Biden’s IRA targets a corporate tactic to amass wealth and avoid taxes. Will it work? – Mother Jones – Mother Jones | Vette Leader

Figure of Mother Jones; Getty

Fight disinformation: Sign up for free Mother Jones daily Newsletter and follow the news that matters.

The Anti-Inflation Act—the blockbuster tax and climate reform bill passed by the Senate earlier this week — contains several provisions aimed at forcing businesses to pay a fairer share of their taxes. These include a rule requiring large companies to pay at least 15 percent of their profits in taxes, $80 billion in additional funding for the IRS to step up tax enforcement, and expanding the limits of the 2017 tax law on the use of Corporate losses shrink tax bills.

But there’s one more change worth delving deeper into. If passed, the IRA will levy a 1 percent tax on share buybacks, a tactic used by companies to increase their share price. Buybacks are becoming increasingly popular: in 2022, American companies are expected to spend a record $1 trillion on them. They have long caused consternation among Democrats, who accuse CEOs of using buybacks to avoid taxes and enrich themselves instead of better rewarding their employees: a “corporate sugar rush” and a “tax scam to reward CEOs, while laying off workers, ” in the words of Massachusetts Senator Elizabeth Warren.

To understand why Warren and other Democrats have been making buybacks, it helps to first look at how the corporations work and love. In a buyback, companies buy shares in their own company from investors and boost the value of the remaining shares because there are fewer shares outstanding. Buybacks are taxed at the lower capital gains rate, which tops out at 20 percent for the wealthiest households. But for those investors who don’t sell their shares back to the company, there are no taxes — even though the value of their holdings has increased. Until that investor sells the asset, their wealth grows tax-free. And thanks in part to a loophole in tax laws that allows the wealthy to pass interests on to their heirs, who can then skip paying capital gains taxes on them entirely, buybacks play a role in building generational untaxed wealth.

This tax evasion is at the root of what has made buybacks so popular. Illegal until the early 1980s, buybacks have skyrocketed over the past five years thanks to the Trump administration’s 2017 tax law. The law cut corporate taxes sharply, so many companies began investing their extra tax savings in buybacks — enriching their top executives and their investors, often at the expense of their employees. A spring report by the Brookings Institute found that 16 major American companies that employ millions of frontline workers have spent $49 billion on buybacks during the pandemic, and less than half of that to increase workers’ wages. Companies “could have increased the annual wages of their middle workers by an average of 40% if they had redirected the stock buybacks of the past four quarters to workers,” the report’s authors write.

That’s what led Sens. Ron Wyden (D-Ore.) and Sherrod Brown (D-Ohio) to propose this buyback tax. “Rather than spending billions buying back shares and handing out CEO bonuses, it’s time Wall Street paid its fair share and reinvested more of that capital into the workers and communities that make those gains possible,” he said Brown in a statement when he first proposed the VAT.

Once the IRA is signed into law – it is expected to pass the House as early as Friday – companies will have to cut 1 per cent of buybacks to send to Uncle Sam. But how much will this tax help the majority of Americans? Will it diminish the benefits that have made them a favorite tactic of wealthy executives and investors, and who will see the benefits of this change?

The answer is complicated, but two implications of this change are important to note. The 1 percent tax is charged approximately $73 billion in tax revenue for the federal government over the next decade – more than five times the revenue that would have been generated by closing private equity’s favorite tax loopholes (a cut in the final bill) and a third of the $223 billion projected by the 15 percent minimum tax for corporations. That’s a lot of dough from just 1 percent. Aside from increasing revenue, the buyback tax will reduce the benefit for top executives, company founders and foreign investors, while encouraging big companies to reinvest in their employees to boost jobs and wages. And moving from no tax to some tax is a sensible first step toward more robust taxation in the future, says Daniel Hemel, a professor of tax law at New York University Law School and co-author of a 2021 paper on the Benefits of Imposing a Buyback Tax.

Faced with the prospect of additional taxes, companies can make fewer or smaller buybacks to compensate for the extra money they have to send to the government, essentially passing the cost of the tax on to their investors. And in the face of smaller buybacks, firms that manage millions of dollars in investments and own huge blocks of shares in big companies could begin to favor buybacks less than dividends, which offer fewer tax benefits.

“CEOs basically take orders from Blackrock, Vanguard, State Street, and Fidelity because those companies own a lot of stock in every public company,” says Hemel. “So hopefully BlackRock and Vanguard are really pulling the strings.”

In the meantime, there are several other longstanding issues that Democrats hope a buyback tax will help address. The first is using buybacks to reward CEOs while lowering corporate taxes. Thanks to legislation passed in the 1990s, companies can reward their top executives with shares and then deduct the value from their tax bills at the end of the year. That means companies have used buybacks to boost their stock prices and later increase the salaries of their executives — and then deduct the total from the company’s taxes.

Then there’s what Hemel and his co-author Gregg Polsky, a professor at the University of Georgia Law School, have dubbed the “problem of the Panama Papers.” Foreigners investing their wealth in offshore havens like Switzerland or the Cayman Islands often invest that offshore money in the US market. When their stocks receive dividends, they pay an even higher tax rate than Americans — up to 30 percent. However, capital gains are taxed by the country where the funds are located – meaning they are simply not taxed at all in the case of offshore buybacks. Congress is softening a popular move by foreign tax evaders by introducing a tax designed to discourage corporate buybacks. And potentially significant cash, too: Hemel and Polsky calculate that raising the buyback tax to 2.5 percent would attract about $27 billion from foreign investors in tax havens.

Finally, Hemel and Polsky’s “Mark Zuckerberg problem” points to another tax benefit of buybacks. Named after the Facebook CEO, it refers to founders who put equity into their startups early on. These shares grow into enormous valuations that can be boosted even further through buybacks. If these founders keep those shares and pass them on after death, the next generation can cash them out tax-free thanks to the heir tax loopholes mentioned above.

A 1 percent buyback tax is certainly not going to wipe out all of these benefits. But it will soften them and usher in an incremental approach that has worked in the past to reform tax policy. The first federal income tax in 1863, Hemel points out, was just 2 percent and then expanded over the last century into the robust income tax system used today.

“Part of what made the 1 percent excise tax on buybacks possible was that it was only 1 percent,” he says. “But part of what makes the 1 percent tax attractive to progressives is that it can become something other than 1 percent.”

Leave a Comment