Congress Misses Opportunity To Repeal IRA Stock Buyback Tax
Republicans hailed the One Big Beautiful Bill for achieving tax cuts and spending reductions. Despite this victory, the bill was missing a fix for an unwarranted tax imposed on stock buybacks by the Inflation Reduction Act.
Stock buybacks allow public companies to repurchase their own shares, and there is no good reason why the government should discourage this practice. In fact, there are several benefits associated with buybacks.
As a company grows in size, so too can the value of its stock offering, and one way to enhance stock prices is for firms to repurchase their shares at peak performance or during robust economic activity.
Stock repurchases help improve the firm’s value on the stock market and signal confidence from management, demonstrating firm health and attracting new investors. Buybacks also help investors, including middle-class investors, as the firm enhances its current market value and pays dividends. In reducing the total number of shares on its balance sheet, the company enhances the earnings potential for shareholders. Fewer shares available means each shareholder obtains a larger slice of the earnings pie, strengthening their ownership of the company. Buybacks can also be a more flexible alternative to issuing cash dividends by incentivizing retail investors to remain with the company by increasing corporate earnings per share.
Despite these benefits, many on the political left like Rep. Sean Casten, D-Ill., Sen. Elizabeth Warren, D-Mass., Sen. Chuck Schumer, D-N.Y., and Sen. Bernie Sanders, I-Vt., demonize buybacks as dollars lining wealthy pockets. That’s why, by 2023, the anti-buyback coalition was able to attach a 1% tax on all domestic stock buybacks to the Inflation Reduction Act. If Democrats regain control of Congress and the White House, that tax rate could easily rise to 4%, 8%, or even higher.
Taxing stock buybacks presents two major problems for public companies.
Invaluable research and development capital is diminished. Data shows that as companies repurchase more of their shares, they also invest in R&D as part of their overall growth. Over the past decade, corporate spending on R&D plus capital expenditures (capex) has climbed to all-time highs. Additionally, companies have enjoyed more robust cash balances at their disposal, amounting to $3.5-$5.8 trillion between 2003-2011.
The tax also increases the risk of further political interference in the markets. Proponents of the IRA’s 1% levy will likely attempt to increase this rate to something higher than 8% in order to artificially pressure companies away from buybacks and toward dividends. This is because even at a 4% rate, stock buybacks remain a more tax-advantaged option than dividends, as the Tax Policy Center model revealed.
Proponents of the buyback tax also ignore the parallel rise in record-high dividends issued by companies. According to recent 2024 data from S&P Global, “… dividends set a record $629.6 billion payments, up 7% on an aggregate basis from 2023’s $588.2 billion.” The recent surge in both buybacks and dividends demonstrates how companies have benefited from high levels of profitability. Taxing buybacks only increases the burden on new investments and introduces economic distortions in how companies make payout decisions.
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