A 1% tax on companies purchasing their own shares from the market was signed into law by US President Joe Biden on Aug 16, as part of a bill addressing climate change and healthcare. Initial market reaction to the tax, expected to raise US$74 billion ($103.2 billion) over nine years, was muted, as were the predictions by analysts on the impact on corporate behaviour.
Indeed, a 1% tax is too trivial to make firms change their payout policy. The new tax will not change corporate behaviour and will ultimately make matters worse. The levy on share buybacks was apparently introduced to secure Arizona Senator Kyrsten Sinema’s support. Sinema had insisted on dropping planned tax increases on manufacturers and the private equity industry. The buyback tax is supposed to make up for the lost tax revenue. It may, however, just be the start of more to come, leading Democratic lawmaker Chuck Schumer indicated earlier this month.
“I hate stock buybacks,” Schumer reportedly said. “Instead of investing in workers, training and research, or equipment, they don’t do a thing to make the company better and they artificially raise the stock price by just reducing the number of shares. They are despicable. I’d like to abolish them”.