You still pay capital gains tax when you sell the shares. Buybacks don't let investors avoid taxable events, they just allow investors to control when the taxable event happens.

Whereas with a dividend, you pay tax immediately when the dividend is issued.

They don't trigger a taxable event for shareholders who continue to hold the shares. They (obviously) trigger a taxable event (and a more concentrated one) for the sellers of the shares which were bought back.

I think the primary concern was stock price manipulation. There are some safeguards in place that prevent that from being too big of an issue.

The tax-free dividend is more of a modern discovery, I think. Which is why the loophole hasn't been closed yet.

They also offset shares created for stock based compensation. It's common for the number of outstanding shares to increase even in quarters companies do buybacks, because stock based compensation is bigger than the buybacks.

Since newly issued shares are not tax deductible for the owners, you'd basically be paying tax even if net zero capital is returned.