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Comment by klyrs | Hacker News Reader

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.

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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.

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.

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”.

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