New buyback excise tax traps foreign investors

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inflation reduction act (IRA) included a new 1 percent stock buyback excise duty on U.S. publicly traded corporations approved by Congress last week. Many of these companies now spend their excess cash repurchasing stock from their shareholders instead of paying dividends or investing more in their firms. The new tax would discourage stock repurchases and encourage dividend payments. As a result, it would increase US tax receipts from foreign investors, which Americans do not pay capital gains tax when they sell stock but dividends are taxed. they receive.

From next year onwards, companies will pay tax on the fair market value of the stock they repurchase, less any new equity they have issued. The Congressional Joint Committee on Taxation (JCT) estimated that the buyback tax would Raise $74 billion over the next 10 yearsSecond largest revenue earner after Bill corporate minimum tax,

Over the past twenty-five years, corporate buybacks have exploded (for example, in the first quarter of this year, S&P 500 companies $281 billion reported buyback, a new record). They also regularly exceed dividend payouts. During the last 25 years, Publicly traded US stock owned by foreign investors also grew rapidly. He now owns about 30 percent of publicly traded U.S. stock, which is more than three times what he initially owned.

This Increased presence of foreign investors, and they enjoy tax benefits, adds fuel to the buyback. A 1 percent excise duty could slow the buyback frenzy (though a 2 percent excise duty Tax would work better).

For example, if a US publicly traded company spent $10 million of its excess cash to repurchase its stock on the open market, foreign investors would pay no US tax, whether in the buyback or after. sold in But if the corporation paid $10 million in dividends, foreign investors would typically pay a 30 percent tax on the payment (or 15 percent under some treaties). As a result, foreign shareholders strongly prefer stock buybacks over dividends.

There is also a small tax preference for buybacks. by certain US taxable shareholders, But most American shareholders, like 401(k)s and other retirement plans, are tax-free, and indifferent between buybacks and dividends.

Republicans and Democrats in Congress are both troubled by stock buybacks. Several years ago, Sen. Marco Rubio (R-FL) as proposed To treat the buyback as dividend for income tax purposes. But Senate Democrats preferred a simpler approach, an excise tax, to discourage corporate buybacks.

Some Democrats believe it would encourage “worker training, research, modernization equipment and other [investment] ActivitiesHowever, it is not clear whether taxing or restricting buybacks will increase investment in American workers and factories. This is because corporations that distribute income to shareholders, either in the form of dividends or buybacks, usually But they do so because they are not finding an attractive investment. And, even if a corporation does not repurchase its stock, it may still pay dividends.

By raising the tax on buybacks without raising the tax on dividends higher dividend, To this extent, the buyback tax would take away some of the US tax advantage from foreign investors and generate more revenue for the US. Presumably, JCT calculated both new taxes from foreign investors and new excise taxes from American corporations in its $74 billion revenue estimate.

Congress’s 1 percent buyback excise duty to remove tax benefits for foreign investors in U.S. corporations is a good start. Using the same logic, and given the increasing presence of foreign investors, MPs could also reconsider Recent tax rate cuts for US corporations and other corporate tax rules that have been flouted overseas.

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