Why Stock Buybacks Are Dangerous for the Economy • Hacker News Board

Re: Why Stock Buybacks Are Dangerous for the Economy

#11

Post by downerending » Tue, May 19, 2020, 5:54 PM UTC

georgeecollins wrote: post #7

The best excuse for buybacks are that they are "tax efficient" which is another way of saying they are about tax evasion. I don't care how you feel about tax rates, if you think corporations should pay less taxes lower the rates. We just did that in the US. Less legitimate (but I would argue as common) reasons are to prevent excessive dilution from stock compensation plans and to prop up the value of shares tied to c…

Tax evasion is a crime. This is tax avoidance, which is not, and which we all do to varying degrees.

Re: Why Stock Buybacks Are Dangerous for the Economy

#12

Post by rmrfstar » Tue, May 19, 2020, 5:55 PM UTC

valuearb wrote: post #3

Yawn. If you look at why companies like Apple use debt for buybacks, it’s because the US corporate tax system traps earnings overseas. Sure the Trump tax cuts made things slightly better, but returning foreign profits still cedes about half of them to the tax man. Buybacks are just dividends with a more tax efficient method of distribution. I still don’t understand why we tax savings and investment, which is what cor…

I'm not sure how taking the corporate rate to zero addresses any of the issues raised here.

The 16th amendment only authorizes an income tax. A tax on unrealized gains would likely be a "direct" tax, which makes it a non-starter.

So, if you take the corporate rate to zero and raise the capital gains rate, you will push any remaining dividends into buybacks. Because most equities are ultimately owned by households that don't need to sell shares to finance consumption, the result will be a dramatic reduction in tax revenues.

It is perfectly legitimate to argue that the US should collect less taxes, but if that's your point you should just come out and say it.

I agree with your broader point that buybacks are themselves neutral. Corporate leverage, however, is a serious problem that needs to be addressed.

Re: Why Stock Buybacks Are Dangerous for the Economy

#13

Post by valuearb » Tue, May 19, 2020, 6:47 PM UTC

rmrfstar wrote: post #12

valuearb wrote: post #3

Yawn. If you look at why companies like Apple use debt for buybacks, it’s because the US corporate tax system traps earnings overseas. Sure the Trump tax cuts made things slightly better, but returning foreign profits still cedes about half of them to the tax man. Buybacks are just dividends with a more tax efficient method of distribution. I still don’t understand why we tax savings and investment, which is what cor…

I'm not sure how taking the corporate rate to zero addresses any of the issues raised here. The 16th amendment only authorizes an income tax. A tax on unrealized gains would likely be a "direct" tax, which makes it a non-starter. So, if you take the corporate rate to zero and raise the capital gains rate, you will push any remaining dividends into buybacks. Because most equities are ultimately owned by households tha…

Sorry, confused. I didn’t propose any tax on unrealized gains.

Raising capital gains and dividend rates to ordinary income rates should favor neither, with one exception. Capital gains would need to be indexed against inflation, otherwise in any high inflationary period they could produce effective tax rates over 100%.

And investors require dividends and buybacks, or their is no reason to own stocks. So both will continue and most stock owners will pay significantly higher tax rates on them, partially offsetting their higher dividends and returns.

But you are correct that this will probably lower tax receipts in the near term, but it will also increase investment and R&D, which will help tax receipts catch up over time.

And of it does lower tax receipts it’s also evidence we have been eating our own seed corn, capital wise.