Senate Democrats propose 2% tax on stock buybacks to help fund $3.5 trillion spending plan

• A tax on corporate stock buybacks could fund part of Democrat’s $3.5 trillion spending plan.
• Senators Ron Wyden and Sherrod Brown floated the idea of a 2% tax on stock buybacks on Friday.
• It is estimated that the Stock Buyback Accountability Act could raise more than $100 billion over the next decade.
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Senators Ron Wyden and Sherrod Brown are proposing a tax on corporate stock buybacks to help fund part of Democrat’s $3.5 trillion spending plans.

On Friday, senior Senators Wyden and Brown unveiled the Stock Buyback Accountability Act, which would impose a 2% tax on company share repurchases. It is estimated that the tax could raise more than $100 billion over the next decade, according to an aide to Brown.

“Instead of spending billions driving up their own stock prices to line executives’ pockets, Wall Street should be reinvesting in workers,” Senator Brown said on Friday.

Stock buybacks are often viewed as a form of financial engineering that allows companies to boost their earnings per share results even if revenue is flat or down, as it reduces the number of shares outstanding. And if a CEO has his or her pay tied to EPS results, stock buybacks could serve as an incentive for them to help reach their compensation targets.

The criticism of stock buybacks hit new heights following the passage of former-President Donald Trump’s 2017 tax cut, as many businesses that saved money on taxes spent a bulk of those savings to buy back more stock rather than invest it back into their business and employees.

But others view stock buybacks as a more efficient way to return capital to shareholders, as it increases an investors ownership in a company with no tax consequences, as opposed to dividend payments which are often taxed as ordinary income. Berkshire Hathaway CEO Warren Buffett has favored stock buybacks over dividend payments as the company looks to make use of its growing cash pile.

In 2019, corporate stock buybacks surged to more than $700 billion, and JPMorgan estimates that a record $1 trillion in corporate stock buybacks could be made over the next year.