President Joe Biden’s push to quadruple the tax on corporate stock buybacks could act as a stealth tax on people’s pension funds, explained Breitbart Economics Editor John Carney in an interview Wednesday on Larry Kudlow’s eponymously named Fox Business show.
Biden called for a quadrupling of the one percent surcharge on stock buybacks during his State of the Union address, as Carney explained in Tuesday’s Breitbart Business Digest:
The Biden administration’s misleadingly named Inflation Reduction Act included a one percent stock buyback tax that went into effect at the start of this year. Even when it was in the process of being enacted, most analysts agreed that it would not do much to reduce plans by corporations to repurchase their shares because the one percent rate was too low to make much of a difference. Critics of the plan said the one percent was a kind of Trojan Horse tax: once it made it inside the gates of the tax code, Democrats would eventually and inevitably seek to hike it in search of more revenue. Eventually and inevitably turned out to be just a month after the one percent tax became effective.
“I thought stock buybacks or dividends is just different ways of handling returns to investors. Why is he obsessed about it?” Kudlow asked Carney.
“They seem to believe that when you buy back a stock, the money sort of goes up in flames. It can’t get reinvested. They complain that it’s hurting growth. They say they want the money invested in growth and productivity. Guess what happens when you return money to shareholders? They invested in growth and productivity,” Carney explained.
He also noted that when a company “doesn’t see another opportunity to invest its own money, it should definitely be handing back the money” to investors.
“We actually don’t want companies going out wasting it on boondoggles,” Carney added. “It’s much better to distribute it out to shareholders [and] have the collective wisdom of the markets decide where the capital is going to go rather than some CFO or CTO deciding where the money’s going to go.”
“And it’s very strange that Democrats have focused on this because essentially what they’re doing is locking money up inside of corporate treasuries. That’s what the effect of this would be. Maybe they like it because so many CEOs are sort of going woke now and they think we could direct capital if we could just keep it out of the shareholders,” he added.
As Carney noted in Tuesday’s Breitbart Business Digest, Biden’s anti-buyback argument implies that “investors are wrong about their own interests, that they are rewarding companies for buying back shares when the money could be more profitably used to ‘invest in growth and productivity’”:
Basic finance suggests this is not true. Stock prices reflect expectations of future earnings discounted for risk and time. A company that buys back stock at the expense of future earnings is likely to see its stock price decline. Executives who oversee capital plans that push down share prices are likely to become ex-executives in short order, which is why they do not usually do this. When companies buy back stock, it is usually because management believes the stock is undervalued or that they have already fully invested profits in things like R&D and have concluded that the best thing to do is return capital to shareholders.
There is also a possible stealth tax aspect to Biden’s proposal, Carney explained to Kudlow.
“The buyback tax, by the way, is also a tax on pension funds and people’s savings because, particularly [with] tax-free vehicles, they’re not paying the taxes on the gains that they’re getting. And so, what happens is if you’re taxing the company for doing the buybacks, then you’re actually taxing the pension funds that would otherwise be tax-exempt. So, they’re taxing people’s retirements when they say they’re taxing buybacks,” he said.
“Call Joe Biden and try to explain it to him. Give him a free copy of Breitbart,” Kudlow quipped.
“I told him to subscribe to the newsletter,” Carney joked.