Thought that was an interesting take.
Edit: here is the link but it may be behind a paywall. https://americanaffairsjournal.org/2018/12/share-buybacks-an...
Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is equally true for both buybacks and dividends.
This is because most companies have no wish to operate like broad VC firms or investment firms. While plenty of shareholders do.
The government has all the infinite "dibs" it wants, they're called taxes. If the government wants to tax buybacks further it doesn't need any particular logic of "dibs" to do so. And right now buybacks are taxed in exactly the same way as capital gains, which is the same way qualified dividends are taxed too. And corporate profits are already taxed too.
Executives are doing this to meet performance targets and get bonuses. Not to allocate capital efficiently.
Tax rate on cap gains and dividends is 20%.
Inflation is zero.
Company earns 10% of its market cap yearly in profits.
Company's market cap is static over time.
Scenario A: returns profits as share buy backs.
Scenario B: returns profits as dividends on which the shareholder pays tax and reinvests the rest in company stock.
At the end of the scenario, sell all stock paying capital gains tax due (nothing to pay on scenario B since stock price has not changed.)
Even though dividends and capital gains are taxed at the same rate, scenario A beats scenario B by 10% over 10 years and 45% over 30 years.
on topic https://www.ft.com/content/0f863da4-0b6e-11ea-b2d6-9bf4d1957...
There's some confusion in your comment. The company is already property of the shareholder. The shareholder holds shares of the company. Thus, the assertion that stock buybacks transfer wealth from the company to the shareholder is a tautology because the wealth from the company is already the wealth of the shareholder.
Perhaps more accurate would be to say they liquidate part of a company's wealth (the broader value of all assets owned by the company) into stock price (the value at which a share can be sold on the open market).
From this perspective it seems fair to say that they transfer wealth from company control to shareholder control.
Of course, all of these characterizations are the same and describe the same event, but I find this one the least inflammatory. It makes it clear that no transfer of wealth is happening, that buybacks don't meaningfully effect share price, etc.
But if you’re a foreigner owning US stocks, they’re taxed much differently.
Right off the bat, the IRS withholds 15-30% of dividende paid to foreigners. Not so with cap gains.
And, at least in Canada, US stock dividends are taxed at full personal tax rates.
Cap gains are cap gains, foreign or domestic in Canada.
So I’m all for cutting dividends and doing buybacks.
Your basically taking more risk with capital that income to reward you for putting your capital at risk
What is peculiar is that this act has nothing to do with running a company well in the long term, yet is the most immediate way executives can improve their "performance based compensation". Execs seem to have found a hack around stock based compensation that biases companies towards divestiture over investment, and the short-term minded shareholders are onboard with this scheme at the expense of long-term minded shareholders.
This looks largely like a bug in the executive compensation system...I'm curious what kinds of fixes are going to come out of the world of MBA academia.
Dividend and company taxes can really screw certain types of shareholders.
It also depends on what kind of account the holdings are in. In retirement accounts, it’s all the same.
In our « tax-free savings accounts », we still get hit by IRS withholding taxes that we can’t write off against any corresponding taxes (because there aren’t any).
In a cash account, US dividends are taxed as if they were bond interest.
Capital gains also let stockholders pick and choose which year to crystallize their gains.
I don’t plan on selling some funds until I have a low tax year.
No. It drives up the share price. That's nice for people who want to sell, but does little for the long term. A company that has dividends might be able to increase them if the number of shares is reduced, but buybacks are often done by companies that dont have dividends. There are companies doing both and I'm not sure what to make of that.
That is to say from the shareholders to themselves.
No, because the shareholders already have the wealth that is in the company, since stock is a form of wealth. It makes some part of the wealth shareholders already have liquid, though.
This same calculation can be made for stocks based on their dividends and any terminal value from an eventual acquisition. These calculations fluctuate more because dividends are variable.
The parent's comment is right though, its something buffet often observes: If a company buys back stock far about its intrinsic value, it is transferring wealth from current shareholders to now ex-shareholders. If it buys it back below intrinsic value, then it is transferring it from now ex-shareholders to shareholders.
There is actually a wonderful story that illustrates this. Try searching for "buffet pritzker Rockwood & Co arbitrage".
The short version is that Rockwood & Co was sitting on a massive supply of very valuable chocolate, and its stock price didn't reflect the value of that chocolate. Pritzker controlled the company, and announced it would redeem shares for chocolate (a buy-back in chocolate). Arbitrage traders then bought up shares at the low price, redeemed them for more valuable chocolate, and pocketed the difference.
BUT, what they didn't calculate was that the amount of chocolate that remained inside the company was far larger than the amount that was going out to the departing shareholders. Essentially, the chocolate 'payments' for stocks were far below the intrinsic value of the company. So, every time an arbitrage trader traded in shares for chocolate (at a profit to them) Pritzker was actually getting far richer by retaining his remaining shares. Everyone was winning, but Pritzker was winning far more. In the end, Pritzker retained a much higher ownership percentage of an only slightly smaller stockpile of very valuable chocolate, and made a lot doing it.
I think I saw the full version of this story in the biography of Buffet, but I am not sure. It is super fun. It illustrates why a management team that is buying back shares below intrinsic value is helping the remaining owners increase their wealth, and vice versa.
The fact that arbitration actually exists is because there is a disconnect between price and wealth generated solely by information differential.
And beyond an exchange, that, merely because their parent's opportunity cost differs greatly, raising one infant is in fact vastly more valuable than another essentially identical infant.
I would suggest that price is not identical to value, it's just that the market is usually the best way to determine a value.
In the extreme case of a disclosure that will tank the stock price their current investors would be better if the company sold new shares ahead of that announcement. This would then dilute the loss across more investors. Though the ethical issues should be obvious.
Buybacks are simply the opposite of issuing new stock which happens to have tax advantages.
That's assuming the value of the cash is the same in the hands of the corporation as the shareholders. But if the corporation has nothing it needs the money for internally then the cash is nothing but a liability that it has to waste resources trying to figure out how to externally invest, or have it get infected with principal-agent problems and empire building. The shareholders as more directly self-interested parties may be better equipped to find investments with a better risk-adjusted return.
Moreover, if the company is successful then needlessly holding the cash causes the stock to trade for less than its intrinsic value, because holding cash lowers the company's overall ROI from the above-market returns its actual business is generating to the average of that and the presumably market-average rate of return it collects on the cash. Returning the cash causes the company's share price to adjust (i.e. rise) to reflect the higher returns from its actual business once they're no longer being diluted.
Whether the stock is over or undervalued is a bit besides the point, actually. It's a direct flow of cash to investors, that any investor can take advantage if they think the current price is too high (or not, if the price is too low)
Banning buybacks would leave money in the hands of the managers/administrators. Only suggest this if you feel CEOs are under paid and control too weak.
Rinse and repeat.. tons of companies have done this. So sure some investors will eventually cash out but companies should also be taxed if they derive some benefit from the country they are from or selling products. I would argue those taxes should be low but allowing companies to totally dodge them seems like a bad setup long term.
I feel like this must be against the law somehow, but I don't quite understand where the line is.
Honestly: because you're not rich and connected enough to have the rules written for to your benefit your naked self-interest. If it was legal and economical for ordinary people to evade taxes, too many people would do it and the country would collapse.
Wages are taxed differently than a company's income. If you were to distribute the income to yourself every 2 weeks, you'd end up paying all the same taxes as wages.
Which is why a country like Belgium can be a Tax Haven for companies and have the world's highest income tax at the same time.
Maybe your company has to sell something to be legit? Okay, you sell the people who are paying your company toothpicks. They pay your company for the toothpicks, the labor is just incidental.
Also the situation you describe would make your life incredibly complicated. The logistical hoops necessary to pay your rent make it extremely unappealing, IMO.
The ultra-wealthy and big corporations take advantage of schemes to lower their taxes.
 Most corporate equities are held by retirement plans or foreigners. Just 25% are held in taxable account. Of those, the bulk is owned by people outside the top 0.1%.
Equity is an entirely imaginary value store. What’s the point of the majority holding all the corporate equity when it goes poof constantly?
80% of last generations Fortune 500s are gone. Retirees and the public were left holding the bag.
Meanwhile, the aristocracy retains generational control of all real assets.
This is another emotional boondoggle, wrapped in numbers to provide some sort of concretized framework. It’s the same old scam:
Load the public up on ownership/stewardship of ephemeral nonsense (previously religion) insulate the most pious/rich.
The bottom will fall out on the value of the equity, they can buy up more of the real property cheap. Rinse. Repeat.
So is money.
>> 80% of last generations Fortune 500s are gone.
Good it's called capitalism. We need creative destruction to move forward.
>> Retirees and the public were left holding the bag.
Largely because the finance industry(or perhaps the world) is run by sales people.
Don't be a sucker, if you don't understand your financial assets in detail(e.g. if you are buying an index fund, understand why, not just based on past performance, go deep, what's the weighting?(currently float weighted which makes it easiest to sell to you, but the worst possible weighting makes it buy high and sell low).
Fuck that's a shit fuck ton of work for just a surface level analysis. But you should do much more research into your mutual funds/stocks than you do your next car purchase.
So yeah, it's not that they were left holding the bag, it's that they were sold free money that turned out to be not so free. Imagine that.
The S&P 500 is > 80% owned by institutions. That is mutual funds, pension funds and insurance companies. The main beneficiaries arent fat cats, but rather anyone with a 401k.
In the last 40 years 0.00025% of Americans have tripled their share of the wealth. Of course everyone with a 401k has benefited but they are nowhere close to the main beneficiaries of capital gains.
The pool of people people in that quantile is dynamic.
In 1980, that was about 600 people. In 1980 the richest person in the United States was J. Paul Getty. I imagine most of those people are no longer alive.
In 1980, Jeff Bezos was 15, Bill Gates was 24, Larry and Sergey were 6, and Sergey had been living in the United States for 1 year. It's likely that the effect you're seeing is an artifact of the role technology plays in the economy rather than exploitation or rent seeking.
"Of the $22.8 trillion in stock outstanding... retirement accounts owned roughly 37%, the most of any type of holder." 
So... The best-case scenario is $75k per year someone might be able to stash away in a retirement account. Let's say someone is able to do it for 50 years - it leads to $3.75m. It is a decent amount for retirement in my opinion, but 1) it is unlikely to optimize it fully to get there, and 2) doesn't really look stratospheric to make a difference in retirement funds ownership categorizations (i.e. 0.1% owns large part of retirement investments).
==As of 2011, 314 multi-millionaires had more than $25 million saved in their IRA, with average holdings of $258 million, the GAO reported. About 9,000 taxpayers had at least $5 million in their IRA, with average holdings of $16 million.==
==All told, 630,000 millionaires — about 1% of all IRA savers — cumulatively had more than $1 trillion in IRA accounts, accounting for 22% of all IRA assets.
Meanwhile, the other 99% — the 42 million taxpayers whose IRAs held less than $1 million — had average savings of just under $100,000.==
"In essence, Bain would value the special, riskier shares at pennies on the dollar. In one deal, employees invested about $23,000 in their IRAs. When the takeover target went public, those shares were worth about $14 million, and were worth about $23 million they finally sold the shares. That’s a 100,000% return."
Meaning, someone was risking their $23k in IRA. And looks like that investment opportunity was given to regular employees as well, meaning it wasn't a rigged up illegal trade based on some kind of insider information?
So if shares had a low valuation, employees buying these risked that they will worth nothing in the future. I.e. not really different from buying AMZN shares in IRA.
Unless, shares were valued low on purpose, and were offered to buy at that price as another form of compensation (so compensation was difference between "as valued" and "real value"). In that scenario, it appears that these employees had ordinary income, which was not declared as such... And of course, that smells "fraud"...
So the question is - was the original investment truly at risk?
Also, as my sister comment points out, rich people can still have ridiculous retirement accounts. Saying that “everyone gets a piece in retirement” ignores a large portion of our society.
Citation needed. My savings account has been paying 0.1% for about a decade now. They just introduced a new 0.0% rate on deposits over CHF 250'000 :)
Sure the ultra-wealthy can have their retirement accounts too (if they even bother), but they can't be any larger than anyone else's. Just a tiny tiny tiny sliver for them, really.
==The GAO report shows that the top 1% have saved $1 trillion in their IRAs, 22% of the total.==
(excluding your home)
There's nothing unhealthy about buybacks, that's a total misconception that needs to die. They're just treated differently from unqualified dividends for tax purposes.
>They're just treated differently from unqualified dividends for tax purposes
Tax loopholes are unhealthy in my book.
A retirement fund needs $x/month: things may work out such that they receive too much cash from dividends in any given month/quarter. So they're receiving, and being taxed on, cash that is not needed.
With buybacks a retirement fund can determine how much money they need and can cash out only what is required, and only take the tax hit on that.
What exactly do you think a retirement fund is, if not someone who get paid to reinvest?
I thought the reason for a stock buyback was that the board believes the stock is undervalued.
I can't imagine investing in a company that borrows loads of money from the government just to hand it back to shareholders. That sounds like a total scam to me and a terrible investment. I wouldn't accept stock in a company like that even for free. But what do I know. I'm not a CEO.
This is very strange explaination. As stated it sounds like stock buybacks are some sort of altruistic endeavor resulting from some kind of collective shrug.
This couldn’t be further from truth. Buybacks are the result of executive incentives to hit a certain stock valuation. You can either do this the intended way by growing the company’s value by making competing in the marketplace, or you can do it the lazy underhanded way by manipulating the stock market by creating an artificial scarcity.
You don’t get chalk this up to a faceless emergent phenomena when there are a very short list of people on FTC documents who made the decision at each and every one of the these companies.
Why do you ignore the people who choose to sell their shares to the company?
Stock buybacks move cash from the company's coffers into the hands of selling shareholders, period. Whether it's good or bad to do so at any specific time is certainly debatable, but the idea that it "manipulates" the share price is wrong, both in theory and practice.
It’s a common very common way to juice the numbers.
As for those that choose to sell, its obviously. It’s free money.
Their compensation would be based on market cap, which you can’t increase by doing a buyback.
These compensation deals are very often based on earnings per share or value per share. And you can increase it.
The link below is from the Conference Board, which is about as rock-ribbed big business friendly capital establishment types as they come. Even they caution about executive trickery here.
In this case, companies are exploiting a short term feedback loop around taxation and share price, to funnel money into the executives and primary share owners.
In the long term -- the next crash will be a doozy.
Instead, the company prefers to give the money back to shareholders in the form of capital appreciation so that they will either hold it or sell some of it and use the proceeds to buy shares of another equally wasteful corporation.
Eventually these corporate stock buybacks will lead to grotesque wealth inequality and if we're lucky, complete collapse of the international fiat monetary system which facilitates such atrocities.
_This_ doesn't make any sense. Companies don't think. They're legal entities that are controlled by a small group of people. This group of people can decide that they would prefer to do share buybacks to meet their own performance targets.
Fact 1. Companies’ brains (for this level of executive decision-making) are their boards of directors.
Fact 2. Boards of directors are made up of people elected by shareholders.
Fact 3. “Making the shareholders money” (either through dividends or equity) is the most obvious “platform” on which to get elected to this position; and “not making the shareholders money” is usually a quick way to get replaced.
Fact 4. Unlike government elections in America—but like elections in Commonwealth nations—corporate “snap elections” can be triggered at any time from a shareholder vote. This means that a board-member can be removed pretty much instantly if they start to look like they’re not serving the shareholders’ interests.
Fact 5. Members of the board usually want to stay on the board, because it confers advantages. Even if there are no explicit advantages to being on the board, they get the ability to vote in ways that work toward their own personal interests, perhaps even getting themselves sweetheart deals. Even if they don’t go for these, there might be “lobbyists” (internal to the company, from industry-organizational bodies, etc.) that are willing to bribe them to vote certain ways.
And now, the assumption, that tends to hold in cases of publicly-traded companies: shareholders in the company are, by majority, pure investors that want their share value to increase, with some making short-term plays and others going long, but neither all that interested in the company outside of its portfolio value.
Putting the facts and the assumption together, you can derive that the board is structured in such a way, and members of the board are incentivized in such a way, that their behaviour is extremely predictable, operating almost according to an algorithm, rather than acting like a “group of people” with human whims.
This emergent behavior of the group, and the clear algorithmic model that can be used to predict it, are what people mean when they talk about “what corporations want.”
It’s very similar to how a person can want things that are at odds with the “wants” of the cells that compose them (such as doing things like drinking that damage those cells, despite each cell embodying an algorithm that steers toward that cell’s own survival.)
Fact 3 is also a fairly fanciful interpretation. Large public corporate board membership can be lucrative, but is in practice not competed for by a talent pool the way that say, a CTO or VP of Sales or CFO role would be. New board members are almost always vetted and nominated by the existing board. Hence new board members are nearly always either 1. in-group members (a cynic would say "cronies") with satisficing business acumen from the same social/business milieu as the incumbents, or in the exceptional case, 2. high visibility outsiders (a cynic would say "window-dressing") from other endeavors, such as former politicians, admirals and generals, etc. A new movement adds a third possible vector in, namely being a highly qualified business person with a politically / optically desirable diversity characteristic. But once that candidate comes in, they quickly will learn that the means to stay in the Inner Ring and gain lucrative additional such opportunities is to toe the line...
I'm sympathetic to your idea of emergent behaviors of the group arising from knowable axioms about the individuals and their motivation but I think you've got some incorrect axioms about the selection and incentives of those individuals.
Really obviously. Just observe any company.
I appreciate you might have a real hard-on for capitalism, but making up stuff like you just did doesn't help.
Companies are cess-pools of politics, incomplete information, petty rivalries, and disparate power. Most shareholders are clueless, poorly informed or spreadbetting.
Given this is all true, your "facts" are all objectively false.
Employees at a company might be engaging in petty rivalries in a "cesspool"... but the board of directors is composed of extremely professional, educated and informed investors.
Also, the board primarily represents not the small independent investor, but the majority of shares which are owned by professional institutional investors, which have quite the clue and are extremely well-informed -- they have entire teams of research analysts.
The comment you responded to does accurately represent how corporate boards work, if you actually bothered to "observe any company" in reality -- specifically publicly traded ones.
That's not a valid counter to the parent's well-formed post. Speaking for myself, I have observed countless companies and those facts continue to hold true.
I appreciate you might have a real hard-on for anti-capitalism, but making up stuff like you just did doesn't help.
Fact 2 is true-ish, sort-of, but largely irrelevant. Except in extreme cases that tend to make headlines, shareholders vote for the people management selects.
And when was Fact 4 last seen in public?
I was only asked to provide a recent example, not an example of an effective campaign.
Look up the Elliott / Arconic saga to name an older example of a successful activism campaign.
If that's the case, then equity buyback is tantamount to admitting that the company has no future potential for growth. As a company's stock price reflects expected value from future growth, a buyback should therefore trigger a drop in the stock price.
But it usually doesn't, usually buybacks trigger increases in the stock price as fewer shares remain in circulation in the public market and the company improves executive flexibility by consolidating control, and as investors expect to be paid a premium over market price through the buyback program.
Why? Because private players don't care about macro performance metrics. Buybacks have nothing to do with what may or may not be the best allocation of capital in the market.
This is finance 101 really. Buybacks are just more tax efficient because they are not taxed at the time of the buyback but at the time the stock holders sell.
Simple case with a corporation worth $200 with two equal shareholders, who each paid $100 for their half of the company and are in 20% capital gains tax bracket, ignoring net investment tax of 3.8%:
Corporation pays $100 in qualified dividends, $50 to each shareholder. Each shareholder pays their capital gains tax rate on the $50. If that rate is 20% for each, then a total of $20 is collected by the US Treasury. Each shareholder then reinvests or spends the remaining $80 in the economy, while the government puts the $20 to work.
Buy Back Case:
Corporation buys back $100 of shares from 1 shareholder. No taxes were due there as there were no capital gains for shareholder 1. Shareholder 2 now owns 100% of the corporation, so their investment is now, all other thing equal, worth $200. When shareholder 2 sells, a bill for $20 is due ( $100 in capital gains x capital gains rate ). Shareholder 1 reinvests/spends $100 in economy, government gets no additional cash now, but will eventually when Shareholder 2 sells.
In the end, government gets the same $20 in tax. Benefits of the buy back are that investors are able to choose whether or not they want to cash out, whereas a dividend forces it on all investors. Downside is that government has to wait for the $20 in capital gains taxes. However, if shareholder 1 owed capital gains on the buy back ( perhaps they bought their share for $50, so would owe $10 in the $50 it made on the sale ), the government would get $10 from that sale + $20 down the road when shareholder 2 sold.
Maybe I don't understand how stock works, but wouldn't shareholder 2 still own only 50%, with the corporation still owning 50% of itself?
Think about it like ... the opposite of an IPO. Instead of dividing up the firm into n shares and selling them to investors for cash; it's buying back n/m shares and effectively canceling them.
After the buy back, there are fewer shares of the company which are proportionately more valuable assuming the market capitalization has remained the same.
How is that legal? It doesn't make sense to me that if a share is worth x% of a company that said company can just decide "Nah, you actually now only own half of that" and sell more shares.
Fake edit: I googled "how is stock dilution legal" and found this  which explained it well and now it makes sense to me. The diluted stock might be a smaller % ownership, but since the company gained value because of money coming in, the dollar value of the shares stays the same.
To say nothing of the fact that the stock might never be sold. Or the fact that capital losses can offset a gain from a buyback, unlike dividends.
If you are the seller from whom the company buys back shares, you pay taxes on your gain. If you’re a shareholder who doesn’t sell, you haven’t realized any gain.
Taxes for all shareholders are deferred until they sell. Taxes for all retail businesses are deferred until they sell their product. Taxes for all homeowners are deferred until they sell their house. Taxes for all art/collectible investors are deferred until they sell.
It’s a matter of practicality and fairness. (Don’t make someone sell an investment solely to raise the cash to pay taxes on an unrealized gain. Don’t create paperwork that’s unnecessary. The government is a patient investing partner. They’re willing to wait to take their cut when you sell. They can borrow arms-length money in the meantime far more cheaply than you can anyway.)
Sorry, but this is plain out wrong. If you are shareholder and get dividends, you pay taxes. Even before you sell.
My apologies if my text was somehow confusing to suggest that I believed shareholders didn’t pay taxes on dividends when received as income.
Furthermore, whenever shareholders sell shares after the buyback, their shares are generally worth more, so they pay increased capital gains, too.
I don't know which yields more tax revenue in the long run, but buybacks definitely generate some tax income.
The only time I could see a "buyback" influencing share price without taxation is if the buyback has a price cap, and every shareholder believes that the company is worth more, so they don't sell any shares back. This is exceedingly unlikely unless the company is very thinly traded.
From my perspective, the key difference with a buyback is the winnowing of shareholders to those who believe more-strongly in the company's future. With a dividend, every shareholder gets a small amount of cash. With a buyback, some shareholders get cash for their shares, and every other shareholder gets a bigger slice of a company that is worth less (total) money.
If the market is efficient (and it isn't, but it can be) then following a buyback, one would expect the market capitalization of the company to be smaller, as the company has paid out money. After 6 months, if the market cap of the company, plus the funds expended in the buyback, is greater than the inflation-adjusted pre-buyout market-cap, then the company has created shareholder value through some other mechanism (even if the mechanism is pure psychology).
This doesn't make sense to me. If I spend $X to buy a widget worth $X, I've paid out money, but I haven't net lost anything. I'm worth the same in total. If the widget is a share in a company, even my own, that shouldn't change the fact that the net change in total value is zero.
Look at if from a different angle: the ones selling the shares to the company are the shareholders. In aggregate, the shareholders own the company valued at $B (market cap) before the buyback, and the company valued at $A plus the cash paid $X after the buyback. If $A=$B they are creating $X out of thin air.
Even simpler to grasp: you have a business 50/50 with a partner. There is $1m in the company account, you reach an agreement and he will sell his interest back to the company for $1mn in cash. You are sole owner now. The company doesn’t have the cash anymore. How much was the company worth before? How much is it worth now?
The mechanism may be called profit, earnings, free cash flow... at least for the old-fashioned companies that bring in more money that they spend over the six-months period.
The company's cash flow is the same, but there are fewer outstanding shares, so earnings per share goes up. Earnings per share matters because when it increases that implies that future dividends per share will also increase.
If investors expect higher future dividends, that means that the stock is worth more, so it goes up.
Before the buyback, it is a company with some extra cash. After the buyback, it is just the company.
Would you tax the entity buying the stock (in case always a company since it's a buyback; which I think would be the only example of taxing a stock purchase), or the entity selling the stock (either an individual or a company, which is already potentially taxed as capital gains)?
If the goal is to tax it similar to dividends you would tax the person selling the stock but it's already taxed as capital gains, either long term (0%/15%/20%) or short term (marginal bracket rate).
does the company get a tax break if it buys its shares back at less than it sold them for?
The right answer isn't to introduce new forms of buyback taxes with unknown second-order effects (who would you tax? if the shareholder is avoiding dividend taxation, taxing the corporation isn't a great solution). The solution is to just improve the way we tax dividends and capital gains.
If only 20 widgetshares exists in the world and we each have 50% (you have 10 and I have 10) and the market for widgetshares is $200.
Should you be taxed for your theoretical $5.26 gain if I destroy 1 widgetshare but you haven't sold any. Buy backs are no different. You will pay taxes if you sell.
Personally, I think you should pay taxes if you take out a loan using the market value of the shares as collateral. This is where everything starts getting funny and companies and individuals start being able to avoid taxes forever.
At the time of death, either make the estate pay capital gains taxes on the market value of the assets, or just don't give the heirs a stepped-up basis. It will catch up eventually.
Simple example: Dividends can be made ad nauseum; Buybacks can only be made as long as there are outstanding shares.
If you think those consequences are unintended, then I have a bridge to sell you.
(All numbers in the following are made up).
Some major company a long time ago was going to pay out a dividend, and then their accountants had a great idea. Instead of a dividend, they would first do 100 for 99 stock split. Then they would do a 1% stock buyback. The shareholders would be taxed at capital gains rates instead of ordinary income rates on this.
Note that for any shareholder, the result afterward is that for every 99 shared they owned before the split and buyback they still own 99 shares. No one's actual percentage ownership of the company has changed--but they have received money from the company.
The code and/or regulations were updated to fix this. But then buybacks that were not hidden dividends were getting classified as ordinary income, too, and so further code and/or regulation changes were made to further refine this.
What it eventually ended up with is rules that looked at how ownership was distributed among the shareholders before the buyback and after the buyback, and decided if it was a disguised dividend or a legitimate buyback based on how that distribution changed.
(I haven't followed tax law for several years. Anyone happen to know if this is still there after the Trump tax changes?)
This sort of thing is a large part of why tax codes and regulations tend to be big and complicated. Even if they start out fairly simple, people find holes like that split/buyback trick, and closing those holes adds complexity. The result is that you only generally will see either very simple tax systems (like sales taxes) or very complex systems. Systems that start out in between end up moving toward very complex.
Then there’s the question of what I do with the money. If I invest it in government bonds, they get the remainder. Otherwise the money gets recirculated through consumption or other investment.
If you really think companies are too eager to return money to shareholders, take away deductibility of interest. This would dissuade companies from borrowing money to buy shares. (Effectively creating debt from equity)
Here's Amazon's SEC filing for 2018 . They paid 1+ billion on income taxes (page 37) on 11B in profits. They paid billions more in property taxes and other regulatory taxes.
Note that annual taxes also are affected by previous year issues. This is why from the same document, same page, you see them paying 1.4B on 3.9B of profit.
So getting upset about a year of no taxes with profits, when it truly does happen, is missing important nuance on what companies do pay. Check surrounding years, and read the SEC filings to see the reasons, which I've always found to be quite reasonable. It's not as bad as the pop press would have you believe when they cherry pick the outliers from one year or another.
And the pop press usually ignores all the other taxes that corporations also pay, focusing solely on income taxes, as if that were the only tax.
I trust SEC filings more than this article without supporting evidence.
From the SEC filing, on page 22, they talk about US income taxes, and state over the three years covered that they paid out billions with exact amounts in the SEC filing.
Care to provide a well sourced link with the zero federal income taxes claim supported by something legally binding like SEC filings or shareholder filings? I've never seen one to date.
If you count deferred taxes they do owe money, but that’s money that hasn’t left their pockets in that tax year. Hence 0 federal taxes for tax year 2018. That is a hard fact.
Snopes gives a further summary of how to calculate it, albeit for the tax year 2017, though equally applicable as it’s the same format as the SEC filing you linked.
If you look a few lines lower, you see that same (129) as being owed from foreign taxes. This means it is deferred since it was paid on foreign income to countries for which we likely have tax treaties. You'll also note the federal and international taxes match to under 1% as 563m and 565m, also waiting to be accounted for, to avoid double taxation on the income. It's the same thing as if you worked in one state while living in another, and had to file income taxes in both places: many states let you defer their payment and instead collect from the other state. In this case it's between countries.
>Hence 0 federal taxes for tax year 2018. That is a hard fact.
It's a very misleading fact since the deferment will likely result on them paying federal income tax for 2018. This lack of nuance spreads ignorance to people that don't understand such things are common and legal, and the companies do in fact pay substantial taxes over time.
And this "fact" ignores that this is likely the result, as explained above, of multi-country tax resolution which doesn't happen instantly on US tax time, since other countries have other tax schedules.
Again, he same link you posted showed they paid 1.1B in Federal income taxes the previous year. From year to year taxes vary due to how things roll over, so it's easy to cherry pick a year where they pay zero, but other years they pay quite a lot, sometimes too much, giving them a discount in future years.
This is clear from page 22 of the SEC filing where they state " The U.S. Tax Act enhanced and extended the option to claim accelerated depreciation deductions by allowing full expensing of qualified property, primarily equipment, through 2022. Cash taxes paid (net of refunds) were $412 million, $957 million, and $1.2 billion for 2016, 2017, and 2018. " regarding US federal income taxes.
If you want more details, p62 of  shows how the deductions were computed. The majority of the deduction was because of "excess tax benefits from stock-based compensation", which, if you google the phrase, means they overpaid taxes in previous years.
The income totals are also global. The US taxes are only on the US profits, not the global profits. These are broken out in another SEC document mentioned in the one I linked, which makes all the pieces more clear.
I agree that some years net federal income taxes are zero, but almost no company has this happen many years in a row without well deserved reason (such as massive tax loss some other year allowing them to carry forward those benefits).
In short, look at 2018 taxes in a few years, and I bet it won't still be zero. This annual rush to complain about company taxes is usually the same ignorance game, wholly ignoring the underlying reality or going back and offering retraction articles once the original is proven wrong.
On page 62, it says "Cash taxes paid, net of refunds, were $412 million, $957 million, and $1.2 billion for 2016, 2017, and 2018."
Honestly, at their most supportable, share buybacks seem to be just dividends in all but name with different tax consequences (i.e. they're a tax dodge). I'd support a law that declared the only legal way to intentionally return cash to shareholders is via dividends, to close the loophole and increase tax revenues.
In other cases, they just seem like financial engineering employed by CEOs and other interested parties to game their personal job performance metrics.
I'm unsure how you're reaching this conclusion. I said nothing about eliminating capital gains and moving to some kind of system where investors are taxed on yearly stock price fluctuations. All I proposed was to forbid companies from purchasing their own stock for the purpose of manipulating its price upward.
Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity.
>>Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity.
Buybacks has many advantages though. The biggest one is that if you want to reinvest dividends into stock you would have to pay taxes which creates a situation where you are liable for taxes even if you didn't make any money (if the price fluctuates). Buyback is like automatically reinvested dividend. I don't think it should be taxable for the reasons outlined above.
You're literally describing manipulating price by manipulating supply. If companies aren't buying back their stock to make its price go up, why are they buying it? You're contradicting yourself.
> Buybacks has many advantages though. The biggest one is that if you want to reinvest dividends into stock you would have to pay taxes which creates a situation where you are liable for taxes even if you didn't make any money (if the price fluctuates). Buyback is like automatically reinvested dividend. I don't think it should be taxable for the reasons outlined above.
I understand that stock buybacks have advantages in certain situations for some people. I'm suggesting those advantages be eliminated.
I already explained my reasoning for forbidding them.
They may seem like that from the outside looking in, but you'd be hard press to find a finance professional who agrees with that assessment. Just imagine how many incorrect notions laymen have about software and realize that the same is true in finance and any other sufficiently advanced field of knowledge.
Insiders may have expertise, but their insider-ness means one should be skeptical of their perspective for all kinds of reasons (including, but not limited to: self-interest, indoctrination, selection effects, acclimation to industry practice, etc.).
No single, monolithic set of interests exists in finance for all experts to be equally conflicted.
Taxing buybacks essentially means that you are taxing poor shareholders and rich shareholders the same.
You're essentially saying companies are choosing to do the wrong thing with their money therefore we're entitled to seize it. If that were a compelling argument, why wouldn't we treat individuals the same? And who do you think stock prices affect, with virtually all of society in the stock market either directly or through pension funds?
By keeping interest rates artificially low, stock buybacks are more appealing than capital investment or labor force expansion. It's simply a logical outcome of the policy our government is pursuing.
Deny -> extinction
Complain about costs -> extinction
Do nothing -> extinction
Do too little -> mass deaths, world war
Act decisively -> enough of us would likely survive
We're the only species on the planet that lives in both 100+ degree deserts and frozen wastelands.
As long as it's still possible to grow crops, humanity will survive.
I think the bigger problem is if we kill the ocean through sea level rise, warming, deoxygenation and acidification, then we kill 3/4 of oxygen production (but we would still have 100k-400k years supply) and 2%+ of the food supply.
Let's call climate change a "Dial-a-yield" planetary nuke that will extinct many species and most likely reduce our numbers anywhere from 1-50 million if nothing is done, e.g., pre-historic levels. We have to make drastic changes now to dial back the "yield." How bad climate change has to be is ultimately up to all people across the world, here and now.
If things get nasty, the nuclear-armed folk might just light up the 14,000 nukes lying around.
That could do it.
Polluting our water supply definitely will kill most land based species.
Don't waste your time fighting for something is an inconvenience. Fight for clean water and minimizing pollution.
According to orthodox economic theory, large US corporations must be buying back stock with earned profits and new debt[a] because they don't have better uses for that money. Rational executives and company boards looking out mainly for shareholders must have concluded that buying back shares at current prices is a better use of money than investing, you know, in the business.
In reality, executives and directors could very well be authorizing stock buy-backs to keep share prices up so their stock options remain in-the-money for as long as possible. If that's the case, the buybacks are meant more for the benefit of executives and directors than for the benefit of the business or its shareholders.
[a] Corporate debt to GDP is now at an all-time high: https://ei.marketwatch.com/Multimedia/2018/11/29/Photos/NS/M...
This plan shouldn't work because buybacks shouldn't cause stocks to rise unless the market thinks they're a good idea. For example, if a company with 1 million shares is worth $90 million and has $10 million of cash on top of that, then each share will be worth $100. If it uses that cash to buy shares it will be able to get 100 thousand of them, so it will become a $90 million company with 900 thousand shares. Each share is still worth $100.
It works fine in the short term. It even makes the company more attractive to people who think it is a bad deal - maybe I expect them to go bust in 12 months, but there is an opportunity right now for me to buy shares off Trader A and sell them to a company for a slight markup, leaching money out of a failing concern. I've actually bought government bonds using very similar logic. I can't say if my logic on that specific trade was right, but as long as traders expect buybacks in the near future the price will be artificially elevated.
Essentially, for a shortish time-frame (don't know how long) stocks trade as tokens giving access to a cash flow instead of a measure of the intrinsic value of the company.
The issue is that the price will drop immediately on the prospect of further share buybacks ending. The shareholders who didn't sell are left holding the bag - a company with less cash, more debt and likely a wealthy executive bowing out while the going is good. As soon as something goes publicly wrong that suggests the end of buybacks (maybe a corporate debt crisis of some sort) the stock prices will probably drop further than usual because the buybacks end.
Yes, but not overnight. It will take one year or one quarter or whatever would by the period required for the price to recover if it had distributed the 1% dividend. (You said an annual dividend of 1% but that seems too low for a stable business!)
The point there is the mechanics of buybacks make more sense when you think of how they behave marginally, and what it says about how the company's future earnings are being discounted.
In one case the intent is good (proper allocation of cash); in the other it is not-good (engineering financial bonuses for themselves).
Here is link to an updated data set for [a] https://fred.stlouisfed.org/graph/?id=QUSNAM770A,
See https://seekingalpha.com/article/3672916-buyback-arbitrage-i... for several examples of how smart this is. The TLDR is that this is just a company unable/unwilling to lower its dividend yield and arbitraging that yield against low interest rates. Every share it buys back represents a dividend it never has to pay again. A ~2% loan for 30 years in present-value terms is cheaper than a 3% dividend yield into perpetuity for some number of shares it can buy.
Also, buying back shares keeps stock prices high, makes each outstanding share worth more (less dilution), so more value for the remaining owners.
one way to discourage such behavior is the lengthen the time horizons of performance incentives like stock grants and bonuses (to, say, 7 years).