Anything that results in stock price appreciation results in more wealth to the owners. If the stock is held “unequally” then that inequality is increased. Nothing special about stock buybacks in that regard.
DB2
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Remember, I am not an economist, but I believe that prior to legalized buybacks, the only significant legal way for companies to manipulate stock price was through dividends, which are taxed. So at least some of that stock appreciation goes back to the public fund. Otherwise excess revenues were spent on capital investment, R&D, or employee compensation. All these expenditures are taxed and benefit the general economy. They provide new work for workers.
Stock buybacks are clearly a special case.
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The decision by a business to repurchase shares is the transfer of retained earnings which are the property of the shareholders of the business to reduce the total outstanding share count. It is not a transfer of wealth from one class to another. A person that owns 1 share of stock receives exactly the same tax deferred growth on a % basis as a person that owns 1million shares.
Further, won’t someone that has more wealth be able to defer the sale of any investment vs someone with less resources? How does this make buybacks any different than someone that owns large amounts of real estate and financially doesn’t need to sell the property and realize the gain vs someone with lesser resources?
This isn’t a buy back issue but more of a tax code issue. It would be easily fixed by making the use of stocks as collateral a triggering event for the realization of a capital gain. As far as inheritance, again, this to me is a tax code issue solved by how much and what should be passed tax free to heirs.
Wealth isn’t moving from working and middle class to the wealthy in this scenario. On its most basic level, if you can save more than you spend and reinvest those savings, there is a compounding impact on your net worth. The less one is able to save or simply treads water financially, the larger the gap will grow between the two groups. I think there is a reasonable argument to be made for ending disparate tax treatment for ordinary income vs capital gains and qualified dividends.
There is no doubt the practice can be abused by shortsighted CEO’s. Again, I stay clear of those types of investments. The purpose of a business is not to serve the best interest of the American Economy. It should be to do what best serves its customers and the shareholders that own it. If it does that, it should remain viable long term, which I think benefits the Economy.
It seems to me that the focus on solutions to reduce the wealth gap are misplaced. It matters less the gap but whether people are able to move out of the lower income classes and their income relative to the cost of living. The goal is to improve the quality of one’s life and also create net savers. The taxation of buybacks at the corporate level might impact the rate of return for the wealthy but it doesn’t do anything to reduce the cost of living or raise the standard of living for the lower and middle classes.
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Now you are in favor of eliminating taxation of corporations and passing all the income through to the shareholders, who declare that income as earned income and pay income taxes on it.
No corporate income tax (so no double taxation). Eliminate virtually all corporate tax laws because they are mostly no longer applicable.
No, I am saying that investors pay taxes at a lower rate on long term capital gains and qualified dividends than individuals do on ordinary income, such as wages or interest earned in a bank account. This disparate tax treatment adds to the wealth gap favoring those where their income sources are driven largely by passive investment income.
Where did I make the suggestion that Corporations shouldn’t pay taxes?
“Ending disparate tax treatment for ordinary income vs capital gains and qualified dividends.”
Make it all ordinary (earned) income. That also eliminates the whine about “double taxation”–when profit is taxed at corporate level and then taxed again when it is distributed as dividends, etc.
Yes.
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What about manipulating the stock price by creating and selling products at huge margins? Or just at normal margins? What about by doing mergers or spinoffs? Or layoffs?
Mike
It’s literally just the opposite!!! The money that a company uses to buyback its stock goes to investors (individual, funds, pensions, insurance companies, etc), and those investors invest the money into OTHER companies, sometimes new and innovative ones. If all that money were simply reinvested inside those huge companies, they might grow, but it wouldn’t allow many of those new upstarts with great ideas to receive enough investment. Not only that, but large companies with excess cash often (almost always) become hidebound and will make substandard investments instead of better ones that would grow the US economy faster.
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Your position is that if a group gains a financial benefit, as long as all members of the group are treated equally, there is no transfer of wealth. My point is that if that group is disproportionately of one economic class, then there is a transfer of wealth to that class.
In 2022, “About 93% of U.S. households’ stock market wealth is held by the top 10%.” https://www.axios.com/2024/01/10/wealthy-own-record-share-stock-market
Over the past 10 years, corporations have earned trillions of dollars in revenue from sales to “the masses” that they used in buybacks to increase the value of their stock. That is trillions of dollars in wealth that went mostly to the wealthiest 10% tax-free. That is a transfer of wealth to the wealthy by any definition
How is this a serious question? Stock buybacks are equivalent to raising the assessed value of real estate without incurring any increase in property taxes.
Companies buy back their stocks from shareholders, the vast majority of whom are wealthy. You then assume that these wealthy shareholders will spend this wealth in ways that will benefit the general public. This is classic Trickle-Down Economics.
The difference between Apple today with its declining iphone sales and that uber-innovative company fifteen years ago is Steven Jobs, who didn’t believe in stock buybacks.
“We know if we need to acquire something — a piece of the puzzle to make something big and bold — we can write a check for it and not borrow a lot of money and put our whole company at risk,” Jobs said. “The cash in the bank gives us tremendous security and flexibility.” Steve Jobs Wasn't A Fan, But Apple's Record Stock Buyback Is So Massive It Dwarfs Valuations Of Boeing, Starbucks, EBay And 415 Other S&P 500 Companies
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60% of Americans own equities. With the disappearance of defined benefit programs (pensions) and shrinking social security benefits, most individuals are going to invest in stocks directly or through mutual funds and ETF’s to fund their retirements. Shareholders at all levels benefit from these strategies.
It’s not a wealth transfer but a trade. The consumer gave cash in return for a product it finds valuable and productive. Apple then takes those funds and reallocates the capital in areas that help with growth of the business, new product development, dividends, and then share buybacks. If I open a lemonade stand and sell you a glass of lemonade, did you transfer wealth to me or simply exchange an asset for a product?
It is a given that someone that owns more of stock will benefit more from efforts to increase its value, so what? I have no problem with someone being wealthy and making decisions that increase that wealth. I have no idea what you are referring to in term of 10% tax free. The long term capital gains rate is over 20% plus another 3.25% for certain size transactions as a result of the affordable care act.
You’ve taken my answer out of context. It was in response to the argument that wealthier shareholders never have to realize the gains created by the buying back of shares. My point was wealthy real estate investors enjoy the same advantage with tax deferred appreciation of the value of a property. They never pay the taxes until the property is sold. In fact, they have the added advantage of the ability to exchange properties. Land and Property ownership has the greatest tax advantages in the US. It has nothing to do with assessed value.
The accumulation of wealth is always going to disproportionately favor those with more accumulated wealth to invest. It is an economic reality and I have no problem with it. I am interested in policies that provide for class mobility and elevate the standard of living but I don’t care about the absolute differences in wealth. It matters little and efforts to alter this disparity seem to do nothing more than hollow out the middle class.
Not true. There are ways for a society to accumulate wealth without increasing wealth inequality. Consider the USA for example. Here is a graph showing the % wealth held by the wealthiest Americans per year.
For about 40 years after FDR, wealth inequality declined or was flat as the middle class grew in size. That all changed in the 1980s. That is when the rich began to get richer at the expense of the working and middle classes.
Coincidentally (or not), stock buybacks were legalized in 1982.
There is nothing wrong with accumulating wealth through stock appreciation. Thing is that prior to 1982, stocks appreciated either because money was invested in the company, which meant more purchases of goods or increases in employee compensation, or through dividends, which are taxed. Either way, a significant fraction of the stock appreciation went back to the general public and businesses had to focus on long-term growth through investment. That’s why we had such private enterprises like Bell Labs winning Nobel prizes and pushing US tech supremacy.
After 1982, much (if not most) of stock appreciation is occurring through buybacks, which are not directly taxed. And much (if not most) of the appreciated stock is not realized but instead used as collateral. Wealth redistribution by any definition. Since most CEOs get a big chunk of their compensation through stocks, is it surprising that buybacks are so common?
And my point was that if you increase the value of the property you pay an additional tax even if you don’t realize the profit. The tax advantage of stock buybacks is an exception that disproportionately benefits the wealthy who own most of the stock being bought back.
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I think the rise in wealth inequality is primarily a result of regressive tax policy and nonexistent fiscal policy by Congress. These regressive policies have forced the Fed to rescue the economy with monetary policy which creates money that flows upstream into the hands of those who control the wealth at the top.
Buybacks are just one of many tools used by the owners of capital to increase their wealth. I think you are making increasingly complicated arguments that miss the point. You are confusing (conflating?) cause and effect.
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I appreciate the detailed response and understand your position. I think that to some degree you are mistaking correlation with causation. There is without a doubt an increase in the gap between the ultra wealthy and the middle and lower classes. The % of wealth held by the top 1% has increase by roughly 9% since the 1990’s. So, you’ll get no disagreement from me that the gap is widening. What is unclear are the reasons and then secondarily, does it matter?
First, the below is a chart that shows the average asset allocation in 2022 for those considered Ultra High Net Worth. Personal real estate at 32% is the single largest holding, Equities are second at 18% and then 50% of the entire wealth is in other types of investments. If you combine personal real estate with Commercial Property, funds, and REITS, 54% of the average UHNWI is tied to some form or real estate investment. By that logic, is it really publicly held equities driving wealth and therefore buybacks or is it something else or is it simply difficult to know?
How the Ultra-Wealthy Invest
Below, we show where UHNWIs invest their fortunes, based on a global survey of over 500 wealth managers, family offices, and private bankers that oversee a combined $2.5 trillion in assets:
| Rank | Asset | Average Proportion of Total Wealth |
|---|---|---|
| 1 | Primary and Secondary Homes | 32% |
| 2 | Equities | 18% |
| 3 | Commercial Property | 14% |
| 4 | Bonds | 12% |
| 5 | Private Equity / Venture Capital | 6% |
| 6 | Commercial Property Funds | 5% |
| 7 | Commercial Property REITs | 3% |
| 8 | Investment of Passion (e.g. art, cars, wine) | 3% |
| 9 | Gold | 2% |
| 10 | Crypto Assets | 1% |
| 11 | Other | 5% |
Numbers may not total 100 due to rounding.
As the table above shows, primary and secondary homes make up 32% of total wealth, the largest share across assets. The average UHNWI owns 3.7 homes.
It seems to me that you are suggesting that business innovation stagnated as a result of buybacks. Yet, the US is still the HUB for innovation. Google, Apple, TSLA, MSFT, NVDA, most major drug innovation, Intuitive Surgical and on and on have and continue to advance and lead the world. Where are the great innovations in AI happening, right here in the US.
On this point, you and I are in complete agreement. I think three changes need to occur.
- Any Public businesses that buys back shares is barred from the use of the public’s tax dollars in the event of a catastrophic event, no bailouts.
- There should be no differentiation in the rate the wealthy pay on long term capital gains and the rates paid by the middle class on ordinary income. We can debate the level.
- There is a test so to speak called the economic benefit doctrine. Basically, anyone that is making use of a tax protected asset as if they have ownership of it should be taxed as if they have taken receipt. Interestingly, we allow this same carve out for loans against 401K programs, so everybody might be a little unhappy with that approach. But, I agree we should discourage collateralization, but it is a policy that would impact a whole host of other areas, including investment real estate.
Back to your original thesis, how much of the increasing gap is tied to buybacks. At a minimum, I think it’s difficult to know. What we have seen after the 1990’s is a complete abandonment of fiscal responsibility at the Federal and State Level. I think there are several factors to consider.
- The printing of money devalues earned wages and increases the value of hard assets and income producing assets. This will always favor the upper class over the lower classes.
2)Inflation pressures continue to erode the ability to save, disproportionately impacting lower classes living closer to or paycheck to paycheck. - The Federal GOVT has not adjusted income and aid programs like SSI to reflect the cost of living increases for more than a decade or more.
4)The reality is the rest of the world is also modernizing and creating more competition for jobs on a global stage. - The cost of Advanced Education has risen at a rate faster than any other expense, creating hurdles to entry and or saddling more people with debt right out of college.
- We continue to engage in tax policies that cause financial death by 1,000 cuts to the lower and middle class. Increased Property Tax Rates, sales tax rates, toll charges and whole host of fees and expenses, all increasing from municipalities to the Federal level. Worst of all, we violated Reagan’s promise that the wealthy would never pay a rate lower than the local bus driver. For some reasons, both political parties seem unwilling to address very simple changes like the carried interest rule and other selective and favorable carve outs.
Do buybacks add to the wealth gap, yes of course but so would dividends as an alternative or if the business simply stockpiled the net free cash flow. I don’t see the value in ending the practice for businesses that use it properly to buy their shares undervalued and to maximize shareholder value. As I said, I see no clear evidence that it would do anything more than make the rich slightly less rich and harm individual investors trying to build and accumulate wealth.
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I’m not sure what the split is in these groups, exactly, because a VC fund usually exits to an IPO or buyout, both ending up as equities…or they fail.
Anyway. most (much) innovation happens via small(ish) startups.
Without the wealthy who can afford to invest in VC funds (or as angel investors) where would we expect this investment to come from? 100 year old companies?
And how does this VC money compare to the top 1% in other countries?
Mike
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It’s not hard to know. The rich have been using equities to buy property and further increase wealth for a very long time. Don’t take my word for it. This is from Forbes:
This strategy has been dubbed “Buy, Borrow, Die” and has become a way for the uber-wealthy, with tax planning experts by their sides, to fund their lifestyles while minimizing their taxes along the way.
The most common way to do this is a Securities Backed Line of Credit (SBLOC), where you take a loan against the value of your stock portfolio. You could think of this as a Home Equity Line of Credit where your stocks are the collateral rather than your home. An SBLOC has a few benefits that are quite appealing, like flexible repayment schedules, easy approval (with little or no cost) and, in many cases, low-interest rates. These loans can allow tech employees to avoid selling when stocks are down (like they are in 2022) or up dramatically, as they have been for much of the past decade. How The Rich Use The Buy, Borrow Die Strategy To Avoid Large Tax Bills
Now combine the above with this tidbit also from Forbes:
See how this works? The Wealthy own lots of stock. Companies (mostly run by the Wealthy) uses profits for buybacks that artificially raises the price of their stock. The Wealthy increase in equity wealth with no increase in taxes. They use this wealth to get equity secured loans at low interest (cheap tax-free money) to buy property.
Remember Intel? Intel used to rule the Chip world. It also bragged about its humongous stock buybacks making it a darling of investors.
Intel was doing massive stock buybacks while losing market share and its tech advantage to competitors. So much so that the US now feels the need for a government program to rebuild domestic chip manufacturing with Intel getting billions of dollars in middle class tax payer dollars. Intel awarded up to $8.5 billion in CHIPS Act grants, with billions more in loans available.
So Intel is using taxpayer dollars do stuff it should have done with the money it instead gave to mostly rich stockholders in buybacks. If it smells like wealth redistribution from the middle class to the rich…
I think Intel exemplifies the rule more than the exception when it comes to the impact of stock buybacks. Boeing spent $43B in stock buybacks between 2013-2019. Do you really believe Boeing did not have a better use for all that money, like maybe not cutting production corners? GM is continuing to buyback billions of dollars in stock while shifting factories to Mexico and at the same time the US is raising tariffs on China to protect GM. Perhaps GM should care more about its working class employees than its wealthy stockholders. Perhaps GM should be more concerned about making competitive products than artificially raising the price of its stock.
Why are we so far behind China in battery technology or Taiwan in advanced chipmaking? Why do Toyota vehicles have consistently higher quality rankings than those from Ford or GM? Why can’t US car makers not named Tesla market a car that can compete with Accords and Camrys? Why can Airbus make planes that don’t have stuff falling off? Perhaps it is because a lot of American companies have got their priorities wrong, caring more about keeping their CEO and board wealthy and their stockholders happy rather than constantly improving their product and business model.
Apple is doing massive buybacks at the same time its iphone sales are stagnating and there hasn’t been a game-changing Apple product in what seems forever. Is that really the best use of the money? Perhaps Tim Cook is getting too old and traditional.
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You are making an assumption that most wealth is created by public equities and then is reallocated according to the data. You have provided no evidence to support that claim.
Regardless, the ability to borrow is fixed by disallowing that practice under the tax code not by eliminating the use of buybacks. I mentioned this in a prior response but you don’t seem to want to address it. By the way, the same process is used by people to borrow against their 401k plans and also by investors that hold real estate to collateralize future development projects.
Intel could end its buyback program tomorrow and would do almost nothing to move the innovation needle. Intel may just decide to pay larger regular dividends or larger one time distributions to shareholders. Businesses mature and then most eventually decline. It is the reality of business. Should Berkshire be barred from buying back shares as well? It is simply a serial acquirer of businesses. Should it be forced to use its excess cash flows only for further purchases?
Apple spent $29 billion on R&D efforts last year. It has plenty of cash flow to do both product development and other allocation strategies. Buybacks are simply a tool, like any subject to misuse. It does not seem to me appropriate to bar those companies that use it properly. Most importantly, it’s not for the public or government to decide capital allocation decisions. It’s for shareholders and management on their behalf to decide how they want to spend their gains.
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I offer these lines of credit to clients. They don’t work as easily as you imply.
- There is always the risk of a margin call (these are effectively margin loans that cannot be used to buy more equities).
- You can generally borrow up to a max of 50% of the account value - but very often less when you have a concentrated position.
- You can only borrow against taxable assets. Retirement accounts are excluded.
- You pay a variable interest rate that can change at any time.
- Interest is owed monthly.
Buybacks don’t have enough impact on share price to make such a convoluted strategy very effective. A 20% increase in share price would at most give you another 10% on the LOC. That’s not going to get you a lot of property.
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Not at all. I am making a set of observations.
- There has been $7Trillion in buybacks from 2009-2022. https://advisor.visualcapitalist.com/rise-of-stock-buybacks/
- Buybacks benefit stockholders by creating tax-free increases in stock prices.
- By far, most stockholders are wealthy.
- $7Trillion is a lot of wealth.
The conclusion seems obvious.
I’m not opposed to barring buybacks. US companies were also doing well prior to 1982 after all. But I could also support allowing buybacks but imposing a 4% tax on such repurchases and banning those companies from receiving federal subsidies for at least a year after.
Consider this example. Over the past 10 years, Big Pharma (the 14 or so largest US pharmaceutical companies) spent more on stock buybacks than on R&D. So when Big Pharma says that the cost of drugs is necessarily high for Americans because of the high costs of drug development, is that really true?
To put it another way, should the average American pay significantly higher medical costs in order for Big Pharma to maximize shareholder value through buybacks? Or would the average American be better off if buybacks were banned or discouraged through taxes? https://www.nytimes.com/2017/07/14/business/big-pharma-spends-on-share-buybacks-but-rd-not-so-much.html
One simple way to effectively tax wealth accumulation through equities is to put a tax on buybacks.
It is estimated that there will be $1T in US buybacks in 2025. A 4% would bring some of that money into the public coffers. The Biden Administration Wants to Quadruple Taxes on Stock Buybacks - Markets Insider
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The vast majority of shares are generally owned by mutual funds, hedge funds, pension fund managers, and other professional wealth managers. All of which are invested in by much smaller shareholders. $7 trillion is a lot of wealth spread across a wide range of investors that benefit from companies freely allocating capital as they choose.
Again, you are making the mistake that companies, if deterred from buybacks, will simply plow money back into the business or lower the price of their products or services. It’s not how businesses operate by trying to operate on the lowest margin possible. Americans pay high prices for several reasons but buybacks have nothing to do with it. $4.3billion was spent last year only on lobbying efforts by the drug and health product industries.
It’s really about simply increasing taxes and to some degree deterring the use of the strategy. The revenue was taxed when the business earned it and the shareholder is taxed again when they sell the shares. It’s just another way take a pound of flesh, just simply for smart capital allocation. In the end, it harms the small shareholder much more than it does the wealthy one. 45% of American households own mutual funds and are heavily reliant on those assets to fund retirements.
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