The fact that Republicans hope the new buyback tax will raise revenue and Democrats hope it will change behavior suggests that both will be disappointed by this provision in the new legislation.
The U.S. government estimates that it will raise $74 billion over nine years from the tax, which comes into force at the start of next year. For Democrats, the hope is that the tax will alter behavior by encouraging corporate management to invest in expanding their businesses and hiring workers, ultimately lifting the broader economy. It might also push companies to distribute cash through dividends, which are subject to a higher tax paid by investors.
Financial analysts say it’s not a given that either of those outcomes will occur. “We don’t think it will make a large difference,” said Ben Snider, an equity strategist at Goldman Sachs. Though he acknowledges that the new legislation might have an effect “at the margin,” the bank’s analysts have not changed their forecast for the number of shares companies will repurchase this year or next.
Mr. Snider pointed to a basket of stocks of some of the most active share repurchasers that has risen in line with the S&P 500 this month, even after Congress passed the new tax. “It tells us investors, and the equity market more broadly, do not expect a major impact from this tax,” Mr. Snider said.
Scott Chronert, an equity strategist at Citigroup, calculated that there were $882 billion worth of buybacks in 2021 from companies in the S&P 500. The law would allow companies to offset share issuance — such as shares issued as part of employee compensation — which means that $620 billion of those companies’ buybacks last year would have been subject to the new tax, Mr. Chronert said.
A tax of 1 percent would therefore have raised just over $6 billion in 2021, a small fraction of the profits earned by companies in the S&P 500.Why the 1 Percent Buyback Tax Doesn’t Scare Investors – The New York Times