President Joe Biden called in his new budget plan for legislation to place a three-year freeze on executives selling their shares after a stock buyback, a measure meant to target what Democrats have derided as corporate short-term thinking and greed.
The draft budget, which was released on Monday, re-ups a previous White House proposal to tax stock buybacks at 1% but goes further in placing the time limits on sales by executives. The plan was structured as such to prevent executives from making a quick profit off the higher-priced company shares immediately after a buyback.
In the budget document, which is just a request and will not necessarily prompt action in Congress, the Biden administration said the changes would “align executives’ interests with the long-term interests of shareholders, workers, and the economy.”
“This would discourage corporations from using profits to re-purchase stock and enrich executives, rather than investing in long-term growth and innovation,” the administration said about the proposed stock buyback restrictions.
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Stock buybacks, when corporations believe their shares are undervalued and buy up their own company stock to reduce the number of outstanding shares in the market, have become increasingly common over the years.
Proponents see the practice as a good way to create value for shareholders, but detractors contend that the practice helps the company’s wealthiest employees make money that could be used to expand the business, for instance by hiring more workers.
Companies tracked by the S&P 500 spent a whopping $882 billion on stock buybacks in 2021, and Goldman Sachs predicted that stock buybacks could tick above $1 trillion this year. For example, earlier this month, retail giant Amazon announced a 20-for-1 stock split, its first split in more than two decades, and authorization to buy back up to $10 billion worth of its own stock.
In 2018, an analysis conducted by the U.S. Securities and Exchange Commission concluded that in half of the buybacks studied, at least one executive sold shares within a month of a buyback announcement and that “twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day.”
Critics of the Biden buyback plan contend that by curbing the practice of buybacks, average investors will see slower gains, including those investors who are on the lower end of the socioeconomic spectrum. There are also concerns that executives might end up demanding higher cash salaries because they won’t be able to benefit from stock buybacks.
Treasury Secretary Janet Yellen praised the Biden budget plan and highlighted the rapid economic recovery that the United States has experienced over the past year, especially as it relates to job growth and employment.
“This economic rebound allows us to look beyond the pandemic-induced crisis and provide a roadmap to address future challenges: creating a tax system that is fair to working families, expanding access to capital in disadvantaged communities, and safeguarding the financial system,” she said in a statement.
Another new proposal in the president’s budget is the imposition of a so-called Billionaire Minimum Tax that would impose a 20% levy on individuals and households worth more than $100 million against their income and unrealized gains on liquid assets. The White House claimed that half of that revenue would come specifically from billionaires.
Biden’s proposed 2023 fiscal year budget also includes several other tax measures that the White House pitched last year but failed to pass. An increase of the corporate income tax rate from 21% to 28% is included, as is an increase in the top marginal income tax rate.
The corporate rate pitch was met with fierce opposition from business groups that feared an increase would hurt U.S. global competitiveness and lead to even higher prices in an economy already racked with explosive inflation. Hopes for a corporate tax rate hike were effectively dead in the water when Sen. Kyrsten Sinema, an Arizona Democrat, signaled she was not willing to raise the rate.
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Biden’s total budget request clocks in at $5.8 trillion for the year, although the White House claimed that if it were approved as pitched, it would reduce the deficit by $1.3 trillion next year, which would be the biggest single-year deficit cut in U.S. history.
“All told, it is a budget that includes historic deficit reduction, historic investments in our security at home and abroad, and an unprecedented commitment to building an economy where everyone has a chance to succeed,” Biden said in a statement.
