Remember all that talk about a 1% tax on buybacks? It’s about to get a little more real. President Biden signed the Inflation Reduction Act in 2022 , which included the 1% tax on buybacks, but no one has paid their bill yet. The public comment period for the Treasury Department’s rule formalizing the 1% tax on buybacks closed Tuesday. This should clear the way for Treasury to issue its final rule, perhaps as soon as next month. That means some of the largest companies in America may soon be getting a tax bill. A $9.4 billion tax bill Howard Silverblatt at S & P Global estimates that for the five quarters where tax may be due (January 1, 2023-April 1, 2024), companies in the S & P 500 would owe $9.4 billion from a 1% buyback tax. However, much of the bill would be spread out between roughly 25 companies, which would pay about two-thirds of the total tax. Apple , as the largest buyer of its own stock, would see the largest bill: $1.07 billion. 1% tax on buybacks: who owes what (Q1 2023 through Q1 2024) Apple $1.07 b. Alphabet $772 m. Meta $449 m. Microsoft $217 m. Nvidia $211 m. Exxon Mobil $207 m Wells Fargo $178 m. Chevron $175 m. T-Mobile $171 m. Visa $151 m. Source: S & P Global While this sounds like a large amount of money, it pales in comparison to the revenues and profits these companies generate. Apple, for example, made $476 billion in revenue and $124 billion in profits over the five quarters from 2023 to the first quarter of 2024, Silverblatt tells me What’s the goal here? The goal seems to be to discourage corporate America from buying back stock and instead invest more in hiring people and making capital expenditures. If the goal is to discourage buybacks, the strategy is not succeeding. Total buybacks for the S & P 500 are at $820 billion in the last 12 months, not a record but not far from all-time high for a calendar year of $923 billion either. “We have a good shot at beating that old record this year,” Howard Silverblatt from S & P Global tells me. There has been noise that President Biden wants to increase the tax, perhaps to as high as 4%. What would it take to really discourage buybacks? “My guess is you would have to get it at least to two or two-and-a-half percent,” Silverblatt told me. Will higher taxes make corporate America hire more people? The theory is that imposing additional taxes on buybacks will encourage companies to invest in hiring more people or make capital expenditures (more plants, buildings, or technology) rather than repurchase their own stock. That theory, while laudable, rests on shaky foundations. The decision to return cash to shareholders (either as a dividend or a buyback), or to invest in more jobs or make capital expenditures (building factories, opening labs, buying equipment and land) boils down to economic growth: higher growth means companies will be more willing to invest in hiring more people and making capital expenditures. The simple truth is that many corporations see limited opportunities for growth in the businesses they are in. If they make the reasonable assumption that corporations are run primarily for the benefit of shareholders, returning cash rather than using the cash to hire more people or make capital expenditures may be a perfectly rational choice. In recent years buybacks have become the preferred method of returning cash to shareholders. That’s because buybacks are more flexible than dividends. 2023: What corporate America did with its cash flow Buybacks $765 b. Capital expenditures $597 b. Dividends $588 b. Source: S & P Global The bottom line: corporations will rationally use cash flow on hiring and capital spending when there are opportunities to grow the company. It’s unlikely taxing the money is going to change anyone’s mind. Money may be diverted to a dividend, but that is still returning cash to shareholders.
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