Compared to unjust income taxation, scams and fraud, deregulation, subsidies, price gouging, hedge funds, and government bailouts, even massive buybacks are small potatoes
If Democrats critical of buybacks thought the new 1 percent excise tax on stock buybacks would deter this loophole, they were either wildly optimistic or had their hands tied. Buybacks are burgeoning. Record buybacks this year will exceed the record one trillion dollars in 2022, far more than in previous years. As a tax revenue source, a hundred billion dollar tax deposit ain’t chopped liver, yet only 1/50th of last year’s tax receipts ($4.9 trillion). More than a band aid, but hardly a systemic fix to badly-broken capitalism.
Okay, anti-buyback politicians (admirable progressives like B. Sanders, Sherrod Brown and E. Warren) can now brag they sorta began to hold corporate feet to the fire. But dream on if you think that buybacks will impact anyone’s wages or dividends, new hiring or capital spending, more factories or life-saving research. Last year’s tax reform fell short, confirmed now because Democrats want a 4 percent tax. But how does anything certainly skewered as a “big woke tax increase” pass this House? Or even the next one?
That’s because the mainly amassed cash reserves that fund billion-dollar buybacks aren’t related to routine issues, like staff salaries or business expansion, charitable (or political) donations or reducing inflated prices. Its sole objective is to curb the marketable stock totals (without incurring debt). For dispassionate corporations, these categories live in separate worlds. Companies use stock buybacks as indirect return of capital that avoid taxing shareholders (like taxable dividends), boost executive compensation leverage, or improve the hallowed “profits per share” by simply shrinking the share divisor. All else being equal, fewer outstanding shares means less supply, thus higher prices. Just like oil embargoes—or wars against farmland. Big re-purchasers are generally respectable, environmentally-clean brands, namely Apple, Google, Microsoft, Meta and Cigna (though Big Oil has of late jumped in).
Buybacks illegal before 1982
Interestingly, Reaganomics delivered this non-taxable loophole largess. Before 1982 buybacks were illegal, damned as tax scams (imagine!) when America was still great. Not now, thanks to greed is good. Yet, considering the national addiction to cut taxes, this excise tax is better than nothing. But whatever its positives (for shareholders or taxpayers), this under the radar loophole must be set against serial corporate welfare policies, whether subsidies, bailouts, tax credits, deductible lobbyist/political costs – or now for chip makers direct grants for new production. Plus, profits from infrastructure /construction and climate change windfalls.
No question that buybacks provide tax-free gains for investors and such distributions imply internal financial strength. New hires loaded with stock options love buybacks. Billionaire investors love buybacks so much so that even presumed Democrats, like Warren Buffett, are up in arms—scolding the anti-buyback crowd as anti-business “economic illiterate[s] or silver-tongued demagogue[s].” Ouch, from a legendary moderate.
Buybacks that reduce available stock and boost prices are grist for Buffett-style investments, favoring big, low tech, consistently profitable behemoths (insurance, finance, prestige consumer brands, oil drillers), held for decades. Buffett leveraged buybacks as his own PR subsidy last year, allowing his venture company, Berkshire Hathaway, to boast a yearly gain (because of less stock) vs. a decline. More generally, buybacks do compensate for bear market declines and the perception one’s stock is “oversold” (thus undervalued).
The new tax does award these respectable Dems some rare bragging rights, if only baby steps against hegemony. Corporations can brag they’re paying “more of their share” (to counter sharp Biden criticism), and shareholders rarely complain (except when no-profit tech companies squander cash for employee options). But overall this tax is a cosmetic, even symbolic reform as the largest corporate octopi, free of onerous interference, exercise more clout about life on earth than all but the richest countries.
The religion of business
Not unlike Christianity, though without the popularity falloff, capitalism approximates our new, untouchable religion, even with its own dubious, dogmatic “free market” theology. And like divinities it works invisibly, even mysteriously. Take regular hedge fund salary income, unjustly taxed at lower capital gains rates—so an executive secretary (per the Buffett quip) pays higher tax rates than bosses. Even your average working Joe with decent deductions (like mortgage interest) surpass the 10 percent long-term capital gains rates (gains offset by losses, of course). Because like religion capitalism brims with paradoxes and contradictions, the “divinity of trickle-down economics” is mysteriously but not invisibly trickle-up. Inflation, favoring producers, sellers and earth miners, represents a further “tax” on working stiffs—and once raised, how rarely prices fall. The Federal Reserve, divine protector of paper assets (bonds, stocks, mortgages, bank balances), has kicked up everyone’s interest rates, a crude way of taming inflation that’s less about the money supply than Ukraine, COVID mayhem, greed, plus supply chain and sales disruptions.
Some government pump priming, like Biden’s infrastructure and computer chip legislation, have far greater potential to improve inequality by spurring development and on the ground hiring. But unless income tax rates on say over a million dollars annually are miraculously reset to the 1950’s (90 percent), equality fairness remains a pipe dream. Only from the late 1940’s to the late 1970’s, due to higher taxes on the rich and robust government spending, did the total of middle class family wealth rise significantly vs. the percentage of overall wealth owned by the super-rich. Now we’re back to the top 10 percent owning 76 percent of all U.S. wealth while the bottom 50 percent own perhaps 2 percent. In 2021, the top 1 percent of U.S. households owned over 32 percent of the total assets of the richest country in the history of the world.
Perhaps Dems should resurrect a no buyback policy (though this Supreme Court would gag on such lawless misappropriation of sacrosanct private property). Then cash-rich corporations will have to work harder to expand their business, improve employee compensation plans, what! even pay higher taxes. But with the minority right-wing lackeys strangling the House (and Senate), who expects meaningful, systemic reforms?
Without a New Progressive Era, and the painful, serious recession needed to trigger a New New Deal, where’s evidence that a political system, hard-pressed to defend itself against rampant authoritarians, can address systemic inequalities that magically allow the rich to get richer while most others stagnate? Until the working class corrects its delusions about what keeps them and their children as modern serfs, fueled in no small part by Democratic failures to offset takeaways, the status quo will grind on, with everyone complaining but change out of reach. Right now, inequality is as predictable as another decade of authoritarian Republican politics—banish the thought.
Maybe a 4 percent excise tax will discourage buybacks. Now the only way for the average American, owning few common stocks, to gain from buybacks is to own Apple or Microsoft and wait a bunch of years. Not a great investment strategy as it lacks diversity, making the average family asset worth wholly dependent on home values and perhaps insurance or pensions.
Oddly, corporations are remarkably closed to progressive solutions that would improve their low credibility, if not (as with erasing student debt) greatly improve consumer buying power—a win-win. Alas, the Era of Deceit, of insider manipulation and outright subterfuge, of making education harder and more expensive for those less able to afford it, will last as long we envision “corporations as people”—except for these marked differences: Corporations don’t have feelings and they can go on forever, buybacks or not.
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