Taxing Share Buybacks: The Cheapest Tax EVER!

August 07, 2023

I just saw a piece touting the tax on share buybacks as the basis of the investment boom we are seeing in factory construction. I’m a bit skeptical on that one, I think the incentives provided by the CHIPS Act and the Inflation Reduction Act (IRA) are a far bigger deal, but if taxing buybacks gave a little extra kick, I’m fine with that.

But there is another aspect to the tax on buybacks that deserves far more attention than it is getting. The tax on buybacks is likely going to be the most administratively efficient tax we have ever seen.

If we think about other taxes, like the individual or corporate income tax, property taxes, or even payroll taxes, the government has to do lots of footwork to determine how much is owed. This is especially true of the corporate income tax, where it has to rely on corporate accountants to tell us what their company’s profits were.

And, calculating profit is actually a difficult process, even if everyone is trying to be completely honest. There are depreciation rules that have to be applied, there are standards on the treatment of inventories, there are issues of capital gains or losses when property or subsidiaries are sold off. This is just the beginning and that’s when they are being honest. Pro tip: they are not always being honest.

Anyhow, what we have effectively done with the IRA is replaced a portion of the corporate income tax with a tax on share buybacks. We don’t have to rely on corporate accountants to tell us how much money they spent on share buybacks. We just have to look at their quarterly financial reports.

They can’t keep buybacks secret unless they are also lying to their shareholders. CEOs and top management get away with a lot of game-playing, but outright lying to shareholders on a systematic basis seems like a bit of a stretch.

The I.R.S. can monitor all the buybacks of U.S. corporations with just a few people reading over corporate statements. This means that we can raise billions of dollars of revenue, by maybe spending $1 or $2 million on I.R.S. staff. That’s a pretty damn good payback.

It also is good that corporations won’t spend a lot of money avoiding the buyback tax, since they know they can’t avoid it. This matters far more than most people seem to recognize. The point of the federal government’s taxation is to reduce demand in the economy.

We can always just print money, as the Modern Monetary crew remind us, the federal government doesn’t need taxes to pay for spending. We need taxes to reduce demand in the economy to create room for spending, without creating inflation.

However, if companies spend a lot of money – they hire workers and use capital in the form of offices, computers, and other equipment – then we have reduced demand by considerably less than the size of the tax. But with the buyback tax, this is a non-issue. We have them nailed and there is nothing they can do about it.

As it stands, the buyback tax is relatively small. The 1.0 percent tax is projected to raise $74 billion over the next decade. By contrast, the corporate income tax is projected to raise over $5,000 billion over this period, almost seventy times as much.

But maybe we can build on a win. When it becomes clear how easy it is to raise revenue from a tax that is based on returns to shareholders, we can look to increase that tax. In fact, we can look to replace the corporate income tax entirely with a tax that is based on returns to shareholders, specifically the dividends and capital gains they accrue each year.

This would have the same advantage as the tax on buybacks. We don’t need corporate accountants to tell us what the company’s profits are. We just need some people sitting around the basement of the I.R.S. reviewing corporate dividend statements and then calculating capital gains from postings on any of the hundreds of financial websites that track these data. This can all be done on a single spreadsheet. (That is, a single spreadsheet for all the companies together.)

There is no way the companies can avoid letting the I.R.S. get this information. This means it’s cheap for the I.R.S. to do it. And, there is no point in them wasting tens of billions of dollars hiring tax lawyers and accountants to game the system. It’s all a done deal.

There will be some complications. We can allow some averaging process so that companies don’t get whacked with a big bill if their stock soars in a year. We also need a formula for dividing revenue between countries for companies that operate internationally, but that is an issue we already struggle with.

Anyhow, the tax on share buybacks inadvertently opened some really big doors. It’s time to push through them.   


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