Investors and financial analysts appear unperturbed by the passage of a 1% tax on corporate share buybacks, saying the new law is unlikely to have a significant impact on corporate behavior. The tax is part of the Reducing Inflation Act, a comprehensive climate and health bill that President Biden is set to sign into law on Tuesday.
Share buybacks, also called buybacks, are politically divisive. Some say the practice of companies using cash to buy back their own shares is an irresponsible way to boost stock prices, reward executives, and divert cash from investing in the business. We also believe that share buybacks are a reasonable way to return excess cash to shareholders or bet the company’s excess cash on the long-term health of the business run by management. Some argue.
US government estimate to raise $74 billion over nine years from the tax that takes effect early next year. Democrats hope the tax will change behavior by encouraging business owners to invest in expanding their businesses and hiring workers, ultimately boosting the economy as a whole. It could also encourage companies to distribute cash through dividends that are subject to higher taxes paid by investors.
Financial analysts say neither of these outcomes should occur. “I don’t think it will make much of a difference,” said Ben Snyder, an equity strategist at Goldman Sachs. Bank analysts have not changed their forecasts for the number of shares the company will buy back this year or next.
Snyder pointed to a basket of shares of the most active stock buybacks, which rose along the S&P 500 this month, even after Congress passed the new tax. “It shows that investors and the stock market as a whole don’t expect a big impact from this tax,” Snyder said.
Citigroup equity strategist Scott Cronert has calculated that there will be $882 billion worth of buybacks from S&P 500 companies in 2021. The law allows companies to offset equity issuance, such as shares issued as part of employee compensation. Cronert said $620 billion of the company’s share buybacks last year were subject to the new tax.
So a 1% tax would have raised just over $6 billion in 2021, a tiny fraction of the profits earned by companies in the S&P 500.
“I think there are other, more important implications, such as what happens to earnings trends, especially in the face of inflation,” Kronert said. “That will be the bigger decision point.”