Time to Ban Stock Repurchases
tbwns.com
tbwns.com
Capital gains should be taxed at windfall rates, say income + 10%.
Prioritize repeatable, stable profits over swing-for-the-fences highly-leveraged moonshots, and watch how many of these problems disappear.
So this is another example of the US being unable to find solutions to problems only it has.
This came up with the whole passthrough preferential treatment. The argument for it was that dividends were essentially double-taxed. So you end up creating a whole new set of complexity (eg what qualifies for it) when the solution is remarkable simple.
In Australia, dividends issued by companies come with franking credits. That means you get credit for any taxes already paid. The vast majority of dividends are fully-franked, meaning all funds have paid the 30% tax rate. Much less common are unfranked (no taxes paid) or partially-franked.
To give you an example. Say a company makes a profit of $10,000 and wants to pay it as a dividend. It pays 30% tax on it ($3000) and disburses $7000. Alice owns 10% of the company so she receives $700 (10% of $7000, being $10000 - the $3000 tax) and $300 in franking credits. If Alice's marginal tax rate is 30% she has paid all her taxes. If it's 40% then she owes 40% x $1000 = $400 - $300 in franking credits = $100 in extra taxes. If her marginal tax rate is 15% she gets a refund ($1000 x 15% = $150 is her liability so her refund is $300 - $150 = $150).
So no double taxation and all the recipients pay their marginal rates of tax on the income. Easy.
This is also a far cleaner way to deal with foreign withholding taxes. Let's say the dividend recipient is a foreign corporation, should they pay taxes on the income? Well, they already have. it's a policy decision as to whether they should get the taxes back or not. But again, it's handled by that system without having to create a foreign withholding taxes regime.
> Capital gains should be taxed at windfall rates, say income + 10%.
Yeah so you lose me here. I don't see the justification for this. Investment is typically in already-taxed dollars.
From the "regular person" side of the world - dividends vs capital gains vs estate tax, how I would've loved to have such problems for most of my life - I've always seen it as transactions that are taxed, not dollars. I pay income tax. I pay sales tax. That's about it (property tax would be something entirely different, but requires owning real property), but how is it not "double tax" by the same logic? Why all this consternation about "double taxing" in certain investment circles, but not around sales tax? Just because it matters less to the super-wealthy?
It's not really the same logic. If I own 100% of the shares of company A, and I make a profit of $100, I have to pay a tax on that profit. Now I have $75. Now I want to use that money to buy an XBox, so I move that money from my company account to my bank account (again, I own the company, the money is already mine), but I have to pay another "income" tax. This is the "double" tax, there is no "transaction". But lets ignore that, if you could avoid sales tax, wouldn't you? This is how shopping online worked pretty much up until 2016.
IMO, we should just get rid of the corporate tax and simply tax cap gains and dividends more. It would solve the issue of corporations parking money in Ireland and loading up on debt domestically.
That...doesn't sound right. I mean, I know I'm not really much of an investor, but my understanding is it works more like this:
If I own 100% of the shares of company A, and the company makes a profit of $100, the company pays a tax on that profit, then has $75 in its bank account.
Separately, when the company reports those earnings, its stock price rises 5%. Now, if I want to realize the value of my stock appreciation, I have to sell shares of stock, which is a completely separate, taxed, transaction.
I can only transfer money from company A's bank account to my own because I own 100% of the shares, and control the entire company. I also know that treating the company like my own personal piggy bank is frowned upon (at least by people with scruples and sense), and the much more reasonable thing to do is have the company pay me a salary out of its profits. Which is another, separate, taxed, transaction. Which also makes perfect sense, because in the general case where I am not the only employee, payroll taxes are a perfectly reasonable thing, and in the more specific case where I am, I'm paying for the protection of having the corporation to take liability.
Like the sibling comment said, thats how stocks are supposed to work. The entire reason stocks have value is because you were entitled to a dividend. So that $75 would be shared among the people who own the stock.
Now if the stock entitles you to a dividend of $5/year of the company's profits, you then might say that the company's stock is with $25 (just an example). If you think the company may become more profitable, and start paying $6, you may decide the stock is worth $26, and the inverse is true as well. Transferring that ownership of the stock is taxed, naturally.
Now we now live in a world where the largest companies don't pay a dividend, and I'm not sure how much "potential dividend revenue" factors into company valuation, but, as I understand it, this is the "backbone" of how stocks work.
>and the much more reasonable thing to do is have the company pay me a salary out of its profits. Which is another, separate, taxed, transaction.
This is taxed separately however. There is no "double-tax" here as payments to employees aren't considered the company's profit. When the company pays its employees, it's taxed once (payroll tax). When the company pays it's owners it's taxed twice (Corporate tax, then dividend tax).
But: no, I wouldn't lobby that I should be exempt from sales tax just becaues it's "double taxation." I certainly don't think tax is something to always be avoided when possible, I think it's a tool of government, and that eliminating variou taxes is rarely discussed for truly useful reasons vs just individual selfishness. (On that note: if I were going to argue against sales tax it would be on grounds of regressiveness. It's not something that has much of a noticable impact on my own lifestyle, though.)
It's not. The way public companies were designed to work, in theory, is the "owners" get a proportional slice of the profits of the company. That's what a dividend is. I simply described the simplest scenario - if it feels wrong to you, you should consider why that is so.
>But: no, I wouldn't lobby that I should be exempt from sales tax just because it's "double taxation."
I agree here, but in the case of the corporate tax, I think it should be eliminated because it just incentives companies to game the tax system and creates these awful headlines where "LARGE COMPANY PAID $0 IN TAXES" which is almost never accurate.
You pay taxes on the gains over the initial investment. Why would where the money came from matter?
A huge portion of investment in publicly-traded companies comes from funds like pension funds which don't use after-tax dollars.
The reason that stock repurchases are better than dividends for most tax purposes is that the owner can elect to sell or not sell their stock rather than rely on the forced timing of a dividend.
However, it’s worth noting that in terms of market volume, most entities that buy shares (like pension funds) don’t pay any taxes on their dividends or stock sales, so your scheme won’t make dividends attractive to these entities and indeed would likely raise the price, making them even less interesting to those entities.
This is why pension funds don’t buy (many) munis or TIPS etc. - they gain nothing from the tax advantages.
This model has disadvantages. Not every shareholder wants to receive a dividend they then have to pay taxes on. The company also drops in value by the amount of money disbursed, which has its own issues (eg triggering wash sale rules).
Share buybacks are an alternative to returning money to investors. You use that same pool of money to buy shares on the open market. The company has lost that same asset (the disbursed cash) to those investors who want to receive that money (ie by choosing to sell) and the stock price remains unchanged.
So this is (IMHO) concentrating on the wrong problem. The real problem is that companies can borrow money to return to shareholders through dividends or buybacks rather than repatriating foreign profits, which would otherwise make those profits subject to US taxes. So this is a near-indefinite deferral of US taxes.
In my opinion, we need to treat any form of borrowing as effective repatriation of retained foreign profits that then get taxed accordingly.
As for bailout funds, I'm totally fine with all of these restrictions until the loan has been repaid:
1. Any borrowed funds are treated as repatriation of foreign profits as per above. Why bailout companies who are choosing not to pay US taxes?
2. A freeze on executive compensation, including no extraordinary bonuses, additional stock grants and so forth. Additionally, all such compensation from the previous 12 months needs to be clawed back.
3. No disbursement of any kind to investors while the bailout loan remains unpaid. This includes dividends and buybacks.
Focusing solely on stock buybacks is misguided.
I however do agree if a company takes a recent government "bailout" they should be restricted from buybacks until they payback the loan/bailout.
Of course, the details matter enormously here, including how things like debt factor into the equation.