How will the 1% excise tax on buybacks affect dividends?

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Lyrrad
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How will the 1% excise tax on buybacks affect dividends?

Post by Lyrrad »

Due to the Inflation Reduction Act, starting January 1, 2023, there will be a 1% excise tax on some stock buybacks by publicly traded corporations.

How do you think this will effect the dividend yield of companies?

If I was holding stock in a tax protected account like a Traditional or Roth IRA, I would now prefer that affected companies distribute dividends to avoid the tax.

If I was instead holding it in a taxable account, I would most likely still prefer buybacks to reduce the tax drag of dividends.

Which group would corporations favor?

Would companies frontload some buybacks in the fourth quarter of this year? Would this result in increased corporate bond issuance to fund these buybacks?

In recent years, large cap growth funds had a lower dividend yield than large cap value funds. I have been splitting these funds up between taxable and tax protected accounts in order to optimize taxes. Would this tax advantage narrow significantly or invert?
billaster
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

The great majority of shares are held in non-taxable accounts, something like 70%, so dividends would be preferred. Unfortunately the most influential shareholders, CEOs and executives, a minority, have taxable accounts and prefer buybacks. It will be interesting to see whose interests will be served, but I can guess.
Florida Orange
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by Florida Orange »

All indications so far are that it will have no or almost no effect on buybacks.
gougou
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by gougou »

I think companies will use it as an excuse to hoard money. I don't think it will have much impact on dividends.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
RubyTuesday
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by RubyTuesday »

gougou wrote: Tue Aug 16, 2022 5:30 pm I think companies will use it as an excuse to hoard money. I don't think it will have much impact on dividends.
CXOs don’t get compensated for hoarding cash. I suspect buy backs will be accelerated this year and there will be many millions spent figuring out how to work through loop holes or undo the excise.
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billaster
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

Florida Orange wrote: Tue Aug 16, 2022 5:27 pm All indications so far are that it will have no or almost no effect on buybacks.
That would be unfortunate.

Recall that the argument has always been that dividends and buybacks are financially equivalent other than that taxable investors get a tax break. Buybacks are no harm to non-taxable shareholders.

But that is no longer the case. Non-taxable investors, the majority, will be definitely penalized by buybacks at the expense of taxable shareholders, a minority.

So CEOs that prioritize buybacks over dividends will be serving their own interests as taxable shareholders at the expense of a majority of their shareholders who are in non-taxable accounts.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by gougou »

billaster wrote: Tue Aug 16, 2022 5:52 pm
Florida Orange wrote: Tue Aug 16, 2022 5:27 pm All indications so far are that it will have no or almost no effect on buybacks.
That would be unfortunate.

Recall that the argument has always been that dividends and buybacks are financially equivalent other than that taxable investors get a tax break. Buybacks are no harm to non-taxable shareholders.

But that is no longer the case. Non-taxable investors, the majority, will be definitely penalized by buybacks at the expense of taxable shareholders, a minority.

So CEOs that prioritize buybacks over dividends will be serving their own interests as taxable shareholders at the expense of a majority of their shareholders who are in non-taxable accounts.
Do you have any data that shows non-taxable investors are the majority? As far as I know, over 40% of US stocks are owned by foreigners who must pay tax on US dividends but currently do not pay tax on buybacks. I'm not sure whether they belong to your taxable camp or non-taxable camp.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
marcopolo
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by marcopolo »

billaster wrote: Tue Aug 16, 2022 5:52 pm
Florida Orange wrote: Tue Aug 16, 2022 5:27 pm All indications so far are that it will have no or almost no effect on buybacks.
That would be unfortunate.

Recall that the argument has always been that dividends and buybacks are financially equivalent other than that taxable investors get a tax break. Buybacks are no harm to non-taxable shareholders.

But that is no longer the case. Non-taxable investors, the majority, will be definitely penalized by buybacks at the expense of taxable shareholders, a minority.

So CEOs that prioritize buybacks over dividends will be serving their own interests as taxable shareholders at the expense of a majority of their shareholders who are in non-taxable accounts.
Most executives have a huge portion of their compensation tied to stock price through options and RSUs. Stock buybacks boost stock price, dividends do not.
I think it is a pretty easy guess which they will favor, as long as it is not doing harm to the company.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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crystalbank
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by crystalbank »

It's just 1%, not the end of the world.

If a company like Apple spends $1B in a given quarter on stock repurchases, the excise tax due will be $10M, which in the grand scheme of things is a rounding error on their balance sheet.

I don't think companies will even bother rushing their future stock repurchase programs before the year ends to circumvent this tax.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

gougou wrote: Tue Aug 16, 2022 5:57 pm As far as I know, over 40% of US stocks are owned by foreigners who must pay tax on US dividends but currently do not pay tax on buybacks.
Yes, but most foreigners do pay tax on the capital gains in their own countries, generally at higher rates than the U.S., so buybacks effectively become a transfer of tax revenue from the U.S. to foreign countries.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by joer1212 »

I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points.
Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
And, now that the door has been cracked open, expect this tax to increase over time.
gougou
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by gougou »

joer1212 wrote: Wed Aug 17, 2022 12:20 pm I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points. Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
If the 1% buyback tax turns out to be a cash cow for the government then it could be increased. This is probably the biggest concern.

1% buyback tax is unlikely to have much impact by itself since most companies don’t buy back a lot of stocks. SP500 buyback yield is around 2% to 3% which means a 2 to 3 basis drag on its performance.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
MathWizard
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by MathWizard »

joer1212 wrote: Wed Aug 17, 2022 12:20 pm I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points.
Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
And, now that the door has been cracked open, expect this tax to increase over time.
Why would it be 1% ?
This only applies to stock buybacks, which would likely be a small % of the total shares outstanding.

A company can also do a reverse stock split to boost share price, and
if company A buys company B stock, which company B buys an equivalent amount of company A stock,
they have effectively done a "shared" buyback unaffected by this rule.

I'm sure some accountant will find a way to avoid tax this by using subsidiaries of a holding company.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

joer1212 wrote: Wed Aug 17, 2022 12:20 pm I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points.
Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
And, now that the door has been cracked open, expect this tax to increase over time.
It's a simple tax to avoid. Don't do buybacks.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by Jack FFR1846 »

My own employer, a mega nasdaq chip maker has quarterly employee meetings. Last one, the president addressed this but more so the "AMT" than the buy back tax as the buy back is easy to avoid. Stop buying back. In our company's case, it was publicly disclosed what our plans are for buy backs and for debt pay down. We bought another company about 3 years ago and are still paying back our loans on this. Doing this gives us better numbers which upon loan re-negotiation gives us better terms. Stock buy backs were announced periodically and will continue through this year. Dividends tend to very slowly increase over time to keep investors interested in our stock.

The "AMT" 15% minimum tax is the most concerning. We spent lots of money on R&D and on capital equipment. Part of some of our acquisitions over the years included companies with fabs. To up the capabilities of the fabs (4 inch to 6 inch, 6 inch to 8 inch, 8 inch to 300 mm or 12 inch), it means all new equipment. So spending all this money reduces taxes, right? The last many years, because of all of this spending, we paid about 9% in taxes after all the deductions. Now, with a 15% minimum tax, I'm sure that every decision to buy or not buy equipment or to spend or not spend money on research and development will be scrutinized quite a bit more and will be reduced so that the deductions don't bring us below 15%. That means a slow down in new money spent by a chip company with fabs all in the US. Like any big chip company, we use outside fabs also for specific technologies or for overflow. TSMC is the most well known of these, but there are others. While I agree that the AMT is needed for companies who have paid nothing for years, I don't know if it's good or bad. Depends on what these companies will stop doing that in the past got them deductions. With the big push on US facilities to produce chips, this is going to go against this. We have built a fab and updated several from acquisitions but going forward, we are preparing for the downturn which mostly will mean dropping shifts in the fabs. That makes each fab more expensive as the overhead to run a fab is enormous. We have no plans to build any more fabs at this point. Of course, packaging and test is done for most chip companies in the Philippines. And I doubt anyone has any plans to bring that back to the US. I know I went on a tangent away from buybacks, but I think this is all related.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

Jack FFR1846 wrote: Wed Aug 17, 2022 1:02 pm Now, with a 15% minimum tax, I'm sure that every decision to buy or not buy equipment or to spend or not spend money on research and development will be scrutinized quite a bit more and will be reduced so that the deductions don't bring us below 15%.
This shouldn't be an issue. There is a provision allowing for a depreciation deduction from the alternate book income method in computing the tax. So spending on capital equipment will still be a deduction.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by pianomedic »

billaster wrote: Wed Aug 17, 2022 1:37 pm
Jack FFR1846 wrote: Wed Aug 17, 2022 1:02 pm Now, with a 15% minimum tax, I'm sure that every decision to buy or not buy equipment or to spend or not spend money on research and development will be scrutinized quite a bit more and will be reduced so that the deductions don't bring us below 15%.
This shouldn't be an issue. There is a provision allowing for a depreciation deduction from the alternate book income method in computing the tax. So spending on capital equipment will still be a deduction.
Hope Jack FFR1846 corrects me if I’m wrong, but the way I read his post, his company currently uses the deductions to get to a 9% tax. With a hard minimum tax rate of 15%, those deductions won’t allow his company to go below the 15% rate. So they will scale back further fab rollouts since the depreciation deduction is worth less than it is under current tax law. They’re essentially losing out on a 6% reduction in taxes from what I’m reading and understanding here.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

pianomedic wrote: Wed Aug 17, 2022 3:31 pm
billaster wrote: Wed Aug 17, 2022 1:37 pm
Jack FFR1846 wrote: Wed Aug 17, 2022 1:02 pm Now, with a 15% minimum tax, I'm sure that every decision to buy or not buy equipment or to spend or not spend money on research and development will be scrutinized quite a bit more and will be reduced so that the deductions don't bring us below 15%.
This shouldn't be an issue. There is a provision allowing for a depreciation deduction from the alternate book income method in computing the tax. So spending on capital equipment will still be a deduction.
Hope Jack FFR1846 corrects me if I’m wrong, but the way I read his post, his company currently uses the deductions to get to a 9% tax. With a hard minimum tax rate of 15%, those deductions won’t allow his company to go below the 15% rate. So they will scale back further fab rollouts since the depreciation deduction is worth less than it is under current tax law. They’re essentially losing out on a 6% reduction in taxes from what I’m reading and understanding here.
Corporations pay tax on their net income. So its 15% after deducting depreciation. In other words, capital investment still reduces your taxes, same as before.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by bberris »

gougou wrote: Wed Aug 17, 2022 12:33 pm
joer1212 wrote: Wed Aug 17, 2022 12:20 pm I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points. Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
If the 1% buyback tax turns out to be a cash cow for the government then it could be increased. This is probably the biggest concern.

1% buyback tax is unlikely to have much impact by itself since most companies don’t buy back a lot of stocks. SP500 buyback yield is around 2% to 3% which means a 2 to 3 basis drag on its performance.
Performance of what? If it's earnings, I agree with your calculation. If it is stock price, I think it will drag down everything. Since the value of stocks is ultimately determined by what can be had by shareholders over time, the total stock market should be devalued 1 %.

I wonder how a total liquidation would be treated. This isn't a buyback, but it is a mandatory distribution to shareholders. A lot of closed-end funds have termination-liquidation dates.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by gougou »

bberris wrote: Wed Aug 17, 2022 4:55 pm
gougou wrote: Wed Aug 17, 2022 12:33 pm
joer1212 wrote: Wed Aug 17, 2022 12:20 pm I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points. Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
If the 1% buyback tax turns out to be a cash cow for the government then it could be increased. This is probably the biggest concern.

1% buyback tax is unlikely to have much impact by itself since most companies don’t buy back a lot of stocks. SP500 buyback yield is around 2% to 3% which means a 2 to 3 basis drag on its performance.
Performance of what? If it's earnings, I agree with your calculation. If it is stock price, I think it will drag down everything. Since the value of stocks is ultimately determined by what can be had by shareholders over time, the total stock market should be devalued 1 %.

I wonder how a total liquidation would be treated. This isn't a buyback, but it is a mandatory distribution to shareholders. A lot of closed-end funds have termination-liquidation dates.
If everything else stays the same, this is like a 2 to 3 basis point expense ratio charged by the government. That's almost negligible.

SPY doesn't trade at a discount vs VOO even though SPY's expense ratio is 6 basis point higher per year.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by psteinx »

gougou wrote: Wed Aug 17, 2022 5:03 pm
bberris wrote: Wed Aug 17, 2022 4:55 pm
gougou wrote: Wed Aug 17, 2022 12:33 pm
joer1212 wrote: Wed Aug 17, 2022 12:20 pm I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points. Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
If the 1% buyback tax turns out to be a cash cow for the government then it could be increased. This is probably the biggest concern.

1% buyback tax is unlikely to have much impact by itself since most companies don’t buy back a lot of stocks. SP500 buyback yield is around 2% to 3% which means a 2 to 3 basis drag on its performance.
Performance of what? If it's earnings, I agree with your calculation. If it is stock price, I think it will drag down everything. Since the value of stocks is ultimately determined by what can be had by shareholders over time, the total stock market should be devalued 1 %.

I wonder how a total liquidation would be treated. This isn't a buyback, but it is a mandatory distribution to shareholders. A lot of closed-end funds have termination-liquidation dates.
If everything else stays the same, this is like a 2 to 3 basis point expense ratio charged by the government. That's almost negligible.

SPY doesn't trade at a discount vs VOO even though SPY's expense ratio is 6 basis point higher per year.
That's because there's an arbitrage mechanism.

There's no comparable arbitrage when the tax regime changes. You can't choose to pay taxes personally, or have your stock holdings pay for you, at the prior tax rates.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by pianomedic »

billaster wrote: Wed Aug 17, 2022 4:00 pm Corporations pay tax on their net income. So its 15% after deducting depreciation. In other words, capital investment still reduces your taxes, same as before.
Thanks for this clarification. Been over a decade since I’ve thought about accounting, had forgotten that aspect. So in theory shouldn’t stifle innovation then if I’m now interpreting things correctly?
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by grabiner »

New York Times article: Why the 1 Percent Buyback Tax Doesn’t Scare Investors

Quote from the article: "Scott Chronert, an equity strategist at Citigroup, calculated that there were $882 billion worth of buybacks in 2021 from companies in the S&P 500. The law would allow companies to offset share issuance — such as shares issued as part of employee compensation — which means that $620 billion of those companies’ buybacks last year would have been subject to the new tax, Mr. Chronert said."

Thus, based on the 2021 numbers, 70% of buybacks would be taxed.
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Lyrrad
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by Lyrrad »

grabiner wrote: Wed Aug 17, 2022 10:14 pm New York Times article: Why the 1 Percent Buyback Tax Doesn’t Scare Investors

Quote from the article: "Scott Chronert, an equity strategist at Citigroup, calculated that there were $882 billion worth of buybacks in 2021 from companies in the S&P 500. The law would allow companies to offset share issuance — such as shares issued as part of employee compensation — which means that $620 billion of those companies’ buybacks last year would have been subject to the new tax, Mr. Chronert said."

Thus, based on the 2021 numbers, 70% of buybacks would be taxed.
Estimate based on 2021 numbers:

SP500 Market Cap as of end of 2021 = ~$40 trillion
Buybacks in 2021 subject to taxation under 2023 rules: ~$600 billion
Excise Tax on 2021 buybacks under 2023 rules: ~$6 billion

Tax as a percentage of total US market capitalization in 2021 = $6 billion/$40 trillion = 0.00015 = 0.015%.

So, it seems like the cost will be about one and a half basis points a year.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

Lyrrad wrote: Wed Aug 17, 2022 11:03 pm
grabiner wrote: Wed Aug 17, 2022 10:14 pm New York Times article: Why the 1 Percent Buyback Tax Doesn’t Scare Investors

Quote from the article: "Scott Chronert, an equity strategist at Citigroup, calculated that there were $882 billion worth of buybacks in 2021 from companies in the S&P 500. The law would allow companies to offset share issuance — such as shares issued as part of employee compensation — which means that $620 billion of those companies’ buybacks last year would have been subject to the new tax, Mr. Chronert said."

Thus, based on the 2021 numbers, 70% of buybacks would be taxed.
Estimate based on 2021 numbers:

SP500 Market Cap as of end of 2021 = ~$40 trillion
Buybacks in 2021 subject to taxation under 2023 rules: ~$600 billion
Excise Tax on 2021 buybacks under 2023 rules: ~$6 billion

Tax as a percentage of total US market capitalization in 2021 = $6 billion/$40 trillion = 0.00015 = 0.015%.

So, it seems like the cost will be about one and a half basis points a year.
People seem to get all exercised by 1 or 2 basis points and recommend switching to ETFs. Perhaps the more interesting number is that 30% of shareholder buyback income is going into the pockets of management and other employees.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by tomsense76 »

Probably not much. According to this source, which leans on a previous NBER paper (pdf):
...1 percent tax rate on share repurchases could induce a roughly 1.5 percent increase in corporate dividend payouts.
It's worth remembering that the reason a company does a buyback or pays a dividend is mostly driven by the fact they can't find a more way to invest the money in the company. Following that logic, they won't care whether the government gets a 1% cut of that money they are giving back to investors or not.

Ofc investors could feel differently (and they could band together to change company policy). Though when it is a tax of 1% vs. a tax of 15% (or more) via a dividend, it is quite likely an investor would still prefer the buyback.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by tomsense76 »

billaster wrote: Tue Aug 16, 2022 4:19 pm The great majority of shares are held in non-taxable accounts, something like 70%, so dividends would be preferred. Unfortunately the most influential shareholders, CEOs and executives, a minority, have taxable accounts and prefer buybacks. It will be interesting to see whose interests will be served, but I can guess.
By non-taxable accounts do you mean retirement accounts? If so, they are exempt (source):
The 1% share repurchase excise tax generally does not apply to:
...
* Repurchases of stock, which are contributed to employee-sponsored retirement plans, employee stock ownership plans, or similar plans;
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

tomsense76 wrote: Thu Aug 18, 2022 12:37 am
billaster wrote: Tue Aug 16, 2022 4:19 pm The great majority of shares are held in non-taxable accounts, something like 70%, so dividends would be preferred. Unfortunately the most influential shareholders, CEOs and executives, a minority, have taxable accounts and prefer buybacks. It will be interesting to see whose interests will be served, but I can guess.
By non-taxable accounts do you mean retirement accounts? If so, they are exempt (source):
The 1% share repurchase excise tax generally does not apply to:
...
* Repurchases of stock, which are contributed to employee-sponsored retirement plans, employee stock ownership plans, or similar plans;
I'm not sure what that exemption means, but it is irrelevant. The excise tax is not levied against individual shareholders. It is levied against the company. Returns for all shareholders are reduced equally by the amount of tax the corporation pays.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by joer1212 »

billaster wrote: Wed Aug 17, 2022 12:43 pm
joer1212 wrote: Wed Aug 17, 2022 12:20 pm I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points.
Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
And, now that the door has been cracked open, expect this tax to increase over time.
It's a simple tax to avoid. Don't do buybacks.
And do what instead, raise dividends, which will also raise my taxable income in my non-tax-advantaged account?
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

joer1212 wrote: Sun Nov 27, 2022 4:17 pm
billaster wrote: Wed Aug 17, 2022 12:43 pm
joer1212 wrote: Wed Aug 17, 2022 12:20 pm I recently read somewhere that the 1% excise tax will create a 1% performance drag on stocks. On a 10% annual return, that's 10 basis points.
Don't know if this is true or not, but I can't imagine how this legislation can possibly be good news for investors.
And, now that the door has been cracked open, expect this tax to increase over time.
It's a simple tax to avoid. Don't do buybacks.
And do what instead, raise dividends, which will also raise my taxable income in my non-tax-advantaged account?
Are you suggesting that corporations should intentionally decrease their earnings by paying higher taxes in order to benefit a minority of taxable shareholders at the expense of a majority of not-taxable shareholders?
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by Makefile »

billaster wrote: Sun Nov 27, 2022 6:14 pm Are you suggesting that corporations should intentionally decrease their earnings by paying higher taxes in order to benefit a minority of taxable shareholders at the expense of a majority of not-taxable shareholders?
How is this any different than the price of the repurchased shares simply being 1% more, if officers still believed that the shares remained underpriced even with that premium?
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by firebirdparts »

billaster wrote: Sun Nov 27, 2022 6:14 pm Are you suggesting that corporations should intentionally decrease their earnings by paying higher taxes in order to benefit a minority of taxable shareholders at the expense of a majority of not-taxable shareholders?
We won't have to wait long to find out.

But I think yes, that's exactly what they'll do. I'd bet a dozen donuts on it.
This time is the same
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

firebirdparts wrote: Mon Nov 28, 2022 3:48 pm
billaster wrote: Sun Nov 27, 2022 6:14 pm Are you suggesting that corporations should intentionally decrease their earnings by paying higher taxes in order to benefit a minority of taxable shareholders at the expense of a majority of not-taxable shareholders?
We won't have to wait long to find out.

But I think yes, that's exactly what they'll do. I'd bet a dozen donuts on it.
I agree because there there big incentives for self-dealing by corporate executives for a couple of reasons.
1. If executives hold company stock, their dividends will likely be taxed at high rates, including NIIT.
2. And if they hold stock options, they get nothing from dividends but would instead benefit from price increases due to buybacks.
Two big self-serving reasons for executives to prefer buybacks over dividends, even though the majority of shares are owned by non-taxable accounts.
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Re: How will the 1% excise tax on buybacks affect dividends?

Post by WoodSpinner »

billaster wrote: Tue Aug 16, 2022 4:19 pm The great majority of shares are held in non-taxable accounts, something like 70%, so dividends would be preferred. Unfortunately the most influential shareholders, CEOs and executives, a minority, have taxable accounts and prefer buybacks. It will be interesting to see whose interests will be served, but I can guess.
Is there a source for this? Given retail investors are a small part of the market, I am puzzled how this could be true.

Perhaps I am missing something….

WoodSpinner
WoodSpinner
billaster
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Joined: Wed Apr 27, 2022 2:21 pm

Re: How will the 1% excise tax on buybacks affect dividends?

Post by billaster »

WoodSpinner wrote: Mon Nov 28, 2022 7:45 pm
billaster wrote: Tue Aug 16, 2022 4:19 pm The great majority of shares are held in non-taxable accounts, something like 70%, so dividends would be preferred. Unfortunately the most influential shareholders, CEOs and executives, a minority, have taxable accounts and prefer buybacks. It will be interesting to see whose interests will be served, but I can guess.
Is there a source for this? Given retail investors are a small part of the market, I am puzzled how this could be true.

Perhaps I am missing something….

WoodSpinner
Retail investors have most of their portfolios in non-taxable IRAs and defined contribution plans like 401(k)s. Large non-taxable institutional investors include state and city pension funds, corporate pension funds, charities, endowments and foreign sovereign wealth funds.
Caduceus
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Joined: Mon Sep 17, 2012 1:47 am

Re: How will the 1% excise tax on buybacks affect dividends?

Post by Caduceus »

To a firm, it will simply be like paying 1% more for the stock you wanted to buy back. My guess is that it will have little to no impact on capital allocation decisions.
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