For the past four decadesever since Ronald Reagans appointees to the Securities and Exchange Commission changed a rule and opened a floodgatestock buybacks have been a major contributor to the misshaping of the American economy.
When the top executives of a publicly traded corporation decree that their company will buy back a set amount of the companys shares, it increases the values of the remaining shares, since the underlying value of the company remains the same but the number of outstanding shares decreases. As those same top executives tend to be very handsomely rewarded for increases in the price of the companys shares, buying back stock is a legal and apparently painless way of making themselves m-fing rich. Nice work if you can get it.
The practice of buying back shares went all but unnoticed by economists until the middle of the last decade, when University of Massachusetts economics professor William Lazonick documented that the sum total of buybacks by the corporations on the S&P 500 over the preceding decade approximated the sum total of their profits. Rather than investing in new equipment or research and development or (God forbid) wage increases, Americas corporate sector was buying back its own stock, to the advantage of their leading executives and their shareholders (chiefly, of course, large shareholders), and to the detriment of, well, the economy at large. Lazonick published his findings in theHarvard Business Reviewand has continued to cover this subject through a host of articles in theProspectand other publications.
Over the past decade, the S&P 500 have repurchased more than $5 trillion of their own stock, and the rate of repurchasing is steadily increasing: Theyre pledged to buy back $1 trillion in this year alone. According to aNew York Timesanalysis, Apple devoted $423 billion on buybacks over the past decade, while spending just $233 billion on capital expenditures and R&D.
It makes perfect sense, then, that a 1 percent tax on corporate buybacks is part of the Build Back Better bill that the House has passed and sent to the Senate. Over the next decade, the tax is expected to yield roughly $124 billion to pay for climate investments, workforce development, and such that our corporations wouldnt get around to on their own.
The only argument Ive encountered against the buyback tax (other than the libertarian opposition to all taxes) is that shareholders may use the financial rewards that come to them through buybacks to invest in more productive enterprises. If the shareholders are concerned with making money from their investments, however, theyre more likely to invest in other corporations that reward them with buybacks. Indeed, its all but impossible to find a corporation that doesnt shovel the lions share of its profits to shareholders through buybacks.
Which means, if youre favorably disposed toward bolstering American productivity, industry, and competitiveness, and if the idea of promoting the general good over the fortunes of the few brings a smile to your face, the buyback tax is for you. And your country.
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