Few corporate activities receive more ire from the left than share repurchase programs, commonly known as stock buybacks. Senators Ron Wyden and Sherrod Brown recently attempted to capitalize on this progressive angst to fund a small part of Democrats’ enormous $3.5 trillion legislative package by inserting a 2 percent excise tax on buybacks into the bill. While this will likely prove popular among the Democratic base, the dislike for buybacks is entirely unfounded.
There’s two reasons Democrats hate stock buybacks so much. The first is a class-warfare reason: buybacks increase companies’ share prices by reducing the amount of shares on the open market. Because stock ownership is traditionally thought of as the domain of the wealthy, buybacks are seen as enriching the rich — after all, to one who sees the economy as being zero-sum, anything that makes the wealthy wealthier must be bad.
The second reason is a little more serious, driven by the claim that buybacks are the product of corporate executives seeking to placate shareholders. Sacrificing long-term economic objectives, critics argue, these executives choose to engage in economically unproductive self-enrichment that takes the place of activities that would benefit the economy as a whole.
Were that true, this would be a legitimate concern. Fortunately, it’s not. There’s no evidence whatsoever that corporations prioritize buybacks over capital investments — in fact, it’s fairly clear that corporations engage in stock buybacks only after opportunities for productive investments have been exhausted.
In this sense, buybacks are truly a fairly innocuous corporate activity. They’re akin to putting spare cash in the bank, enabling the corporation to sell more shares in the future when it does need to raise investment capital. At the same time, by returning value to investors, buybacks have the added benefit of increasing the amount of available capital for other businesses that do have productive investments to make.
Displeasure at buybacks crystallized in the aftermath of the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA cut corporate taxes in order to reduce the cost of investing in America, which helps fuel higher wages. When corporations subsequently engaged in record numbers of buybacks in early 2018, critics took this as proof that corporations had put their shareholders above their workers.
That’s because they misunderstand how wages increase. Progressives mistook the argument for the TCJA as being that “giving” corporations more money would allow some of it to “trickle down” to workers. That’s false — the goal of the TCJA was to boost investment, which in turn improves worker productivity. More productive workers return more value to the business they work for, meaning that their employer must either increase worker pay or risk another business willing to pay market value poaching them.
But to a proponent of the “trickle down” criticism of tax reform, buybacks appear as proof that they chose to reward shareholders instead. In short, these critics see buybacks as proof of the falseness of an argument that TCJA advocates were never making in the first place.
It’s also not correct to view shareholders as the wealthiest of the wealthy. Data from the 2019 Federal Reserve Survey of Consumer Finances (the latest available) shows that 53 percent of Americans hold stock in some form. That’s roughly comparable to the percentage of Americans who paid taxes that same year (56 percent). Particularly among seniors and those nearing retirement, who often count on strong performance from their retirement portfolios, increased share value can be important.
Taxing stock buybacks will arbitrarily discourage a corporate activity for little reason other than progressive angst, always a poor reason for crafting policy. Instead, Democrats should perhaps ask themselves, after two straight years with $3 trillion deficits, if now is the time for yet another massive spending package.
