Remember the discussion about the 1% tax on stock buybacks? It’s starting to get a little more real. President Biden signed the Inflation Control Act of 2022, which included a 1% tax on stock buybacks, but nobody’s paid the tax yet. The public comment period for the Treasury Department’s rules formalizing the 1% tax on stock buybacks ended on Tuesday. This should pave the way for the Treasury Department to issue a final rule, possibly as soon as next month. That means some of America’s biggest companies may soon be getting tax bills. $9.4 Billion Tax Bill S&P Global’s Howard Silverblatt estimates that the 1% stock buyback tax for S&P 500 companies would be $9.4 billion over the five quarters (January 1, 2023 to April 1, 2024) when taxes are likely to be due. But the bulk of the tax would be spread across about 25 companies, which would pay about two-thirds of the total tax. Apple, the biggest buyer of its own stock, would be taxed the most, at $1.07 billion. 1% Tax on Stock Buybacks: Who Pays How Much (Q1 2023 to Q1 2024)Apple $1.07 billionAlphabet $772 millionMeta $449 millionMicrosoft $217 millionNvidia $211 millionExxon Mobil $207 millionWells Fargo $178 millionChevron $175 millionT-Mobile $171 millionVisa $151 millionSource: S&P GlobalWhile this sounds like a lot of money, it pales in comparison to the revenue and profits these companies generate. For example, Apple generated $476 billion in revenue and $124 billion in profits in the five quarters between 2023 and Q1 2024, Silverblatt told me. What is the goal here? The goal seems to be to discourage US companies from buying back their own stock, and instead encourage them to hire more people and invest more in capital expenditures.If the goal is to discourage buybacks, the strategy has not been successful. S&P 500 total buybacks were $820 billion over the past 12 months, not a record, but not far from the all-time high of $923 billion for a calendar year. “We’re likely to break that old record this year,” S&P Global’s Howard Silverblatt told me. There are rumors that President Biden wants to raise taxes, perhaps to 4%. What would it take to really discourage buybacks? “My guess is it would need to be at least 2% or 2.5%,” Silverblatt told me. Would higher taxes encourage American companies to hire more people? The theory is that imposing an extra tax on stock buybacks would encourage companies to invest in hiring more people or making capital expenditures (factories, buildings, or more technology) rather than buying back their own stock. The theory is laudable, but the evidence is shaky. The decision to return cash to shareholders (either dividends or share buybacks) or to invest in more jobs or make capital expenditures (building factories, opening laboratories, buying equipment and land) ultimately hinges on economic growth. That is, higher growth means companies are more willing to invest in hiring more people or making capital expenditures. The simple truth is that many companies believe that their business has limited growth opportunities. If we make the reasonable assumption that companies operate primarily for the benefit of shareholders, returning cash rather than using it to hire more people or make capital expenditures may be a perfectly rational choice. In recent years, share buybacks have become the preferred way to return cash to shareholders. This is because share buybacks are more flexible than dividends. 2023: How U.S. companies used their cash flow Share buybacks $765 billion Capital expenditures $597 billion Dividends $588 billion Source: S&P Global Bottom line: Companies will rationally use their cash flow for jobs and capital expenditures if there is an opportunity to grow the company. Taxing the money is unlikely to change anyone’s mind. The money may be put into dividends, but it still gives cash back to shareholders.
CHOOSE LANGUAGE
SELECT LANGUAGE BELOW
