Stock buybacks are a boon to investors, but they’ll often rile up the more general public, as they are seen as companies prioritizing shareholders over workers and customers. President Joe Biden clearly seems to think so, as he announced during the State of the Union last week that he wants to increase the tax on stock buybacks to 4%.
For help with managing your own investment portfolio, regardless of of whether or not you are potentially owed a stock buyback, consider working with a financial advisor.
Stock Buyback Basics
Put simply, stock buybacks are when a company shares of itself off the market, bringing them back in house. There are a number of reasons companies do this. First off, it can raise the price of shares overall, making the company more valuable. It’s also a way to reward investors for companies that don’t pay dividends.
Companies work with investment banks to perform a stock buyback. Generally, a company’s leadership will approve a buyback of a certain number of shares, and investors will have a chance to agree to be part of it.
Critics of stock buybacks say they are designed to create wealth for company executives, whose compensation is often in the form of stock options.
Buybacks were considered illegal until 1982, when they were legalized under the Reagan administration.
Biden’s Proposal
Last summer Biden signed the Inflation Reduction Act into law, which included a 1% tax on all dollars spent on tax buybacks. He doesn’t seem to think that’s enough, though, as during last week’s State of the Union address he proposed upping that to a 4% tax:
“[Corporations] invested too little of that profit to increase domestic production and keep gas prices down. Instead, they used those record profits to buy back their own stock, rewarding their CEOs and shareholders. Corporations ought to do the right thing.That’s why I propose that we quadruple the tax on corporate stock buybacks to encourage long term investments instead.”
There have been a number of companies recently which have offered big stock buybacks even as they layoff employees. Meta, the parent company of Facebook, for instance, just authorized a $40 billion buyback despite recently laying off workers.
What It Means For Investors
This won’t have a direct impact on you, as the tax is paid by the companies performing the buybacks rather than the investors themselves.
That said, this plan could make it less likely for companies to go ahead with buybacks. If you are heavily invested in the stock market, this could mean you lose an opportunity to be part of a buyback program that could make you money.
There isn’t a ton you can do to prepare right now for how this law will impact you, but hiring a financial advisor is the best way to make sure you’re prepared for any new law or tax the government puts forward.
The Bottom Line
Stock buybacks are a way for a company to both reward investors and create wealth for executives. Recently, many companies have authorized buybacks while also laying off workers. In response, President Joe Biden recently proposed raising the excise tax on these programs from 1% to 4%.
Investing Tips
- A financial advisor can help you make the most of any stock buybacks potentially available to you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free investment calculator to see what your investments could be worth down the line.
Photo credit: ©iStock.com/AsiaVision, ©iStock.com/recep-bg, ©iStock.com/tdub303