Corporate America still loves stock buybacks. Warren Buffett spent a significant chunk of his annual letter praising them — which is just as well, given that 2023 is likely to be the first year where they reach $1 trillion.
at 1%. The change enacted two months ago is estimated to raise $74 billion over a decade for the public fisc. So far, the tax doesn't seem to have reduced their popularity in the slightest.As Buffett explains, the theory behind buybacks is that they reduce the number of shares outstanding, thereby giving each remaining shareholder ownership of a greater percentage of the company.Even Buffett doesn't like all buybacks.
Investors who pay taxes generally prefer buybacks, because dividends are taxable as income. Buybacks, on the other hand, generate no tax bill for any non-selling shareholder — and even selling shareholders generally only pay the lower long-term capital gains tax. The new tax on buybacks is not a so-called Pigovian tax on something the government disapproves of and wants less of, so much as it's a way to try to even out distortions in the difference between how dividends and buybacks are taxed.For one, when employees are granted options, buybacks effectively increase the proportion of the company that they're entitled to purchase at a fixed price, making the options more valuable.
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