The Democrats are preparing to bring back a law that would slap a tax on stock buybacks, closing the popular loophole used by large companies to raise stock prices.
The Senate Democrats on Thursday unexpectedly added back a provision into their healthcare and climate package that will tax the value of corporate stock buybacks at 1%. The measure, which is expected to be voted on over the coming weekend, would help reduce the government’s budget deficit ahead of a number of new fiscal spending measures being prepared by the Biden administration.
Stock buybacks have become popular among America’s large companies, many of which use the loophole to raise the price of their shares. But, such a tax may instead motivate corporations to return the excess cash to shareholders via dividends rather than use the money to purchase back their shares. If implemented, it is estimated the tax would generate about $124 billion in revenue, but likely won’t have a significant impact on broader market rallies, which are primarily driven by macroeconomic factors such as the Fed’s interest rate decisions or overall business cycles.
“Investors buy stocks because they want a cut of the action. The action is corporate profits, earnings, and a way that investors will benefit from those earnings is an increase in share price or an increase in dividend payout,” said CFRA chief investment strategist Sam Stovall, as cited by Bloomberg. “I think what this does is sort of remove the incentive offered through share buybacks. The cut of the action would then come simply in price increases or dividend payout increases.”
Information for this briefing was found via the Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.