I’m in favor of the Schumer Sanders plan
Chuck Schumer and Bernie Sanders propose restricting stock buybacks. I agree with this policy! But not for the reasons they say.
The reason that a corporation exists is to make profits for its shareholders. Why would anyone buy stock if the companies will use all their profits to pay higher wages to its workers? Our entire financial system would collapse! So I ignore the socialist nonsense in the op-ed.
However, the correct way for companies to pay profits to their shareholders is by issuing dividends and not by buying back stock. Corporations like stock buybacks because they are a tax loophole that allows the return of profits to shareholders without a dividend tax, and they create the illusion of steadily increasing earnings-per-share. Wall Street loves buybacks because they make money on the buying and selling of securities.
So I’m all in favor of ending stock buybacks. I hate tax loopholes, and I hate the value-transference Wall Street scum. No to stock buybacks, but yes to dividends!
Lion of the Blogosphere 
Would u favor eliminating double taxation of dividends then. Stock buybacks are better than dividends because of that reason
mpt
February 5, 2019 at 1:09 PM
No one has been able to explain to me how a stock buy back can increase the price of stock. After the transaction the corporation has less cash or more debt on its books. From a theoretical perspective the effect of reduced share supply should be a wash.
I can only assume the point of buybacks is just to make it easier for insiders to unload stock with lower fees.
bobbybobbob
February 5, 2019 at 1:19 PM
After a stock buyback there are fewer shares outstanding, so earnings per share increase.
Lion of the Blogosphere
February 5, 2019 at 4:13 PM
Lion is correct.
There are things companies do that are clearly shareholder-unfriendly and meant to benefit insiders, but buybacks are not one of them. Shareholders love them and often demand companies do more of them. People like Carl Icahn make their living by threatening to take over the board and fire management if they won’t buy back more stock, and stocks go up when he does this.
Wency
February 5, 2019 at 5:12 PM
> After a stock buyback there are fewer shares outstanding, so earnings per share increase.
Book value goes down proportionately, because cash was disbursed to by the shares. You missed my whole point. In any sort of intermediate term, buybacks should have no affect on share price.
bobbybobbob
February 5, 2019 at 6:04 PM
Book value does not go down.
Share buybacks result in formerly traded stock becoming Treasury stock, assets that are held internally by the company.
The share buybacks do not result in assets disappearing.
map
February 7, 2019 at 4:28 PM
> traded stock becoming Treasury stock, assets that are held internally by the company.
Sometimes. Sometimes the stock is retired. Doesn’t matter to my point. There’s no theoretical CAPM way buybacks should drive up the fair stock price. It’s all a wash, except if the buybacks are done with debt, in which case the net result should be lower share price.
bobbybobbob
February 7, 2019 at 6:58 PM
Correct, but if you pay a dividend the stock FALLS by the amount of the dividend on the day the stock goes “ex-dividend.”
So it increases the price of the stock RELATIVE to paying a dividend instead.
3rdMoment (@3rdMoment)
February 6, 2019 at 12:17 AM
Here in Silicon Valley many companies have stock purchase plans that allow employees to buy company stock at a 15% discount if I remember correctly. These plans potentially can issue large numbers of new shares. What some profitable companies do is buy back shares to cover the stock purchase plans rather than issuing new shares. That means these plans do not dilute the ownership of existing shareholders.
MikeCA
February 5, 2019 at 1:37 PM
Why are stock buybacks bad? You mention the gov’t doesn’t get taxes, if a buyback is done instead of a dividend. H/e the gov’t will get paid taxes eventually, when the capital gains are realized by investors.
I don’t think there is any difference in the tax rate either. It’s just a matter of when. Perhaps your argument is this makes the accumulation of capital easier somehow, so the rich will pull away more from the herd. I don’t see that, so you will have to explain your argument.
Also, you mention that Wall Street likes buybacks because they like transactions. Why is Wall Street being happy wrong? More financial transactions doesn’t hurt ordinary people.
Lowe
February 5, 2019 at 1:57 PM
One might also conclude that stock buybacks are a means of fine-tuning the number of shares outstanding to a desirable level. For instance, a company might declare a 2 for 1 split and then a year later decide that that number was too many, and so buy back a few.
emanations & penumbras
February 5, 2019 at 5:48 PM
My thoughts on the subject – The current capital markets give no relative advantage to investors who “buy and hold” vs. those that only hold stock for days/minutes/seconds.
Dividends reward investors for holding stocks long-term, buybacks reward investors regardless of how long they’ve held a stock.
I’m in favour of limiting stock buybacks because I would prefer market mechanisms that reward long term investors because companies that are heavily quarter to quarter focused end up treating employees much worse on average (also do stupid fucking inefficient things to improve their year end numbers like GE Transport who would stop buying all the parts they need for their locomotive manufacturing lines in October, running their inventory to almost 0 by end of year so that their end of year numbers looked better… Which of course only works the first year you do it, and then it forces you to keep doing it year after year or you end up double buying all that inventory in a single year)
I’d also like to see the financial regulations that require companies to reward long term share holders over short term holders.
MKS
February 5, 2019 at 2:07 PM
There is no reward for holding for a long time? There is a difference between short term and long term capital gains, so what you say seems false. Maybe you can explain your point so I understand.
Lowe
February 5, 2019 at 5:32 PM
“My thoughts on the subject – The current capital markets give no relative advantage to investors who “buy and hold” vs. those that only hold stock for days/minutes/seconds.”
This is false. The government charges lower taxes (as low as “zero”) for long-term* investors up to $38.6K per year under the current law. So this is great if you live off middle-class level capital income.
*”long-term” is currently one-year, but it has fluctuated in the past
name can't be blank (@DSGNTD_PLYR)
February 6, 2019 at 8:23 AM
My second sentence wasn’t clear. $0.01-$38.6k has a zero rate, then the marginal rates go up at a slower rate than if you sell within a year.
name can't be blank (@DSGNTD_PLYR)
February 6, 2019 at 8:25 AM
the ideal is dividends are tax deductible for the corporation just like interest up to some limit in order to avoid reckless dividend recapitalizations, and then the dividends are taxed as ordinary income for their recipients. then the buy backs wouldn’t be used because they wouldn’t be a loophole. taxing investment income at a lower rate than wages is 1984 on its head.
this policy would also make leveraged buyouts less attractive.
is the pope a racist?
February 5, 2019 at 3:09 PM
Forgive my ignorance, but the issue is that they borrow money to do buybacks, then deduct the interest payments up to some limit? I guess I still do not understand what is wrong with this.
Lowe
February 5, 2019 at 5:30 PM
that’s a “buy back recap” so to say. when (passive) capital gains and dividends are taxed as ordinary income but buy backs aren’t tax deductible…no buy backs. capiche?
is the pope a racist?
February 5, 2019 at 5:59 PM
what about your irobot stock? why would you support policy that goes against your interests
grey enlightenment
February 5, 2019 at 3:38 PM
Agree with Lion that dividends are better.
In theory, if this worked out the way they describe, I’d be in favor of this as a small business owner (assuming it didn’t result in more regulations on me) simply to level the playing field between me and the megacorps.
If this did emerge (and it also punished high dividend payouts), it would lead in practice to companies searching feverishly for a loophole. Such as:
1. Domiciling themselves overseas. Or at least creating overseas subsidiaries that evade these regulations.
2. Structuring large parts of their capital structure as convertible debt right before this goes into place, which perhaps the regulations would still let them pay down.
3. Assuming these regulations only affect public companies, companies would just go private. In fact, since they’re not paying any cash out, they could spend several years piling up cash before going private — this makes it easier to go private. Then they go public again a few years later with a load of debt, which they focus on paying down before piling up cash again. Once the cash pile gets big enough, they go private again, etc. etc.
The last one would be a huge win for Wall Street (Schumer’s constituency) at the expense of Main Street. Lots of money transferred to the hands of investment bankers and private equity, so it seems like the regulations would be crafted to incentivize it.
Wency
February 5, 2019 at 3:55 PM
Yep Schumer pretends to be a populist but in reality he’s a puppet of Wall Street and the hedge fund industry. I still remember when New York had republican senators like Alfonse D’amato who served Wall Street yes but also Main Street.
redarmyvodka
February 5, 2019 at 10:17 PM
The increasing earnings-per-share is not an “illusion”. Accomplishing the same amount while tying up less resources is a genuine win.
Your tax loophole point is valid, though; dividends and stock buybacks should be treated in a consistent manner.
DB
February 5, 2019 at 4:05 PM
So does this have something to do with Cuomo’s announcement that NY tax receipts are down $2 bil?
Vipltd
February 5, 2019 at 5:11 PM
The other use of stock buybacks is to counter the dilution caused by the exercise of stock options.
Old school theory was that companies shouldn’t buy back their own stock unless it was trading for less than book value.
Dave Pinsen
February 5, 2019 at 5:12 PM
You can think of a share buy-back as a company acquiring assets (namely equity in a company that happens to be itself). Whether that makes sense or not for its shareholders depends entirely on the future performance of the company. If the company does well then the buy-back is a better long-term investment than using the cash to pay dividends; and vice versa. But I agree that there should not be any tax advantages favouring one strategy or the other.
lioncub
February 5, 2019 at 5:18 PM
Conceptually, this is about right. In practice, the analysis has shown that companies tend to buy back their stock at the worst of times. They spend heavily on buybacks as their stock peaks and are too cash-strapped to buy back anything when it troughs. This is one advantage of dividends.
Wency
February 5, 2019 at 6:26 PM
I agree. Also, the purpose of companies is not to speculate on the stock market. That’s the job of investors. So I agree the best policy is to return capital to investors through dividends. They can then decide whether to reinvest. The only case for buy-backs is that management has inside information on its investment. But most management teams are (a) excessively bullish concerning their own abilities and (b) excessively self-interested and poor guardians of shareholder interests.
lioncub
February 6, 2019 at 1:46 AM
if i thought ayn rand was smart i would apply for welfare for mental retardation or i would become a billionaire. one or the other.
ex cathedra: ayn rand = dr ruth = satan
February 5, 2019 at 6:32 PM
I hate tax loopholes
It’s been wisely observed that tax loopholes are just tricks done by Republican lawmakers whereby they think they pulled one over on Democratic lawmakers.
E. Rekshun
February 5, 2019 at 6:44 PM
Did you guys see that Twilight Zone promo with Jordan Peele? Looks like it aired during the Super Bowl, not that I tuned in for that.
Anyway the promo is so shitty I think it might be a joke. Jordan Peele looks like a clown walking around in a suit and raising one eyebrow like he’s got some secret. Is this serious? If so then the reboot is going to suck.
Lowe
February 5, 2019 at 6:58 PM
The only big issue I see with buybacks is this. If high-ranking people in the company are heavily compensated with stock options, as opposed to stock or cash, it creates an incentive to misuse buybacks. How do you misuse buybacks? Basically by trying to temporarily run the stock up higher when its at a local high. The proper use of buybacks is to authorize a certain amount of it over time and to buy when the stock is low. Looking at the buyback history of a company can tell you an awful lot about its capital discipline.
Companies that use buybacks properly also seem to be companies that have non-trivial dividends for some reason. Maybe its because dividends impose a certain measure of discipline.
Honest, I’d love to see dividends made able to be expensed by companies (like interest payments are), but fully taxable to the recipients (like interest income is). That’d also remove a big distortion favoring debt as opposed to equity financing.
Jehu
February 5, 2019 at 10:12 PM
Agree that it’s wrong that dividends get harsher tax treatment than interest payments.
Lion of the Blogosphere
February 5, 2019 at 11:19 PM
LOTB: The tax code doesn’t change (rich) people’s behavior
Capitalists: We’re doing this activity because of the tax code.
BTW, the tax code is also why companies have shifted compensation from cash, to healthcare benefits.
name can't be blank (@DSGNTD_PLYR)
February 6, 2019 at 8:33 AM
When did I say that loopholes don’t change people’s behavior????? Of course they do.
Lion of the Blogosphere
February 6, 2019 at 9:56 AM
#TaxationIsTheft especially these days when far-left theft.
‘The reason that a corporation exists is to make profits for its shareholders.’ No. Corporation’s purpose is whatever the shareholders or members desire. This is far-left propaganda and regulatory legislation, as even Milton Friedman acknowledged he was duped to believe as he came to embrace Libertarianism.
You have non-profits, and thanks to Libertarians things like S and combined B corporations, and the current push for worker/user corporations, condos, and co-ops the far-left hates or tries to hijack, as they’re attempting with the libertarian basic income and social insurances push, LBGT+ rights, etc. If anything, we should be demanding the restoration of NPO’s right to create large endowments without all these conflicting far-left regulations meant to hamper them (and why we really don’t have free health care today).
There’re many good reasons for corporate stock buybacks, most having to do with managerial or functional restructuring. It’s the stockholder’s job to assess those reasons, not some officious busybody or far-left bureaucrat greedy for other’s money. The far-left and their far-right fascist cronies will randomly regulate anything since their purpose is not to help you but screw up free choice. They detest the fact that thanks to libertarian-inspired deregulation, workers have IRA’s and so on and having a small corporation is easier than ever so nearly 90% of corporations are family-worker pension owned. And the worker pension loves those buybacks: as usual as with minimum wage laws, high tax rates, ‘welfare’ where much of the money pays the bureaucrat, etc. it’s not just the capable but the average working family the far-left despises and is trying to destroy to take over the US. US workers are wealthier than ever and the far-left (like their mirror-image the far-right fascist socialists) sees those pensions as financing their next grab for power. You look at their chat rooms and they see this as a way for even taking over non-profits if they can set the attitudes/legal precedent. Their new slogan is they have to teach the worker ‘you don’t own your paycheck or stocks.’ They’re busy training a generation of authoritarian ‘democratic socialists’ in colleges as the idiocracy slavemasters of to-morrow, giddy with altruist slogans and BS scholarship on US history, economics, etc.
In due course they’ll restrict buy-backs in even small family corporations without having to go through all kinds of tax and regulation hoops. And they’re talking about a 2% wealth tax at federal, state, and local levels which compounded to impoverish families in a generation.
The far-left is the US-hating enemy, the secularized version of the feudal far-right. Nothing good comes from them. The left always lies. They count on you focusing and debating one proposal like buybacks without realizing it’s part of many interlocking ones like a 2% but really 6% wealth tax and restrictions on speech, NPO endowments, IRA’s, etc. meant to strangle the country and re-fight and win the Cold War. Don’t repeat their treason.
The Old Libertarian
February 6, 2019 at 9:30 AM
‘Why would anyone buy stock if the companies will use all their profits to pay higher wages to its workers?’
This is why there is no e-verify and no changes to the immigration disaster. Dont make me laugh now.
Obviously the workers should be paid good wages and share in the profits. They buybacks is the corporation’s bussiness, but the protection of the people against the corporate gread is the state’s business. A fascist dictatorship is the only answer to this conundrum.
Take health care, for example, a libertarian would say that this isn’t the state’s responsibility, a communist would say that it’s sure is, but Africans, Cubans or Syrians have priority at the moment. Only a nationalist government that will put its people first is the solution. Everything else is a complete disaster.
Yakov
February 6, 2019 at 9:56 AM
It is a bad idea to limit share buybacks. The only way investors get returns on their money is either through capital appreciation (which is influenced by share buybacks) or with dividends.
You cannot have a system where shareholder equity is paid out as wages. Nobody would bother investing. You also cannot have a system where shareholder equity goes to capital expenditure. That is also converting shareholder wealth to private use.
Share buy backs are a very important method of returning money to shareholders. The problem with dividends is that they have to be paid out of retained earning using free or excess cash, whereas share buybacks do not. Moreover, once you start paying dividends, you cannot stop, because, if you do, your share price will crash. Dividends have to be carefully planned over years, whereas share buybacks do not.
Also remember that company shares are retained as Treasury stock when they are bought back.
map
February 7, 2019 at 4:44 PM
“The problem with dividends is that they have to be paid out of retained earning using free or excess cash”
That’s not a problem, it prevents companies from over-leveraging.
Lion of the Blogosphere
February 7, 2019 at 5:05 PM
There is no such thing as “over-leveraging.” Lenders are not going to give money to a firm that will default on its loans.
map
February 7, 2019 at 9:42 PM