a guaranteed profit, which is not possible in an efficient market.
False. If I receive cash today I can reinvest it and start earning a return. If I receive cash in a month I have forgone one months reinvestment return.
> investors could simply short the stock and get a guaranteed profit, which is not possible in an efficient market.
False. Well if you are short a stock over ex dividend date then you need to pay the owner of the stock (whomever you borrowed from) 1) the dividend which he has forgone 2) a financing spread equal to a benchmark (e.g. FED Funds + 300 bp's) for the duration you are short.
No offense but you really haven't thought this through very hard.
Also markets are not efficient despite what you read in academia.
The net present value takes into account the difference between payment today and payment tomorrow.
The ex-dividend rate is an implementation flaw that makes the stock price discontinuous at the dividend date. If dividends were pro-rata it would not be.
I never said markets were perfectly efficient.
You didn't think through your answer very hard did you? ;)
The adjusted price reference you made is axiomatic. Adjusted prices simply subtract the dividend. It does not reflect market value. You'll notice the open on the day after the dividend, the stock actually went up $0.40 from the closing price.
When shorting, you only pass the dividends through. The company sends you the dividend, you send it to the original owner, you could still profit from the drop in share price.
Well, the stock price might have changed because of some news or general market sentiment. I guess I could have found a better example, a stock where the dividend is much bigger (percentage-wise), the effect would be much clearer then.
No, shorting doesn't work that way, obviously. "Shorting" means you sell he stock, so the new owner gets the dividend, not you. That's one reason shorting equities is very risky long-term.
The ex-dividend date is an implementation flaw that makes the stock price discontinuous at the dividend date (I initially misunderstood this). However, in theory, a pro-rata dividend would be continuous.
Say you own 1 share. It's trading for $20. Tomorrow the company pays $2 dividend. Then your share is worth $18 and you have $2 cash as well.
Alternatively, if you're buying the share, you're willing to pay $20 for it today but only $18 tomorrow, because you know that you won't be getting a $2 dividend if you buy it.
If you take future dividend payments into account, you also need to discount them. If you think that (discounted future dividends) > (stock price), that's a signal for you to buy. If enough investors reason this way, the price will rise until (discounted future dividends) ~~ (stock price).
The future earnings have huge uncertainty to them. A company with a $50 stock price might have $5 per share worth of cash in the bank, (which is something you can actually observe.) The other $45 represents expected future earnings. If the stock pays out a 50c dividend, the stock now has $4.50 per share in the bank and the $45 expected future value is unchanged.
Either you're stupid, or there's a misunderstanding. Probably the latter. Let me try again. Assume that δ is the discount factor (δ = 1 / (1 + r)), P is price, and D_i is the dividend in year i.
When calculating the value of an annuity, all that matters is your number of periods, the amount, and your discount rate. This is why an annuity appreciation chart over time is continuous.
That's not the argument I'm making. I'm not disagreeing with you.
The point I'm making, which I admit is an obvious one, is that without profits a dividend will erode a company's value. Simple flow of money. Unless there's a surplus flow of money in, you can't have an outward flow. Therefore, the effect of a dividend on a company's market cap depends on how much profit they have in comparison.
Or at least if management thinks (or wants the investors to think) they can continue to exceed the ROI that a normal investor would get making their own decisions.
I don't think this is accurate. When a company buys back shares, the shares are retired increasing the ownership percentage of the remaining shareholders.
It is basically the opposite of issuing shares and diluting existing shareholders.
Right. The remaining shareholders own a larger percentage of a company that now owns less cash.
Say the only thing my company owns is a bank account with $100 in it. There are 5 shares outstanding worth $20 each. The company buys back one share for $20, so now there are 4 shares outstanding in a company that owns $80.
OK, but if the company held $50 in non-cash assets and $50 in cash, the same logic would hold. The "growth and recurring revenue," stuff you're talking about is just an asset pricing restriction, which requires that the $50 in non-cash assets are not affected by moving some cash off the balance sheet. This holds if the company does not face cash constraints. (Like Apple.)
It depends on the industry. Some stock valuations show that investors in certain industries like companies to hold on to cash reserves. This is especially true in the technology space where investors want companies to be able to cash in on the next big thing. Utilities, though, see their stock punished for holding onto excess cash.
Well in theory, if your shares are diluted /2 but the company's capital is x2, and all that capital is used efficiently, you have not lost anything either. Half slice of twice the pie.
There's another issue created when companies issue debt in order to fund share repurchases. It may seem to make financial sense rates are so low but it's created a huge amount of additional leverage throughout the corporate world.
This is not true. You are ignoring the most important factor of all, which is whether the company's share price is above or below its "intrinsic value". Of course, intrinsic value is a fundamentally fuzzy concept, but in some cases the share price is obviously out of line relative to historical measures of valuation (price to tangible book value, TEV/EBITDA, price to sales ratio, etc.). If there is no good fundamental reason for the lowered valuation (loss of patent protection, entrance of new competition, secular changes in technology, etc.), then it could create value for remaining shareholders if the number of shares is reduced and that capital is replaced with debt (or simply spending excess cash on the balance sheet). If the share price is above a conservative estimate of intrinsic value, then a company can easily destroy shareholder value by buying back shares. In that case, they might be better off issuing more shares or doing an acquisition for stock to take advantage of their overvalued currency. This sort of capital management is one of the most important ways a management team and board of directors can create value over time. For a good historical example, look at the case of Teledyne ( http://www.capitalideasonline.com/articles/index.php?id=2725 )
It's true that intrinsic value is not usually well defined (except in simple cases, where a company is going to be liquidated and has clearly defined assets and liabilities that can be precisely measures, such as cash/marketable securities), but that doesn't mean that a thoughtful investor can't determine a reasonable range of likely values that errs on the side of conservatism. For example, by zero-valuing assets that are hard to quantify, such as an undeveloped plot of land. Or if there is an annuity-like cash flow stream from a long-term contract, one can discount those cash flows to the present using a conservative (high) discount rate. In cases where the share price is way below a conservative downside-case valuation, it's not necessary to know with precision what the intrinsic value might be.
Individual investors can define a proxy for intrinsic value. But, overall investors will come up with different numbers. Thus investor A may think a buyback was a net gain, while investor B may think a buyback was a net loss.
The calculation is (net income - preferred dividends/ weighted average common stock outstanding) = eps. Eps is on the income statement, face of financial statements and will go up if wacs goes down. Common stock out standing doesnt include treasury stock, stock repurchased by the company.
But none of this explains the main reason they would do this (a buyback or a dividend) instead of reinvest the profits. Yes the have lots of cash, but they have for awhile.
So the interesting question is why are they doing this now given the medium/long term ROI a company with cash looks generate. It could mean they stopped seeing obvious medium/long term investments. Maybe a small bubble is 5-10 years away.
TLDR earnings are going down, but earnings/shares are going up. So what is going on ? Earnings for the US economy as a whole are dropping (pretty fast even). But the metric investors use to value shares, earnings per share is going up.
That means U.S. companies are buying back shares at a faster rate than their earnings are dropping. Why ? Exactly to generate this outcome : normal valuation metrics for shares (net-present-value of future earnings per share) go up as a result of this operation. When cutting a million corners the share price of any (large cap) stock should be roughly NPV(8%, future_cashflow).
The next question to ask is ... given that this uses a LOT of debt that is currently at very low interest rates, what happens if interest payments inevitably go up (either as a result of inflation, or of the FED raising rates) ? The problem with low interest rates is that, at the moment, 1% rate rise would quadruple interest payments for the government, and double interest payments for AA corporations.
I might be wrong here but aren't most US companies flush with cash these days? I would assume that they use their cash reserves for the buybacks and not debt. Are there any stats on what is used to finance the buybacks?
Most US companies have cash overseas and have never bought them back to the US because doing so will incur a third gone in taxes. Thus they are lending the cash to the US entity to execute but backs, hoping that a tax holiday is declared in the future.
It's trivially true that not all companies can provide ROI surpassing the market average. The more interesting question to me is why they ever stopped.
Even if the tax percent was exactly the same on capitals gains and dividends, buybacks would still make sense. Dividends typically are paid out at least once year. On the other hand, you only incur capital gains when you sell shares. So, with share buybacks, you can potentially wait many years before you pay the tax, having the money accumulate for you in the meantime.
and this is also exactly equivalent to distributing profits in the form of a dividend.
I don't see this equivalence. I guess It's rather like settling debt since after a buy-back there will be fewer future dividends to pay. But nothing changes for continuing shareholders, does it?
Assume an investor takes all dividends and buys more shares.
Example:
Assume 10M shares at $1 each. With a 10 cent dividend ($1M total), an investor with 100k shares (1% of the company) receives $10k. The market cap drops to $9M (since cash holdings decreased) and the stock price drops to $0.90. They then buy ~11k (10k/.9) shares and have 111k shares, or 1.1%.
Now instead assume the company does a buyback of 1M shares. Now there are 9M shares, each still priced at $1 (cash holdings decreased). The investor has 1.11% of the company.
Lots of assumptions here (no fluctuation in price due to market reaction, cash is not discounted in market cap, etc) but the numbers check out in a perfect world.
The point is that with a Dividend investors can choose whether to reinvest, whereas with a buyback everyone essentially reinvests.
Well but that just confirms my whole point. In a buyback the company invests its cash into stock instead of distributing it as dividend. It therefore makes an investment decision for the investor, who never gets to see any cash.
The whole point of giving out dividends as a company is saying to an investor "here, you can invest this cash better than we can". If you're not giving out dividends you think you have better investment foresight than your investors, which may often be true.
What you as a company then do then with the cash, whether you're investing it in R&D, personnel, etc.. or buy stock doesn't change the mathematics of things for the investor, even if the stock you buy happens to be your own stock.
Yep. Except for the fact that without taxes the investor can just sell the stock if they disagree with the investments the company is making, resulting in the same cash return as a dividend.
In my example with the buyback, if the investor sold 0.11% of the company after the buyback, the result would look just like what would happen if they did not reinvest the dividend. 1% of the company and $10k cash.
Ok, but it's not the buy-back that increases the per-share value for the selling investor, it's the fact that the company has generated positive Free Cash Flow that it is free to invest.
True, though investors often discount cash on hand ("a bird in the hand is worth two in the bush") because of the uncertainty of ever seeing that money. YHOO is probably the easiest example as of late, with their massive goodwill write downs of acquisitions. So the act of either a dividend or a buyback removes that uncertainty and can result in an increase in per share value.
For simplicity, assume that the company buys back stock from all shareholders equally, and then the shareholders trade amongst themselves.
Dividends and buybacks are simply a way to get money from the company to the shareholder. The total number of outstanding shares is of no import---as you can see in stock splits.
You're absolutely right that the savings on interest is post tax. However the tax deductibility of interest creates a substantial tax shield and in general, has a net positive value for the company since changing the capital structure by increasing debt decreases the weighted average cost of capital. Studies suggest that debt, because of the deductibility of interest, on average leads to ~1 dollar of additional company value for every 10 dollars of debt financing (vs equity financing).
This is a consequence of tax law and greed. There are three ways a company can pay for their capital - dividends, interest, and stock buybacks. The first is taxable. Only the last makes options given to executives valuable.
The US should tax buybacks and interest as it does dividends. That would put a stop to this.
All of them are taxable. Interest is taxable income (to the lender), though it's also a prime opportunity for tax arbitrage so the lenders have a strong tendency to be incorporated in low tax jurisdictions.
And buybacks effectively get taxed as capital gains (because they result in higher share prices), but not until the shareholders sell their shares, and of course then it's at the capital gains rate.
So what you're really getting at is that dividends and capital gains should be taxed at the same rate.
And if you really want to promote dividends, let reinvested dividends defer taxes like buybacks do until the shares purchased with the dividends are sold, even if they're reinvested in a different company. Then you'll see investors demanding dividends because the tax advantage of buybacks would be gone and dividends would have the advantage of allowing investors to choose what to invest the new money in.
Except that with a capital gain you can choose when realize that gain (and when you pay that tax) whereas the company defines its dividend schedule. But I did not know that was the law...it is always/everywhere repeated that dividends are taxed at the personal income rates (e.g. many times in these comments that is repeated), but that is not true.
Or just quit taxing dividends since you're already taxing the same investment return when it appears as corporate profit or capital gains, and adjust the rate for equivalence. Then you save on the collection costs.
Unfortunately due to the law of large numbers, for them to grow at even a 15-20%, would require billions and billions of dollars in revenue increases. Seems like the most prudent course of action for them and their investors. Albeit you could also argue that using that cash to buy other companies might be worthwhile.
There are at least two widely used "law of large numbers" -- mean reversion is more popular outside finance, and firm size vs market size is probably more popular within finance.
It is used in both situations, but it very clearly only means the former and the latter is incorrect. "Begs the question" is almost always used incorrectly; that doesn't mean its definition has changed.
No. The goal of M&A is to increase shareholder value, if the data said acquisitions generally do not do that, we would not have M&A. Your links simply show that some M&A scenarios (major acquisitions, acquisitions that are overpaid for, etc) lead to underperformance, not that M&A as an overarching thing "typically leads to the destruction of shareholder value." Nowhere do those articles say that.
On top of other commenter's remarks, notice I specifically said to acquire companies holding monopolies over aspects of Apple's competition plus opportunities for expansions of current strategies. Hard to imagine a HP/Compaq failure scenario here. Just lost money which the company might loose anyway. Locking in long-term success more might be worth that, though.
So many companies with so much profit they literally can't find any way to invest it to generate return. It might make you wonder why wages are stagnant or what the argument for outsourcing to lower labor costs is really about, if you were the sort of person to bother wondering about such things.
I no longer wonder about such things. The simple fact of the matter is that the system is designed to work against wage earners. It focuses on the benefit of our corporate overlords.
For example, I use to work for a company as a wage earner. I left, moving my 401k into a self-directed IRA. Since the market has been bad lately, I remained in cash. I want to put that money somewhere else: property.
I would love to buy a building downtown (which is theoretically possible). I would convert the top floor, about 5k sq/ft, into a co-work office that charges $10/day. The first floor I would rent out to someone, like a grocer. Sadly, the system works against this dream.
First, I can't use the building directly if I purchased it with the IRA. I, as the IRA holder, cannot utilize any properties within the account directly. There goes the co-work. I can't put sweat equity in because that is an illegal contribution. There goes fixing the building without loosing money on labor. I can't directly take the checks and deposit them in the IRA. The law requires that all checks go directly to IRA holding company (who will take a percentage). Finally, I have to get a special IRA account that holds property. Trick is that there is almost no one that does that since they don't make a lot of money. The few that do, take a big chunk.
So I, as a lowly wage earner, can't tap my largest asset directly. I can only use my money to feed the pockets of others via stocks and bonds.
I don't want to be rude, but this doesn't make much sense.
Preferential tax treatment for retirement savings accounts was created with the the specific intention of encouraging people to save for retirement, in order to minimize the extent of poverty among senior citizens. It is a feature, not a bug, that these accounts make it difficult to speculate, because the speculation decisions of amateurs and even most professionals are provably, demonstrably worse in aggregate returns than buy-and-hold passive investment in the overall economy.
If you want to speculate on real estate, you are free to do so. You just have to pay taxes on the money used to do so, so that the government can afford to rescue you from poverty if you fail.
> Since the market has been bad lately, I remained in cash.
For the record, buying at the top of the market and cashing out in downturns is the maximally wrong investment strategy. A random number generator would in general outperform this strategy, because at least some of the time it would do anything but that.
> It is a feature, not a bug, that these accounts make it difficult to speculate
Except that IRAs do let people invest their retirement savings in risky speculative investments like buy-to-let properties - they just have to give the IRA holding company a cut of they money in fees and pay someone else to deal with the repairs and maintenance, both of which have the effect of making their returns worse.
The issue is that I'm forced to speculate in the stock or bond markets rather than the property market. The companies providing investment IRAs are practically non existent. I've tried to find them. All I actually find was rumors if their existence.
Isn't the whole point of pensions to make sure people actually invest and retain the money until retirement? If you could invest it in anything you directly control, then you could easily get the whole sum out whenever you want (defeating the purpose of pensions). I don't see this specific point as having anything to do with corporate overlords.
As a national program, it's better if your pension is delayed, rather than your investment completely failing and you becoming homeless and sick at 62.
That doesn't seem like such a great example; when companies get a tax break, it's usually with restrictions on its use as well. That's the whole point of having a tax break: encouraging certain behaviors.
We are supposed to have collective bargaining; most don't. It's almost a foreign concept to any office worker in the US. Elsewhere, white collar unions (or at least enterprise agreements) are the norm.
You shouldn't wonder. Businesses need demand for something before they start making it. That doesn't need to be demand for something that exists, but if there were money out there for goods not yet made there would be more investment towards them.*
Since that is not the case, you can presume there is not money out there not yet tapped. Which, considering economic trends in recent decades towards wealth concentration in the same capitalist class who has nothing to spend money on except making more money nowadays, that should be no surprise.
When the consumers are getting poorer, their demand is dropping, not increasing, so there is no reason to ever try increasing supply. Just use monetary loopholes to profit more instead.
* : all relative to risk. There are of course things you could take large risks on and see incredible returns if you succeed, but you cannot predict or even guarantee success on them (gene therapy, new silicon fab tech, nuclear energy, new solar panel tech, better battery tech, AI, and way, way more). When the board is awash in cash from a perpetual money machine, and you could easily just do stock buybacks to make shareholders happy, you go with the no risk easy route to appease shareholders than taking the risk.
Companies are doing buybacks because the Fed is basically siphoning all the wealth to big business and the Government via 0 per cent interest rates.
In the past companies had to offer their stock in exchange of savings. Today The central banks basically finance big corp and Government just printing money(and diluting the currency).
So instead of using your savings, the central banks create new money and give it to their friends at 0 per cent interest rates(lower than inflation, aka: free money).
Their friends take that loan and buy their own shares. That way prices remain up without plunging enough time for the CEO of the company to look like a superstar and nobody complying when she retires with a billion dollars in golden parachutes.
Does anyone know if you can use foreign funds in a buyback as a way to repatriate funds? Wondering if you have cash sitting in a foreign bank, can you use those funds to buy your own stock? Probably not since it would be a giant loophole you could drive a bunch of cash through.
While U.S. tax law is currently making it unattractive for Apple to spend its foreign earnings on buybacks, that pile of overseas capital (now above $200 billion) is effectively guaranteeing bonds that raise cheap capital Apple can use to buyback its shares at an extreme discount.
Steps:
1. Loan "US" cash, guaranteed by foreign cash (doesn't need profits repatriated)
2. Use loaned cash to buyback shares
Optimization:
1. Loan "US" cash, guaranteed by foreign cash
2. Buyback using loaned cash
3. Have your foreign subsidiary buy the loan from whoever you loaned from
4. Use the interest payments to transform US income into foreign (non-taxable) income
(it's not quite unlimited, there's a number of problems with this)
No. "Going private" is an option when a company has less than 500 shareholders. A share repurchase or buyback is when a company buys its own shares, typically in the open market, to reduce the numbers of shares outstanding. It is extremely unlikely that as result of buybacks the number of shareholders will go below 500. It would require all the others to voluntarily sell their shares.
I've wondered this myself. Companies going back private in general. Curious how often that sort of thing happens and what benefits there are. Also, thought it might happen to Apple when I saw what profits they were making.
Benefits are obvious: you don't have to answer the shareholders for every quarter. You are free to innovate without thinking about short term profits only.
Of course there are drawbacks as well, such as access to Capital. But when you sit on a large amount of cash, this is less relevant.
Some day, please let it be soon, corporations will all be treated as big LLCs, with profits/dividends passed through to shareholders proportionally to be taxed at the individual income rates. Couple that with taxing cap-gains as income, since it is, and all this nonsense goes away.
Owners (rather than todays "owners") get their share of profits, rich people pay their share in taxes, good triumphs over evil, and so on.
Taxing capital gains at 39.6% (our current top income bracket as of 2016) would be bad for business, job creation, and growth in the US economy. California also taxes long term capital gains (LTCG) at a top rate of 13%. It would mean that an investor in California would experience a LTCG rate of 52.6%, the highest in the entire OECD. Capital has legs and having a non-competitive capital gains rate would incentivize investors to allocate their capital elsewhere.
>California also taxes long term capital gains (LTCG) at a top rate of 13%
I'm sure that Zuckerberg et al have brilliant tax accountants, but this is one thing that has never made sense to me. Volunteering to pay an extra 13% simply for the privilege of living in Northern California seems insane to me. Any of these guys could move a few hours down the road to Tahoe or Reno and save themselves billions of dollars in state taxes, even if they left the company headquarters in CA.
I'd also like to see Pricenomics do a study measuring the market cap impact of California's high corporate income tax rates on major publicly traded Silicon Valley companies. I'm guessing investors would be sickened by the results.
The tax only applies to realized gains. As long as they aren't selling their shares they aren't being taxed. They can also sometimes contribute the shares to tax advantaged vehicles (remember Romney having $101 million in his IRA [1]) or set up other structures to minimize their tax burden. That being said, Northern California is a wonderful place and housing and cost of living prices indicate that many people are willing to pay to live there.
>That being said, Northern California is a wonderful place and housing and cost of living prices indicate that many people are willing to pay to live there.
No place is wonderful enough to pay billions of dollars in extra taxes just to live there. If you are a top engineer making $500K/yr, you're only paying ~$65K/yr in CA taxes, and you wouldn't make anywhere close to $500K in other cities. So the decision to live in CA makes perfect financial sense in that scenario. But in the case of a billionaire founder, it simply doesn't make any sense to sell shares while living as a California resident. You're essentially volunteering to pay a ~65% increase in total capital gains taxes over what they would be in a tax-free state.
There's the fact that Facebook is headquartered in California, and having to establish and maintain NV residency might be more of a burden than Mark is willing to do. (Imagine that CA will scrutinize that claim carefully.)
If Mark has to stay 183 nights in NV (or stay in NV more nights than anywhere else), that might be more of a personal burden and inconvenience than paying CA tax. And if it harms his ability to lead his company, it might ultimately be more expensive as well...
Maybe they're rich enough that it doesn't matter to them. Whether you make 10 Million a year or 15 maybe doesn't have an impact on your lifestyle at all.
Yes, but at $15M/yr, the 13% is only $1.95M. That's high, but not singlehandedly-supporting-the-government high. In 2013, Mark Zuckerberg paid an estimated $2.3 billion in total income tax [1]. About 40% - nearly $1 billion - likely went to California state taxes - for the mere privilege of living near the beach.
If he wants to give $1 billion in cash away, there are alot better uses than to give it to state government bureaucrats. For example, he could have moved to Nevada, saved the $1 billion, and taken 50,000 homeless people off the streets for a year for that much money (which, by the way is ~10% of the entire homeless population in the United States - imagine the positive social impact of doing such a thing).
The point is that federal taxes are inescapable, while state taxes are not. It makes no financial sense for someone with nine or ten figure tax liabilities to be living in high tax states.
You pay state taxes based on where the income is generated from (for most states but definitely for California), not where your house is. Putting their house in Tahoe/Reno but leaving the HQ in California wouldn't affect their income taxes.
They'd have to move the company HQ to Reno/Tahoe to avoid the taxes.
Not true in the case of shareholders. For example, if MZ became a Nevada resident and quit working for Facebook but still had all of his shares, he would not be subject to California taxes when he sold them. Even if he continued working or consulting for FB, California taxes would likely only apply to the income or options derived from that work (though California has some onerous and complex "substantial nexus" rules that may apply if he still worked there, yet another reason to simply not startup there in the first place).
Exactly how bad it would be is a lot more interesting than that it would be bad.
I mean, I accept that it will have a negative marginal effect, and I accept that people will shift their behavior to avoid the tax, but I don't accept that they will start stuffing their money in the mattress because they only get to keep some of the profits of their investments.
The problem with treating investment profits as regular income is that you can have negative investment profit but you can never have negative income. If I make 100k one year on my investments and loose 100k the next year I effectively paid taxes without making any money.
Yes you can. Do people not eat when they've not got a job? If you're unemployed you have a 'loss', because you have expenditures.
Also, there's an additional hidden loss. I earn $30k last year, with a tax break of $3k, this year I earn nothing because I take the year off to have a baby, I lost $3k in tax break. When I work next year I don't get a $6k tax break. I can't ever make that back. Just because it's hidden, doesn't mean it's not there.
And that's far more expensive than it is to someone taking extreme risks with capital that they can lose/earn $100k in a year.
I'm usually calling out for a progressive tax system, however, the parent is right. Investment doesn't work the way you describe. You are asking people to risk capital in order to gain some reward. A particular investment may not pan out for years and then give a windfall. I'm going to go out on a limb and say this: typically, the longer term payoff kind of things benefit society more.
As someone who has very little capital, I too get unhappy when I see regressive tax regimes. The increase in inequality is one of the great problems of our age. That said, we must take care not to throw out the baby with the bathwater. Our current standard of living would not be possible without investment.
Your example about taking time off for the baby is an interesting one. Perhaps the tax system needs to take account of people taking sabbaticals and such.
You can have net operating loss carry-forwards that offset profits for tax purposes in future years. You can have capital losses that can offset capital gains and some ordinary income at the investor level. So no, you didn't pay taxes on the losses.
You're not paying tax on profit just for fun, you're paying it because you're receiving a service: limited liability. If you don't want to pay extra tax, simply accept unlimited liability and you're set!
I wonder how much of this is related to the harsh corporate tax environment in the US. Take Apple for example. They can't use their offshore cash to directly fund buybacks or dividends without repatriating the money and paying high US corporate taxes on it. Instead, they have borrowed against their offshore cash to make buybacks, and then whatever cash is needed for debt service can either be funded from operating income or by importing offshore cash in a relative trickle, with a correspondingly low tax burden, while the money grows virtually tax-free overseas.
So by doing share repurchases with borrowed money, shareholders and executives can reap the benefits of offshore cash without subjecting it to the enormous tax burden they would by directly repatriating the money. As long as corporate profits are still piling up abroad, this trend of corporate buybacks will likely continue.
A lot of C-level pay is to tied to the company's earnings-per-share. A buyback makes that number go up without actually improving anything. It's a lazy way of getting your bonus. Here in the UK it was illegal for a very long time.
If this is a lazy way for a CEO to meet goals, I'm as concerned how lazy the board is in not putting scenario exceptions in the bonus to allow for stock concentration via buyback. It would be a fairly simple line in a bonus plan. Likewise they shouldn't be punished if share are diluted via raising money on the markets if that is the best things to do at the time.
For everyone wondering why the large cash balances on company books, this is why. But it also means that if companies are spending their 'rainy day' money that it's truly raining. The theory that the tech cycle is hitting its 8-year downturn cycle just got more substantiated.
Does it really count as "spending rainy-day money" if they're spending their cash reserves on buybacks? It seems more to me like they just have literally nowhere else to spend the money other than bringing all those dividends back into the company.
This is right. Though it's not that there is nowhere to spend the money, it's that the company believes there is nowhere that would generate a better return than just buying back part of the company and the money earns nothing in the bank due to low interest rates. Apple has spent a truly staggering amount of money on buybacks, money which it could have, for instance, used to buy Tesla, Spotify, etc. Even after investing in major new product areas (watch, cars), they still have more cash than they will ever realistically need.
If Apple's shareholders want to hold Tesla stock, they can just buy it via the money Tesla gave to them via the buybacks. They don't need Apple sitting in the middle.
That's not how an acquisition works. It's not about Apple shareholders wanting to hold Tesla stock, it's about Apple potentially wanting to own the company, and that results in Tesla shareholders receiving Apple stock at whatever the agreed upon price is. Apple would not just become an equity investor and buy some Tesla stock, it would assume control of the company.
> For everyone wondering why the large cash balances on company books, this is why.
You have that backwards. Companies are generating vast amounts of cash and don't see investments that they want to make (hiring and expanding into new products, acquisitions, etc), which leads to the large cash piles. Some investors then pressure the company to return part of this cash to shareholders (see Carl Icahn / Apple for a recent and high profile example), and that can be done directly via dividends, somewhat indirectly via buybacks, or both. Companies do not spend 'rainy day' money on buybacks - companies in need of additional funds sell more shares or take on more debt, not use cash to buy shares.
Isn't there a (big) difference between just buying ack shares and keeping them in a pool, or actually destroying them to reduce the number of outstanding shares? Or are those two equivalent?
Buybacks are a terrible waste of shareholders' money and is akin to putting lipstick on a pig. The only reason why IBM has had relatively decent numbers is because of the financial engineering associated with buybacks. Unfortunately, it all blew up with the current CEO who has to deal with the fact that revenues are dropping like a rock and can't be out-engineered anymore.
Warren Buffet is on the phone for you ... He says when the intrinsic value of a company is greater then the price implied by the stock, buybacks benefit the shareholders .. And when the intrinsic value is less than the price implied by the market price of the stock buybacks are bad for shareholders.
The last outstanding share of a company is worth the value of the entire company. Selling the last share is typically a liquidation event where all assets are sold to a third party and the cash is distributed to the remaining shareholder. At that point the comany has no value (all its assets having been liquidated) and is shut down.
Lets assume that the last remaining shareholder of Apple made the choice to sell his share to the company for $1 (not a very logical choice). The company still needs shareholders to operate and so the board would need to issue new shares. At that point the could simply grant them to themselves and take control of the company.
Why does the company need shareholders to operate? Does our legal framework prevent a corporation from owning itself and appointing its own board and so forth?
Laws vary based on where you incorporate but for the corporation to stay in good standing requires regular shareholder meetings.
There are other corporate structures that don't require shareholders for things like trusts, non-profits, member controlled companies and cooperatives.
There wouldn't be any public shareholders left, and the shares would no longer be traded on the public markets.
But it's still possible to own, sell, or give away the shares privately.
It just means any dealings are by private agreement, and not open to public trade or analyst scrutiny.
This also means the value is more likely to be estimated by relying on business fundamentals and perhaps some aggressive haggling, and not on public market sentiment.
On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on corporate dividends, it's advantageous to pay out surplus cash in the form of capital gains by executing a share buyback. This also provides a tax-planning benefit to shareholders: Everybody is forced to realize a dividend (and pay tax on it) but some shareholders will prefer to realize more or less capital gains in a given year.
In Canada we have rules which sometimes reclassify capital gains as "deemed dividends" to prevent this sort of maneuver. A far better solution would be to simply fix the tax system so that economically equivalent actions get taxed identically in the first place.