The largest business group in the United States is warning a new Democratic plan to tax stock buybacks could end up hurting retirement savings.
The stock buyback plan, proposed as a compromise by Sen. Kyrsten Sinema (D-AZ), is facing blowback from the U.S. Chamber of Commerce. The group said the tax proposal, which envisions a 1% excise tax on corporate buybacks, would filter down and have a deleterious effect on average investors.
“Unfortunately, the new excise tax on stock buybacks will only distort the efficient movement of capital to where it can be put to best use and will diminish the value of Americans’ retirement savings,” said Neil Bradley, chief policy officer at the chamber.
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.
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Proponents see the practice as a good way to generate value for shareholders, but detractors contend that the practice helps the company’s wealthiest employees make money that could be better used to expand the business, for example, by hiring more workers.
Critics of the Democrats’ new buyback plan argue 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 the buybacks.
Companies tracked by the S&P 500 spent a whopping $882 billion on stock buybacks last year, and Goldman Sachs predicted that stock buybacks could tick above $1 trillion this year.
The Democrats’ plan to impose an excise tax on buybacks came as part of a compromise to get Sinema on board with the bill, which is a massively scaled-back version of President Joe Biden’s now-failed Build Back Better agenda.
As part of the agreement, Democratic leadership agreed to nix raising taxes on carried interest, a form of income earned by private equity funds that is subject to a lower tax rate.
The Arizona Democrat, one of the most centrist members of the Senate who has opposed some of her party’s tax-and-spend proposals in the past, also worked to scale back the 15% corporate minimum tax proposal by including an exemption for depreciation tax deductions — meaning that companies will still be allowed to write off the cost of investments more quickly.
The U.S. now has a 21% corporate tax rate, which it assesses based on companies’ tax returns. The proposal, initially pitched by Sens. Joe Manchin (D-WV) and Chuck Schumer (D-NY), would assess a minimum 15% tax on the adjusted financial statement income of corporations — “book income.”
Republicans have said the tax would disproportionately hit manufacturers, who are already smarting from explosive inflation and supply chain woes. An analysis from the nonpartisan Joint Committee on Taxation found that nearly 50% of the tax would be borne by the manufacturing industry.
The National Association of Manufacturers had pushed back vociferously on the Manchin-Schumer proposal and said it would make the country “economically weaker.” The NAM praised the revisions to the plan requested by Sinema but remains wary about the legislation.
NAM President and CEO Jay Timmons said the group was “glad to hear that accelerated depreciation provisions are removed, but we remain skeptical and will be reviewing the revised legislation carefully.”
The stock buyback plan is expected to raise less than the $124 billion that is estimated it would have brought in when the House passed the provision last year, although it will offset some of the revenue being lost by cutting the carried interest changes and allowing the book tax exemption.
Still intact in the Sinema plan is increased funding for the Internal Revenue Service so that it can more efficiently conduct audits and bring in new revenue. The Congressional Budget Office predicts that a plan to bolster IRS tax enforcement would bring in $124 billion in increased funds.
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Biden cheered news that Sinema is now signed on to the bill, which makes it far more likely to make it to the Oval Office.
“The Inflation Reduction Act will help Americans save money on prescription drugs, health premiums, and much more,” Biden said in a statement Thursday night. “It will make our tax system more fair by making corporations pay a minimum tax.”
