Sen. Kyrsten Sinema’s Stock Buyback Tax Shows ‘Government Knows Best’ Attitude Toward Investing

Congress “invested” in the American economy to the tune of $7 trillion over two and a half years. The result? Inflation is through the roof, the economy is stagnant at best, and more than 60% of Americans now report living paycheck to paycheck.

Americans got a lousy return on that investment.

Following Congress’ spectacular failure at directly investing Americans’ tax dollars (and dollars printed by the Federal Reserve), the Senate now wants to “help” Americans invest better with the so-called Inflation Reduction Act under debate in a Saturday session.

Democrats’ bill, for example, would significantly redirect investments into speculative green energy projects at the expense of reliable investments in oil and natural gas through $332 billion in green energy tax credits.

The bill also would authorize the treasury secretary to approve $250 billion in loan guarantees for qualifying energy projects. Of course, if those government-subsidized investments fail, the taxpayer would be left holding the bag—remember Solyndra?

And now, in yet another case of the government-knows-best attitude to investing, Sen. Kyrsten Sinema, D-Ariz., reportedly lobbied for the bill to include a new stock-buyback excise tax, which actually would  discourage sound investment.

Taxing stock buybacks is a misguided policy that would further drag down the American economy, making it harder for growing businesses to get the funding they need. Adding even more impediments to business investment at the front end of a recession would only cost jobs and  drive down Americans’ real wages even more.

Although many Americans aren’t familiar with stock buybacks, they nonetheless benefit from the added dynamism and economic growth these buybacks foster.

When a business earns a profit, it either can put that money back into the company or it can put it back in the hands of its shareholders and the owners of 401(k)s.

The most common way for companies to return profits to investors is by paying a flat per-share dividend. Once companies start issuing dividends or add to their dividend amount, though, shareholders typically expect that to become a recurring payment.

Alternatively, companies may return profits to shareholders by buying back stock from those who are interested in selling shares at the set buyback price.

Unlike dividends, stock buybacks are viewed as one-off events. Therefore, stock buybacks are a good way for companies to return profits to investors while maintaining the flexibility to plan future reinvestments in the company.

A new tax on stock buybacks, as Sinema proposes, would discourage those businesses from returning profits to investors, who in turn could reinvest in the companies that could best use the funds in the short term.

In practice, taxing stock buybacks especially would hurt the smaller, rapidly growing businesses that are most reliant on new funding. Such companies are responsible for a great deal of American innovation, and a stock buyback tax would hold them back.

At the same time, a stock buyback tax would help trap capital funding in large, established, less dynamic companies.

As economist Tyler Cowen points out: “Are you worried about corporations being too big and monopolistic? This makes it harder for them to shrink! Think of it also as a tax on the reallocation of capital to new and growing endeavors.”

When companies announce their willingness to buy back stock at above the market price, this also may serve as a valuable signal to markets and investors of management’s confidence in the company.

Just as a product warranty gives consumers more confidence in the quality of what they’re purchasing, stock buybacks are a way for companies to put their money where their mouths are. The proposed new tax would make it harder for investors to distinguish sound investments from unsound ones.

Proponents claim the proposed stock buyback tax would add an estimated $73 billion of additional taxes to the price tag of Democrats’ massive tax and spending bill. That’s on top of roughly $300 billion in other new taxes and the estimated $200 billion in tax revenues from expanded IRS enforcement ($120 billion net of the new cost of IRS funding).

So, while green energy lobbyists would score a huge windfall of new, government-subsidized investments, U.S. businesses in other industries could look forward to more taxes and more audits.

The taxes in Democrats’ Senate bill also would have the unfortunate effect of making investments in foreign companies more attractive relative to investments in U.S. companies. That means more good jobs would end up overseas and fewer good jobs would be created here at home.

Once again, it looks like Americans are about to end up with a lousy return on investment, courtesy of Congress.

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