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Collin Harness


Taxing Share Buybacks

President Biden has signed into law the Inflation Reduction Act, which does many different things, but one of the key elements of the bill is that is will raise money for the US Federal Government. It will do this through a 15% minimum corporate tax on large organization. And it will take a cut of public companies that choose to buy back shares.

Dividends are already taxed. Congress could have chosen to increase this tax, but did not.

No one really knows what will be the long term impact to stocks and the overall market. But lets break down what is expected to happen.


    1. What are share buyback?

    Companies can do 4 things with the profits they receive from operations.

    - Reinvest back into the business

    - Pay dividends

    - Buy other businesses stock or invest in other private companies

    - Buyback their own company stock

    A stock buyback is when a public company uses cash to buy shares of its own stock on the open market.

    2. Why would a company buy back shares?

    A stock buyback happens when management of a public business pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors.

    Companies raise capital equity through the issuing new stock shares. Many companies are often issuing new shares to the public or employees while also repurchasing stock on the open market.

    Businesses do this because

    - They think the business is undervalued

    - They want to reduce the number of shares on the market and increase the stock price

    - They want to reissue new stock and raise money

    - They want to please their shareholders

    It has become really popular for businesses to buyback shares rather than pay dividends or reinvest back into the business. It can give the stock a boost over time, making management look good.

    3. 1%

    Salesforce just announced a plan to buyback $10Billion worth of outstanding stock.

    That would be $100,000,000.00 in income for the government. And this is just one company. There are many more companies doing and with bigger budgets.

    4. Bad for shareholders?

    Any tax on a public business takes away profits from shareholders. The idea is that this tax may discourage businesses from share buybacks and that will slow down share price increase.

    This translate into lower investor returns over time.

    On the other hand, business could instead choose to not buyback stock and instead pay out those funds to shareholders in the form of dividend income. Regular dividends and then special dividend payments.

    Dividends are already taxed. Corporations pay tax on earnings. Then they pay a dividend to shareholders and the shareholders are expected to pay tax on those dividends received as earnings.

    5. Good for society?

    More government tax revenue. Lower US National Debt. This new law will raise more funds for the government.

    Will this new tax raise more money than the government spends each year. It is yet to be seen. My guess is that probably not. This tax will raise government income, but the US Congress will continue to spend more funds than are brought in by taxes each year.

    More equality? Reducing the wealth gap?

    This will raise more money that can be spent on public works. And a lot of the money will go toward clean energy initiatives, which is good for society, but will it reduce the wealth gap? Most likely No.

    This bill does not give money directly to the people. It also does not give individuals equity in those businesses. This program is not social security or universal basic income. So I do not really believe this solve the wealth gap in any way.

    Is this a stepping stone?

    US Congress loves to take baby steps.

    Maybe this is the first step in higher corporate taxes. Over time the Congress could increase the tax on share buybacks to raise more money. Time will tell.

    6. Why not tax net income?

    That is going to happen.

    Historically, business been able to write off expenses, deductions and depreciation in order to not pay federal income tax. They still have to pay other forms of taxes like property tax and social services taxes, but lower federal taxes.

    But not anymore.

    Built into the bill is a corporate minimum tax for business that have profits above $1Billion per year.

    This will make it harder, but not impossible for businesses to get around paying federal income tax.

    7. What about top line revenue? Will they tax that?

    This is the difference between a business and individuals.

    Businesses are taxed on their profits = net income. They write off all of their operational expenses and then pay tax.

    Humans are required to pay tax on their top line revenue. Whatever amount you earned this year in total you have to pay tax on. You do not get to write off your groceries, rent, gas, electronic etc. as expenses.

    *There are some things humans can write as expenses, but not nearly as many as businesses.

    8. What can you do

    Nothing really. The US Congress has signed this bill into law so it will now be enacted.

    If you want stock gains or dividends you still need to invest in the market.

    If you do not like this law then you can organize and vote for the people that did not support it. You can also lobby current members to pass another law replacing this current law. But that is unlikely to happen.

    The best thing you can do is have a money plan to stick to it over time.

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