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Comment by EdwardDiego | Hacker News Reader

I'm all for this, far too much wealth transfer from companies to investors, the worst use debt for buybacks, but tax newbie here, how are shareholders impacted taxwise when share buybacks happen?

I'm guessing it's an unrealised capital gain, so no tax impact until you sell?

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There is a tax deferral advantage to shareholders (esp. ones in a high tax bracket) from stock buy backs vs dividends.

For investors with a low income (retirees for eg.) they can actually receive a good amount of dividends “tax free” (the company has already paid taxes on it so there is a dividend tax credit)

> far too much wealth transfer from companies to investors

The investors (shareholders) own the company.

The government also limits the shareholders and managers personal liability.

One has to ask what in it for the government?

> One has to ask what in it for the government?

A vibrant and productive tax base? Happy citizens?

To be clear, I think the tax-treatment discrepancy between buybacks and interest is B.S. (More so than the income and capital gains discrepancy.)

The company is a distinct entity.

It's capital and assets are held apart from the investors for the traditional reasons.

Are share buybacks always in the best interest of the company?

I'd argue that they're nearly always in the best interest of investors only, especially when accomplished via selling assets, selling assets and then leasing them back, or just straight out taking on debt, that they harm the company, and accordingly, the employees of the company.

buybacks reward selling, not holding, I dont like that. dividends reward ownership

> buybacks reward selling, not holding

Company value unchanged but fewer shares outstanding literally means value per share for holders goes up.

If your cost of capital is cheap and your shares are even cheaper, surely a reorganization of your capital stack is in order?

I struggle to apprehend the fanatic hatred of buybacks that's overwhelmed the national conversation in recent years. Buybacks seems like a rather benign and boring function of corporate finance to me. Comments online would have you believe an orphan was killed every time a share is repurchased.

> I struggle to apprehend the fanatic hatred of buybacks that's overwhelmed the national conversation in recent years. Buybacks seems like a rather benign and boring function of corporate finance to me.

It's not much of a struggle for me, I tend to agree with those that "hate" stock buybacks but maybe not so vehemently.

It's pretty simple to me. It breaks the social contract. The proper way to disburse excess funds that a company has no idea what to do with is via a dividend - which then gets taxed immediately. This is how investing is explained to the layman.

Stock buybacks are simply a tax avoidance scheme, the other properties of them are line noise are not material. It's not very difficult to understand why someone on a W2 salary would find this to be yet another incredibly unfair scheme against their best interests in favor of the investor class.

Of course the real problem is that dividends shouldn't be taxed in the first place.

The entire economy operates on a rule of no double taxation, except for dividends. It's income that's already taxed at the corporate level, then taxed a second time when that post-tax income is transferred to the shareholders.

>The entire economy operates on a rule of no double taxation

Citation needed here. Nowhere is such a rule explicitly written, nor is it clear why it must be the case. Further, what you’re saying is incorrect, people often claim estate taxes to be “double taxation” as well.

It’s not hard to see how many forms of taxes fall under this rubric. If corporate income taxes + taxes on dividends are “double taxation”, then couldn’t the same not be said about those same corporate income taxes and sales taxes? It’s honestly hard to think of any taxation regime that doesn’t include taxation at multiple points in a transaction chain.

Taxes exist to severe a function, and that is to extract money from the economy in a just and efficient manner. It would seem that you are implying that “double taxation” in this instance somehow violates the former, though I don’t think most would agree with you.

It sounds like the companies doing the buyback pay 2% on the amount they spend on the buyback. It doesn't look like shareholders would be directly impacted, except for the sellers realizing gains in the transaction. That said, I'm not quite certain of who sells in a stock buyback.

During a stock buy back they just buy stocks on the open market. They reduce the number of outstanding shares, i.e. number of shares that can be purchased. The value of a single stock is determined by (company value / number of outstanding shares). By reducing the number of outstanding shares, each individual share goes up in value.

Often doesn’t the stock go back out as grants to employees? So rather than create new shares, diluting share value, they buy stock to then grant to employees, so the stock buyback is essentially taxed as personal income.

Yes, it's a way for companies with massive profits to route them to their employees (read: executives), not their shareholders.

And manipulate the stock prices to look to perform better than it should.

They could just pay dividends, but then some argue those would be taxed at time where as buybacks are only if sold later at profit.

> manipulate the stock prices to look to perform better than it should

They're taking actions that raise the stock price. That hardly counts as manipulation. (It would count as manipulation if the buyback were conveniently timed to coincide with share-price incentives.)

The money used for the buyback makes the company worth less, so it should be neutral if the share price was accurate. It never is of course.

> money used for the buyback makes the company worth less, so it should be neutral if the share price was accurate

Assets decrease. But so does the share count. This tends to raise earnings per share while decreasing assets per share [1]. (Liquid assets, particularly [2].) Meanwhile, there are signaling and liquidity factors which raise the theoretical value of the company.

In summary, there is no rule that says a buyback should be share-price neutral. (The same for special dividends.)

[1] https://www.nasdaq.com/articles/does-stock-buyback-affect-pr...

[2] https://business.inquirer.net/238377/share-buybacks-affect-s...

Assets re-invested back into the company rather than through a stock buyback could have increased earnings/share also. Of course, you eventually run out of things to re-invest earnings into (that could lead to more earnings rather than being wasted), and have to decide whether to do a dividend or a stock buyback.

Dividends are taxed twice, as corporate income then as personal income to whoever they are granted to (at least to Americans, other countries have different tax rules).

A buy back is only taxed as personal income when granted to the employee.

What about the capital gains tax for the entity the company is buying the share from?

If it is like a 401K fund, the tax is deferred (it will be treated income rather than capital gains later). But they also wouldn't have had to charge tax right away for dividends (dividends are re-invested into the fund, and taxed as income later).

> doesn’t the stock go back out as grants to employees?

I'd be curious to see a study supporting this claim.

It’s definitely a common thing in publicly traded tech. Those stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares. Though I’m not sure how often it happens.

> stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares

This is how it works. It's why companies report an earnings per share on a fully-diluted basis.

It’s how it often works, but buybacks are an option to avoid diluting share price (issuing stock diluted share price, buying it back does the opposite, though should be neutral).

but debt taken out to fund buybacks is also a form of dilution

It sounds like shareholders won’t be directly impacted but companies deciding to do buybacks might decide otherwise with a tax. It’s marginal at 2% but imagine this hits 5-10%. Then buybacks might make less sense for a company. That will impact shareholders who are usually employees who have been working their asses off for years and have lucked out with a company that actually offers buybacks.

Shareholders are 100% paying this tax.

Shareholders own the company; If the company pays X% tax, it really means the 'shareholders' are paying it.

(Edit: For example the company has $200 in assets. They pay out $100 in a buyback, the remaining shareholders would have to pay the $2 out of their assets. This would technically play out in the valuation of the shares at the time of buyback.)

Moreover, it will affect companies decision making for no obvious benefit to anyone.

This is a total curve ball, I can't even fathom why the government is doing this, there is no obvious upside.

It's a really odd things that 'share buybacks' are considered some kind of negative thing. They are a re-balancing financial activity for the most part. Money goes in, money comes out and goes elsewhere etc. - this is good.

Edit: it's a bit like having a tax for taking cash out of a bank account. If the company needs the money for productive things, they probably would not be doing a buyback. The notion the gov. would want to inhibit money from moving from one spot where it's probably not being used efficiently, makes no sense. If the government needs to raise revenues, it would be far more rational to simply hike corporate taxes by some amount.

It’s a silly law.

They won’t do share buybacks and then distribute earnings via distributions or some other mechanism.

It’s really odd law I’m guessing is just a populist move to get votes.

There is nothing that makes stock buy backs any worse than other methods of distributing earnings. They could just pay out dividends directly instead.

I have no idea what the intent of the law is other than “someone doesn’t like stock buy backs”.

So this is probably a bad policy almost irrespective where you are on the socialist/capitalist-disdain agenda.

It hardly makes any sense at all.

"far too much wealth transfer from companies to investors,"

It's their money, and it's absurd to keep it locked up in some arbitrary place - it's worse than 'neutral' in fact.

Companies will respond by paying dividends, or parking the money in less efficient entities.

There really is no upside to this policy.

Share buybacks are used to avoid dividend taxes. It makes sense to tax them equally. Moreover, don't you think that paying dividends (in stock or in cash) are a better, more transparent way than share buybacks to distribute profits back to investors?

No, because stock buybacks are not free. Someone has to be willing to sell their stock to the company. It can be thought of as the owners willing to hold paying the owners willing to sell.

It's not really our business if investors want to pay dividends or do share buybacks. One is a capital gain, the other has it's own taxation regime, there are already established taxation rules there.

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