Inflation Mitigation Act taxes stock buybacks, one of first new corporate taxes in decades – The Washington Post | Vette Leader

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Democrats are poised to pass the first new corporate taxes in a generation as part of President Biden’s sweeping climate, health and tax bills, including a levy on a corporate financial maneuver once considered illegal market manipulation.

In addition to a proposed 15 percent minimum tax on large corporate profits, lawmakers will pass an all-new 1 percent consumption tax on corporate stock buybacks.

Congress has estimated the stock buyback tax will raise $74 billion over the next decade and is key to funding some of the big spending on initiatives, including loans to buy electric cars. The tax could net some of the country’s biggest share buybacks, including tech giant Apple, Google’s Alphabet and Facebook’s Meta.

The Democrats’ proposal opens a whole new arena for corporate taxes, which are levied against a company’s financial calculations after years of relative stability in the US corporate tax structure. In the past, companies were taxed on their profits and employees on their wages.

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“Very rarely does an entirely new revenue stream emerge,” said Mark Mazur, the former Biden administration’s assistant treasury secretary for tax policy. “This is a big deal. It will generate a lot of revenue and has the potential to change behavior.”

The 1 percent tax on a company’s repurchased stock was a last-minute addition to the Inflation Control Act, which passed the Senate on Sunday and is scheduled for a vote in the House of Representatives on Friday, where passage appears likely.

According to tax policy experts, taxing buybacks is a relatively new revenue-raising idea, at least in Democratic tax circles. In 2020 when he was running for President Biden criticized buybacks. His 2023 budget proposal also calls for new restrictions on buybacks.

In September, Democratic Sens. Ron Wyden (Ore.) and Sherrod Brown (Ohio) introduced legislation for a 2 percent tax and built the proposal into a “menu” of revenue options to balance Biden’s social spending agenda, Wyden should be included, the Washington Post said.

When Sen. Kyrsten Sinema (Ariz.), a moderate Democrat, raised concerns about other tax provisions in the Inflation Reduction Act, the party rallied around Wyden and Brown’s buyback tax as a replacement.

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“When we were on the home stretch looking for additional revenue [of negotiations]we were ready,” said Wyden.

The provision in this version of Biden’s tax and spending agenda is a win for Democrats who have been looking for a political victory to woo on the campaign trail ahead of the midterm elections.

“We’ve seen the trend toward increased share buybacks accelerating, and it’s part of this very distorted economic system,” Wyden said. “I want an economic system that gives everyone in America a chance to thrive.”

Stock buybacks, in which companies buy shares of their own securities, have reached historic highs during the coronavirus pandemic. As companies reported record profits and amassed heaps of cash, executives used buybacks to increase the value of their company’s stock.

In the past 12 months, the top 100 US companies bought $816 billion worth of their own stock, according to Bloomberg data.

Experts say the tax is modest and unlikely to discourage companies from buying back shares. Inquiries from Apple, Alphabet and Meta about the tax proposal have not been answered.

Liberals have long attacked the practice as a tax-free way for companies to concentrate power and reward executives rather than spend their money raising wages, making products cheaper, or investing in new technology.

But policymakers also say it adds substance to Democrats’ years of talk about curbing corporate power and requiring big corporations to shoulder more of the country’s tax burden.

Companies typically return funds to investors in two ways: dividends or buybacks. The buyback maneuver allows investors who wish to sell their shares while increasing the value of the security for the remaining shareholders.

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It’s also mostly tax-free for the time being. Corporations do not pay taxes on purchases and investors generally only pay capital gains tax on the sale of their shares. Buybacks also allow companies more leverage in the market by holding on to equity and creating artificial demand for their shares.

For these reasons, buybacks were illegal until 1982. The Securities and Exchange Commission lifted that ban after reasoning that companies needed to buy back stock for legitimate reasons, said Will McBride, vice president for federal tax policy at the conservative think tank Tax Foundation.

Some companies instead used the new authority to keep a close eye on their share price and find new ways to lower their tax bills.

While a new tax on these transactions is an effective revenue generator, McBride said, it risks burdening companies or forcing them to use less efficient methods of returning money to investors.

“The overall picture is that it introduces another element of friction into the story of the business model to democratize investment or, from a business perspective, use a larger pool of investors to monetize assets,” he said.

And in recent years, tech giants have used buybacks to control the market prepare for acquisitions.

It can also be a sign of consolidation in the market. Companies buying back stock have nothing better to do with their money, said Tom Essaye, president of Sevens Report Research.

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According to Essaye, technology giants in particular have become too large and inflexible to develop new lines of business or new products. It’s easier for them to buy other companies instead, but fewer takeover targets remain after years of tech industry consolidation.

“The business model of these companies was to make a lot of profits and keep the money for a long time, not give it out to shareholders,” Mazur said. “It’s hard to change such a culture.”

Because of this, these companies are giving away some of their excess cash and rewarding investors, Essaye said.

Liberals hope a new tax will change corporate behavior and encourage companies to either spend more money on internal investments – many of which can be written off for tax purposes – or pay out profits as dividends on a more consistent schedule.

“We’ve known for years that stock buybacks are a problem — that they distort the market, lead to lower long-term economic growth and divert investment from workers,” Brown said in a statement. “This excise tax is an important step in preventing companies from rewarding their shareholders over workers and one that will ensure taxpayers benefit when they do so. Regardless of how companies respond, workers are better off.”

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