President Joe Biden’s State of the Union address earlier this month featured a hefty dose of good old-fashioned economic populism. Biden called out the rich for cheating on taxes, and big companies for not paying any taxes at all. He attacked Big Pharma for jacking up drug prices. And he took aim at one of progressives’ bêtes noires: stock buybacks.
Biden attacked companies for spending money on buybacks rather than investing in their operations, and called on Congress to quadruple the tax on such stock repurchases—a tax first put in place by last year’s Inflation Reduction Act. And on February 14, Senate Democrats Sherrod Brown and Ron Wyden introduced a bill that would do exactly that.
The proposed tax would raise some revenue, and make more similar the taxation treatment of buybacks and dividends. But that’s not really the point of the tax. Its goal is to discourage corporations from doing something that many Democrats now see as useless at best and downright harmful at worst.
Buybacks, according to their critics, are a form of stock-market manipulation designed purely to make corporate executives rich. Such self-dealing, critics say, is responsible for wage stagnation, corporate underinvestment, and sluggish economic growth. When Southwest Airlines’ scheduling software crashed recently, leading to a flood of cancellations, buybacks were cited as one of the culprits. And after the Norfolk Southern train derailment in East Palestine, Ohio, buybacks were again blamed—in this case, for the company stinting on safety upgrades. Senate Majority Leader Chuck Schumer captured the prevailing sentiment last August, when he called buybacks “despicable.”
On the face of it, this hatred of buybacks is a little surprising. It’s a fairly mundane thing for a company, public or private, to buy back its stock when it thinks the shares are undervalued (the quintessential rationale for buybacks). Although buybacks do return capital to shareholders, the same is true of dividends—yet you rarely, if ever, hear politicians blasting dividend payments. (To be fair, Senator Bernie Sanders has probably criticized those too at some point.)
So why have buybacks become the object of such vitriol? A lot of it has to do with just how much money corporations are spending on them—more than $5 trillion over the past decade—and the fact that the volume of buybacks has risen dramatically in the past 20 years. Most of the attacks, however, rest not on these actualities but on myths about how buybacks work and what effect they have.
Take the argument—one much favored by Senator Elizabeth Warren—that unlike dividends, buybacks artificially boost the company’s share price, and that executives use them to dump stock. Buybacks, according to this argument, are a kind of sugar high, plumping up the stock price in the short run but weakening the company over the long haul. The problem with the argument is that this effect is negligible: Although it’s true that buybacks do tend to create a short-term boost to stock prices, recent research suggests that they do so by less than a single percentage point.
More important, if buybacks were actually inflating a company’s stock price in the short term at the expense of its long-term well-being, then companies that engage in big buybacks would underperform the market in the long run. The opposite is true: Studies have shown that, on average, companies that buy back their stock beat the market in the long term. This suggests that companies generally do a good job of buying their stock when it’s undervalued. (It also means that executives who choose to dump shares during buybacks are usually giving up sizable future gains.)
The critics also argue that companies, in spending so much money on buybacks, are foregoing worthwhile investment opportunities and underinvesting. They might point to the fact that the percentage of corporate revenue dedicated to traditional capital expenditures, such as physical plant and equipment, has dropped steadily over the years, even as spending on buybacks has risen. But this phenomenon is in large part due to the shift in the U.S. economy away from such industries as manufacturing and mining, and the rising domination of the economy by less capital-intensive industries. If, instead, you look at traditional investment plus spending on “intangibles” such as intellectual property and research and development, there’s no sign of a steep drop-off.
Undoubtedly true is that, in some cases, buybacks are used by unimaginative CEOs who can’t think of anything better to do with surplus cash. Also true is that buybacks are not an inherently good strategy; many of them prove to be bad investments because the company’s stock is overvalued. But if corporations are regularly missing out on solid investment opportunities, you can’t see it in their results: Corporate profits and earnings growth have been high in recent years. That suggests that if companies are buying back stock, it’s mostly because they think more profitable investments aren’t available.
Take, for instance, the example that Biden cited in his State of the Union address: oil companies. Biden criticized “Big Oil” for spending a chunk of the huge profits it earned in 2022 on buybacks rather than investing more in oil production. But it’s not surprising that oil companies view big new investments in oil production as risky, given the Biden administration’s push for a shift in U.S. energy consumption to greener sources, and given the likelihood of tougher regulations on drilling and fracking—perhaps even the introduction of carbon pricing—to help tackle climate change. In that light, the appeal of simply returning money to shareholders is easy to see.
What about workers’ pay? Buyback critics suggest that if corporations can’t buy back stock, they’ll be more inclined to improve wages. But this argument is even more implausible than the one about investment. Taxing buybacks, even at punitive rates, doesn’t create pressure on companies to pay workers more: Even if companies are deterred from buying back their stock, it does not follow that they’re going to choose to reduce their profits. What they’ll do instead is increase dividends, spend money on acquisitions, or, more likely, stockpile the cash.
Just look at Apple, the company that’s spent the most on buybacks in recent years. In 2017, before it accelerated its program of buying back stock, Apple had $285 billion in cash on its balance sheet. That would be the most likely result if companies stopped buying back stock: not higher wages but much bigger corporate bank accounts. The economy does not obviously benefit from having corporations hold piles of cash rather than return some of it to shareholders (who typically recycle it into other investments).
Why progressives have seized on buybacks as a symbol of overweening corporate power is not hard to understand. But to hold buybacks responsible for problems they have little to do with—problems that getting rid of them would do nothing to solve—does not make sense. If you want corporations to raise wages, you need to strengthen labor unions, raise minimum wages, and run tighter labor markets. If you want Southwest Airlines to upgrade its software, you need rules that punish airlines for mass cancellations caused by system failures. If you want Norfolk Southern to spend more on safety, you need tougher safety regulations.
Even if you think corporate America is sick, curbing buybacks treats something that’s barely a symptom. It does nothing to tackle the disease.
