Comment by dangus | Hacker News Reader

Comment by dangus | Hacker News Reader

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I think the article brings up too many separate concepts without sufficiently tying them together.

One of the most basic concepts you have to accept to agree with the premise of the article is that the Fed kept interest rates low to transfer wealth to the wealthy.

> After the Great Recession, the Federal Reserve instituted a zero or near-zero interest rate regime. The philosophy behind it was simple:

> > The Fed’s “strong and creative measures” would inflate stock prices, which would lead those holding stocks to feel wealthier and more confident, and then they’d spend a little more, and some droplets of this might trickle down to the people that are working in the real economy.5

Of note is the fact that the citation for this quote is some random dude Wolf Richter's website. The guy's a former car dealership manager, and that's the extent of his financial background.

A much less sinister and simpler explanation exists: high inflation rates are bad for pretty much the entire economy regardless of level of wealth. We already saw this in action in the 1970s.

I also take issue with a lot of the numbered points in the article. These points seem to avoid the more nuanced multiple factors behind those specific developments:

1. Tech companies are flushed with cash because it's the highest margin business out there. There was no such thing as software company profit margins in the olden days of corporate behavior.

3. The buyback graph didn't show R&D spending decreasing at all or otherwise being impacted by stock buybacks. The cited HBR article doesn't directly link the lack of R&D expenditures to stock buybacks. Aren't there companies out there that have minimal R&D expenses? S&P 500 companies like Dollar General, Costco, Robert Half, and CBRE Group?

4. Isn't the biggest reason to link CEO pay to stocks to avoid personal income tax? That's just a tax efficiency issue.

5. Aren't there other reasons why Vanguard is popular besides the popularity of stocks in general? I always thought it was because the Boglehead ideology spread and Vanguard's low expense ratios proved to be attractive. I see this as "passive versus active investing" not "investing in stocks versus investing in something else."

7. Who says FIRE isn't productive? Where do you think those "tech companies flush with cash" got the cash from?

Regardless of Wolf Richter, the Wealth Effect is an actual philosophy tapped into by Ben Bernanke and others post-2009

> In defending the Fed’s bond-purchasing plan late last year, Bernanke said that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion” (2011)

https://fortune.com/2011/04/21/wheres-the-wealth-effect/

The Fed was buying up government bonds in order to reduce long-term interest rates. The focus of Fed policy has always been on the long-term interest rates as a tool to control inflation/unemployment, and raising the demand for government bonds is the most direct way to lower the long-term interest rates. The quote from fortune.com is taking Bernanke's words out of context. Here is the original quote:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.

The difference is in the way Wolf Richter presents the concept and mischaracterizes it as trickle down economics.

Wolf says:

> …which would lead those holding stocks to feel wealthier and more confident, and then they’d spend a little more, and some droplets of this might trickle down to the people that are working in the real economy

This is distinctly different than what Bernanke says in that quote. Bernanke is saying that the mere economic indicator of higher stock prices boosts consumer confidence, like when someone sees a lower gas price and feels better about the economy.

I have to agree with Bernanke there. The layperson sees a number on the news that says “economy good” and they worry less about losing their job or spending too much.

Richter misunderstands the wealth effect to be the literal spending of money by people who own assets like stocks and the trickling down of that money.

Even if the wealth effect benefits the wealthy more, trickle down economics is not the same concept.

I never understood the negative attention stock buybacks have received relative to dividends. They do basically do the same thing, but nobody is offended when companies pay a dividend.

They are completely different with respect to their impact on stock options.

If you hold stock options, a dividend doesn't benefit you. You need to hold shares to get the dividend. In fact, the dividend can cause the share price to fall (if it was not already anticipated) as the company's capital gets drained to pay shareholders.

On the other hand, buybacks (causing a sudden, surprising increase in share price) are most impactful on those who hold options. Proportionally speaking, they increase the value of options much more than the value of shares. The share price might go up 2%, and the options 200%.

Executive compensation packages tend to consist of stock options. So buybacks benefit corporate insiders more than shareholders.

This isn't accurate. Options are discounted by their expected dividend payout. Unless a company is issuing either 0 dte or decades out expiration options, no options are giving any corporate exec 100x leverage.

That doesn't sound right. Can you explain in more detail? The only mention of 100x was in regards to a buyback, not a dividend. Options are generally issued with a strike price equal to the current market value, to minimize the tax liability. Following the options grant, a subsequent decision to perform a share buyback would be new information to the market, not expected. Even the execs who received that options incentive package wouldn't have known at the time that they'd be doing a buyback down the road, even though they'd be rewarded for doing it.

Dividends create an immediately taxable event, the value gained in a stock buyback is only taxed when the stock is sold. It’s one contributor to the low amount of taxes paid by the so-called 1%.

Of course unrealized gains won't be taxable, but they can't be spent either.

For me, it makes a lot more sense to tax realized profit, or better yet consumption, than wealth itself.

I don't think it is desirable to force realization just to increase tax revenue.

My understanding is that you can play tricks with stocks so that you don't really need to realize the gains to benefit from them. They can be used as collateral for loans, directly donated to charities (lowers down your tax bill w/o forcing you to realize the gain), there's also the step-up basis loophole (or was it already closed?). I may be missing some details (and other creative ways to do "tax optimization") though, I'm not a CPA.

I never see anyone complaining about buybacks because of tax reasons though. In particular, the author is complaining companies are not spending enough on R&D because of buybacks.

It is true that buybacks are more tax efficient than dividends, which is why companies generally do buybacks instead of dividends.

The US tax on capital gains is definitely a mess though.

I was mostly responding to the "but they can't be spent either" part. From my perspective there isn't that much difference if a company is doing a buyback vs a dividend, as long as it's sharing its profits with the investors (w/o that, I view the stock market as a legal Ponzi scheme); I'm not really commenting on how much money should transfer to the shareholders though.

I had not heard about the donating to charity. Very interesting and tax efficient, but worth noting that you cant make money with it (you are still donating far more than you are saving in taxes).

In high-tax states, where Federal + State taxes exceed 50%, it is now possible (but rare!) to 'make money' by donating.

Let's take someone with a 53% marginal income tax, living in NYC. The person has stock with a basis of $0.0 with a current value of $10, and has held the stock for less than a year (short term capital gains = ordinary income rates). Separately, they have $1,000,000 of income.

Scenario 1) Donating the stock would produce a $10 tax deduction, worth $5.3.

Scenario 2) Selling the stock would produce $10 of returns - $5.3 in income tax = $4.7

In this scenario, donating the stock produces higher returns compared selling the stock. It's a fairly obtuse scenario, since it's rare for the cost-basis to be so low, time-span to be so short, and to have a good use for a tax deduction. It becomes much more likely when a completely illiquid & price inflated stock is donated. If a large chunk of illiquid stock is sold, it'll crash. But donating an inflated chunk of stock would lock in the tax deduction.

Donating shares of a stock when a person knows insider information is called 'insider giving', and is highly prevalent & largely unenforced. https://dlj.law.duke.edu/article/insider-giving-avci-vol71-i....

Charities aren't necessarily "charitable" - they can be political and affect businesses. And in the dodgiest situations, they can be something you financially benefit from.

Obviously the latter leans towards tax evasion, but that's exactly the point - stock buybacks aren't necessarily tax evasion but they can certainly assist in it.

Just set up your own charity that pays for your charity-related travel - it's not your fault that the charity focuses on work in a region where you happen to have a summer home. ;- )

> Of course unrealized gains won't be taxable, but they can't be spent either.

They can be spent if you have a low interest LOC at a bank backed by your assets like stocks.

Don't get me wrong, unrealized gains are a useful and great thing to have. I would rather have them over nothing any day. However, you can't get that off your books without realizing gain at some point. It pushes tax burden into the future, but doesn't eliminate it

If you have enough money you can push it into the future more or less indefinitely.

Until you die. At which point your heirs get a "stepped up basis" to the date of your death without paying any capital gains tax, under the theory that they pay estate tax instead. But estate tax starts at $10M or so these days. And don't worry if you have more money than that - you've got enough breathing room to create irrevocable trusts to skip estate tax and distribute income directly to your low tax bracket decedents in perpetuity.

For an example of how much the IRS theoretically cares about not being able to kick income down the road - basically the entirety of retirement savings regulations revolve around the controlled ability to do just that.

> For me, it makes a lot more sense to tax realized profit, or better yet consumption, than wealth itself.

Why not tax all of that simultaneously? That's what the Dutch do.

> I don't think it is desirable to force realization just to increase tax revenue.

And yet various governments are doing or are planning exactly that.

I searched and couldnt find anything about a Dutch wealth tax, just answers saying they dont have one.

Do you have a source?

I wasn't aware of any western countries which have wealth taxes, but I was surprised to find that Norway, Spain, and Switzerland do have some.

https://taxfoundation.org/net-wealth-tax-europe-2022/#:~:tex....

Straight from the source: https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-...

Summary: https://en.wikipedia.org/wiki/Taxation_in_the_Netherlands#Bo...

This looks like capital gains to me. Taxation on income from wealth, not wealth itself.

https://www.belastingdienst.nl/wps/wcm/connect/en/income-in-...

It's not a capital gains tax. The Netherlands has been taxing net wealth (with some exemptions, most notably for primary residences and vehicles) at around around 1.2%/year. This was implemented as a 30% levy on an assumed 4% investment return on net wealth, regardless of actual or realized returns and regardless of how the wealth was held (stocks, bonds, savings account, bitcoins). I suppose you could say that the taxation is on "income from wealth" (assumed to be 4%, taxed at 30%), but that seems like a distinction without any difference to me. Your net wealth is assessed, and you pay a fix % on it, regardless how much money it actually made.

The article you linked to refers to a recent court ruling against that system. (A bunched of pissed citizens sued the government because interest saving rates have been 0% or even negative for many years now.) The government is now scrambling to update the tax code, but AFAIK no change has been implemented yet. Last year's net wealth was still taxed at assumed (rather than realized) investment returns in this years income tax assesment.

You say it is a distinction without a difference, but it seems like it is very relevant to me. For one, the fictional assumed income is based on the type of asset. Second, it seems like the fictitious rate is calculated based on Market conditions and changes over time. Lastly, the entire premise of the tax is to be levied on income. The assumed rate is just a simplification to calculate that. It seems that the legal proceedings were decided in favor of the taxpayers specifically because of this.

> For one, the fictional assumed income is based on the type of asset

It isn't. Under the current systen they make bo distinction, they just look at total worth per the market value. They treat 200k in savings the same as 200k in stocks.

No, they use hypothetical yield (of over 5%). It applies to savings accounts, that had negative interest rates...

See my reply above.

Looking at your links, it says that savings are taxed at 0.01%. What am I missing here

The 0.01% is temporary/new, due to the wealth tax declared illegal by the European Supreme Court. This link explains the situation around the "Box 3" wealth tax better: https://www.tilburguniversity.edu/magazine/supreme-court-net...

“In 2001, the legislature assumed that everyone could easily earn a 4% return on their assets in Box 3 – regardless of how they were invested – without taking any risk, but this has certainly not been the case since 2008. Savings rates have yielded much less interest, as have bonds, with interest rates as low as 0%. At the moment, we’re even seeing negative interest rates. But the legislature never adjusted that assumed 4% return. This resulted in a situation where, for many years, the wealth tax people paid far exceeded their actual income from wealth"

Yes, the Netherlands has wealth tax, also known as "Box 3", and it includes tax on hypothetical yield on your savings accounts. The government got into issues with the European Supreme Court for this:

https://home.kpmg/us/en/home/insights/2022/05/tnf-netherland...

"The box 3 tax rate is assessed against a hypothetical yield. You are not taxed for capital gains or actual rental income. Instead, the Dutch tax office assumes that you enjoy a yield of up to 5.69% over your total asset value, irrespective if any actual gains are higher or lower(!)."

Note that actual savings interest rates were close to zero or even negative.

Isn't stock sold in the event of a buyback? And isn't that event taxable? Are dividend taxes higher than capital gains from stock sale taxes?

Depends. Only if the sellers make a profit with the sale. Then that profit is taxed.

The value gained by the other shareholders is not taxed until they sell themselves.

The post refers to an article [0] which mentions that dividends are also not that great for productivity/R&D spend.

"Excessive dividend payouts, however, can undercut investment in productive capabilities in the same way that buybacks can."

[0] https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...

In a stock buyback, the investor only is made whole by "exiting" the stock. I.e., if that stock has voting rights, and you're more interested in being able to influence as a shareholder, you're left out of the "lifting of every risk sinker" when a company does a buyback. In fact, it guarantees that the amount of shareholder influence as a whole decreases, because if someone were to reacquire that share it would be more expensive now.

Stock buybacks are basically attempts to shirk leashes, freeing execs/other shareholders from the ongoing influence of exiting shareholders.

Dividends on the other hand, are straightforward returns on what was a commitment to sink risk. An ongoing source of income for the shareholder as a result of the company thriving. It's a straight up payment of a coupon off a bond. There is no need to exit/re-enter required. Your # of shares do not move. Therefore your relative investment stays as it was, whereas with the buyback, you're handing back your ongoing leash and influence on the company.

Stock buybacks are therefore not equivalent in any way to paying of dividends. I don't know why this is so hard to understand.

> Stock buybacks are therefore not equivalent in any way to paying of dividends.

They are extremely similar. The differences are around timeline and tax advantages, none of which you covered.

In a buyback, your percent ownership in the company will go up and the price will go up (barring other factors). You can sell some stock to keep your percentage flat and get some cash, making it like a dividend. Or, you can make a dividend like a buyback by reinvesting the dividend. Your percentage of ownership will go up.

If and only if people previously holding stock sell back to the company. Regardless, you realize no gains if you do not exit your interest on that stock. The exit is non-optional, and often not reenterable from.

> If and only if people previously holding stock sell back to the company.

This is trivial. They just buy it on the open market. This is public stock, people are always buying and selling.

> Regardless, you realize no gains if you do not exit your interest on that stock.

This is the big advantage of buybacks for shareholders! It is taxed as capital gains, and you can completely defer taxes by not selling. And "exit your interest" makes it sound like you have to sell all of it. You can just sell a small portion to make it like a dividend. You don't seem to be getting this.

> The exit is non-optional, and often not reenterable from.

Nonsense. It is optional. You can choose to keep it as stock or turn it into cash. And you can totally re enter. It's public stock.

Are you mixing up publicly traded stock buybacks with something in private companies?

Buybacks and dividends both return capital to shareholders. In each case, the board and management are making the conscious choice to return capital rather than reinvest in the business. Mostly because they don't have a good internal investment to make that will generate returns. Investors can diversify and risk allocate for themselves.

Dividends are nothing like bond coupons. Coupons are guaranteed, tax treatment for both payor and payee is quite different.

So by your line of reasoning, a stock split should leash a company and hold them accountable since the cost to acquire or require shares is now much less than before.

We don't need the SEC, we just need to force companies to perform stock splits!

Voting shares + people active exercising and riding management like no tomorrow.

Point I'm making is that you can't declare a mechanism where you gain money but must exit as equivalent to you gain money, but no effect on your position as equivalent things.

The company purchases the shares from the market so you don't have to sell.

What if a company buys back 50% of the shares and simultaneously performs a 1:2 stock split so that there are exactly the same number of shares available?

If a company does a buyback, shouldn't you still have a higher percent control if you dont sell any of your holdings, and the same % control if you do sell the dividend equivalent

Imagine a company has 100 shares and I own 10. If they company buys back 50, the stock price will double, and my % ownership goes up from 10 to 20%. I can sell down to 10%, the same control I had before to take my profits.

What am I missing here?

There are a few reasons some companies prefer buybacks over dividends.

Probably the smallest reason is that buybacks can save investors money on their taxes.

A much bigger reason is that buybacks are viewed as one time events. When a company starts paying a dividend investors often expect that dividend to be paid regularly. If the company chooses to stop paying a dividend or decreases the dividend the share price drops.

Finally, there is executive compensation. Let's say my compensation package let's me buy shares at $100 each. If the share price is currently $110 and the company does a $10 dividend then the share price goes to $100 and my options are worthless. If the company does a stock buyback then the share price goes up and my options are worth more. As CEO which do you push for?

I agree that a smart CEO holding options would favor to dividends but don't see how this is an argument against it.

It seems that it benefits stockholders and CEOs alike. Stockholders get the same value as a dividend without the immediate taxable income, and CEOs and other option holders like employees get some of the value when their options mature.

I wasn't arguing against buybacks. I was just giving some reasons buybacks are more popular with some companies than dividends are.

Nothing, except for well... many investors aren't rational, or at the very least, they operate on other rationale. And because of this, it's entirely possible the stock price doesn't actually double in your scenario. However, if didn't, it at least would work positively towards the value metrics of the stock.

Stock price can't double. The amount of cash the company has must decrease by an amount equal to half its market cap. That should do something roughly equivalent to the value of the company.

The doubling is relative to if they had paid a dividend of the same value.

Stock price can double with the same market cap if you reduce the number of outstanding shares by half.

Wouldn't that friend on who's voting the stock that company holds in itself?

Is it the CEO? The board? The chairman? Or are the stocks cancelled from the total?

I can't parse all of your question. What friend? To answer what I think you are asking, the buyback shares are usually destroyed. It isn't like the CEO gets to vote with them instead of shareholders. In fact, they company does not destroy the shares, and holds on to them for whatever reason, they do not get to vote with them. those are called "treasury stock".

Apple is a classic case. Around 2010, the company had 26 billion shares outstanding. They've spent the last decade buying them back, and now have about 16 billion shares. This contributes significantly to the increase in stock price. The portion of the company 1 share represents is 60% larger today than it was in 2010 because there are fewer of them

Bought back shares are either retired or held in the company’s treasury stock. Either way, there’s no voting right for these shares.

Again, this decreases actionable accountability to the external world.

This should make it clear why stock buybacks would be preferred. Fewer people with standing to sue if they don't agree with management's direction.

so more shares is more accountable?

I'm not sure how you get that more shares means more owners. Doesn't really seem like the limiting factor.

If a company believes its own stock to be undervalued, why not invest in themselves by buying it? In that case it's an investment, vs a dividend which is not.

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