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S&P 500 Buybacks Now Outpace All R&D Spending in the US

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Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#31

Post by rhino369 »

Junk_Collector wrote: post #15
nabla9 wrote: post #3

> drowning out real investment. The conclusion that buybacks are alternative for real investments is wrong. The aggregate change between R&D and capex versus buybacks and dividends is not just some arbitrary decision. ROI from R&D and investments is slowing down for various reasons. Instead of investing more without reason to do so, companies should give profits to owners or pay off excess debt. There is wrong and ri…

I've never understood this take. Buybacks cannot be analogous to dividends because they require you to relinquish your stake in the company to realize the gains. It's a public buyout offer, not profit sharing.

That’s a difference, but they are still analogous. Not realizing the gain is actually a helpful tax avoidance strategy. I’m investing long term, I’d rather not realize the gain.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#32

Post by pc86 »

entropicdrifter wrote: post #14
pc86 wrote: post #9

Earlier quoted context omitted.

What would this look like from a practical standpoint, though? Dividends are a taxable event because you're giving someone money. In a buyback, the value of the stock simply goes up, which isn't a taxable event. How do you determine the cost basis on something like that? If there's a stock buyback over the course of 6 months, how do you determine which proportion of the price increase is due to the buyback, as oppose…

You tax the buyback itself, right? You tax the money the company is spending on its own stock. That's the only step of the transaction where money is changing hands

I'm not trying to be obtuse, I'm genuinely curious how this would work and what changes to tax law would need to be made.

Would you tax the entity buying the stock (in case always a company since it's a buyback; which I think would be the only example of taxing a stock purchase), or the entity selling the stock (either an individual or a company, which is already potentially taxed as capital gains)?

If the goal is to tax it similar to dividends you would tax the person selling the stock but it's already taxed as capital gains, either long term (0%/15%/20%) or short term (marginal bracket rate).

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#34

Post by zebrafish »

ENOTTY wrote: post #16
try-perforate wrote: post #4

Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items…

Wouldn't buybacks be taxed when the investor cashes out?

I'm thinking probably not because the investors, who are either High Net Worth Individuals or investment banks, should be hedging their tax exposure appropriately.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#35

Post by brianwawok »

entropicdrifter wrote: post #14
pc86 wrote: post #9

Earlier quoted context omitted.

What would this look like from a practical standpoint, though? Dividends are a taxable event because you're giving someone money. In a buyback, the value of the stock simply goes up, which isn't a taxable event. How do you determine the cost basis on something like that? If there's a stock buyback over the course of 6 months, how do you determine which proportion of the price increase is due to the buyback, as oppose…

You tax the buyback itself, right? You tax the money the company is spending on its own stock. That's the only step of the transaction where money is changing hands

Isn’t that a double tax? Taxed at buyback time, and taxed when shareholder cashes out and realizes their gain? Though I guess a small (10%??) tax could still make buyback tax + dividend long term gains is still less than normal income tax.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#36

Post by usaar333 »

twoodfin wrote: post #11
rjkennedy98 wrote: post #6

Earlier quoted context omitted.

At the very minimum it should be taxed the same as dividends. Essentially tax buybacks are a tax loophole for giving money back to the shareholder.

It is taxed the same as dividends, just deferred until the outstanding equity is sold, no?

Basically, which is very advantageous, because you continue to reinvest otherwise paid taxes.

To say nothing of the fact that the stock might never be sold. Or the fact that capital losses can offset a gain from a buyback, unlike dividends.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#37

Post by whatshisface »

stopads wrote: post #18
nabla9 wrote: post #3

> drowning out real investment. The conclusion that buybacks are alternative for real investments is wrong. The aggregate change between R&D and capex versus buybacks and dividends is not just some arbitrary decision. ROI from R&D and investments is slowing down for various reasons. Instead of investing more without reason to do so, companies should give profits to owners or pay off excess debt. There is wrong and ri…

It is drowning out real investment, this conclusion is correct because the companies themselves are saying so in their statements. Some companies are taking on huge debt to keep up in the buyback races despite having bad products that are losing market share. Oracle is probably the biggest example of this buyback insanity via debt, but there are many other companies doing the same thing. https://www.cnbc.com/2019/12/…

That's very interesting because that is what you would do if you wanted to liquidate a company and shut it down (on a leisurely timescale). Exactly how much of the US economy is being wound down? Maybe this is a great opportunity for new businesses with an appetite for R&D risk, maybe this is the US laying down so that China will replace it faster.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#38

Post by christophilus »

coldcode wrote: post #22
nabla9 wrote: post #3

> drowning out real investment. The conclusion that buybacks are alternative for real investments is wrong. The aggregate change between R&D and capex versus buybacks and dividends is not just some arbitrary decision. ROI from R&D and investments is slowing down for various reasons. Instead of investing more without reason to do so, companies should give profits to owners or pay off excess debt. There is wrong and ri…

Companies (often ones with business both in and outside the US) generally borrow money to pay for buybacks (Apple as an example). So corporate debt goes up, paid out of future earnings if they exist, to keep the stock price up and keep shareholders happy. But it is not making business value which ultimately is what business exists for and should reflect in the stock price. So the price is propped up for some time per…

Apple is probably a bad example, here. It's got more cash than it knows what to do with-- nearly as much cash as debt. And its debt is at a relatively low interest rate. It's arguable that while interest rates are so low, it makes sense to take on a bit more debt than usual, and when interest rates get high, it makes sense to reduce your debt ratios.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#39

Post by [deleted] »

mrep wrote: post #8
try-perforate wrote: post #4

Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items…

The government already gets first dibs through corporate income taxes. Buybacks aren't deductible from that.

[deleted]

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#40

Post by pedrocr »

Junk_Collector wrote: post #15
nabla9 wrote: post #3

> drowning out real investment. The conclusion that buybacks are alternative for real investments is wrong. The aggregate change between R&D and capex versus buybacks and dividends is not just some arbitrary decision. ROI from R&D and investments is slowing down for various reasons. Instead of investing more without reason to do so, companies should give profits to owners or pay off excess debt. There is wrong and ri…

I've never understood this take. Buybacks cannot be analogous to dividends because they require you to relinquish your stake in the company to realize the gains. It's a public buyout offer, not profit sharing.

That's only true if you own single shares that you can't divide. If the market cap of the company is divided in enough shares that everyone can sell their portion of the buyback then it can be exactly like the dividend. And investors often directly reinvest the dividends so if you are holding an index fund that reinvests dividends, buybacks or dividends are the same except for any tax differences. If you're holding an index fund you also don't have the problem of the shares not being divisible, because someone else is managing that in aggregate for you.
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