Two senior Democrat senators on Friday introduced a legislative proposal that would levy a 2 percent tax on corporate stock buybacks, a move that comes as Democrats scramble to fund the Biden administration’s $3.5 trillion spending plan.
Sens. Ron Wyden (D-Ore.) and Sherrod Brown (D-Ohio) said in a joint statement that the draft bill, called the Stock Buyback Accountability Act (pdf), would boost investment in the economy and raise government revenues, arguing that it would “prioritize real investment in the economy over Wall Street shareholder giveaways.”
Corporations buying back shares can drive up the stock price, benefiting investors as well as executives, whose compensation is often tied to stock performance.
S&P Dow Jones Indices estimated in January that open-market share repurchases, also known as stock buybacks, for companies listed on the S&P 500 totaled about $505 billion in 2020, according to Reuters. Stock buybacks are projected to rise to $651 billion in 2021, according to S&P data cited by Reuters.
“A few decades ago, a majority of Wall Street capital funded the real economy—wages, machinery, research, new construction. Today, much of that capital is funneled back to wealthy executives in the form of stock buybacks—which used to be illegal market manipulation—and only about 15 percent goes to the real economy,” Brown said in a statement.
“Stock buybacks are currently heavily favored by the tax code, despite their skewed benefits for the very top and potential for insider game-playing. Our bill simply ends this preferential treatment and encourages mega-corporations to invest in their workers,” Wyden said in a statement.
The Brown-Wyden legislation would prohibit companies from deducting the cost of the excise tax from their income but would exclude stock repurchases to fund an employee pension plan or employee stock plans.
Brown and Wyden’s proposal was met with a critical reception by the Tax Foundation, a Washington-based think tank. Erica York, an economist with Tax Foundation’s Center for Federal Tax Policy, argued in an analytical note that there’s a large body of evidence that supports the idea that corporations generally look to buybacks once they’ve met their debt obligations and exhausted investment opportunities.
“If lawmakers are truly concerned about instances of corporate short-termism, research indicates they should look at the root causes, such as executive pay structure or quarterly earnings reporting, not stock buybacks in general,” York argued. “Buybacks do not displace productive investments and do not come at the expense of workers—so they should not be targeted for a tax increase based on those misperceptions.”
Harvard Business Review (HBR) warned in a note last year that buybacks are risky as they deprive corporations of liquidity that might help them weather an economic downturn.
“It can make sense for a company to leverage retained earnings with debt to finance investment in productive capabilities that may eventually yield product revenues and corporate profits,” the authors wrote. “Taking on debt to finance buybacks, however, is bad management, given that no revenue-generating investments are made that can allow the company to pay off the debt.”
Biden and congressional Democrats have already been pushing to raise taxes on the wealthy and corporations to help pay the $3.5 trillion bill. Resistance from moderate members of the party, including some who represent states or districts that supported former President Donald Trump, have prompted Democrats to search for a new mix of revenue-raisers.
Multiple House committees this week began considering amendments to the $3.5 trillion bill, with the Ways and Means Committee next week expected to debate the politically charged issue of tax increases in the bill, which also contains some tax breaks for those earning less than $400,000.
Reuters contributed to this report.