The Inflation Reduction Act's tax on stock buybacks isn't a perfect solution to close the wealth gap — but it's a step in the right direction
- Paul Constant is a writer at Civic Ventures and the cohost of the "Pitchfork Economics" podcast.
- He argues the IRA's 1% tax on stock buybacks will curb the practice in corporate America.
- There's more lawmakers can do, he says, like ensure workers who generate profits get a cut.
Since the Inflation Reduction Act successfully passed through the Senate last week, pundits and organizations have spotlighted what they believe to be the most consequential parts of the bill.
Progressive and environmental groups have praised the IRA's water conservation efforts, its incentivizing of the purchase of electrical vehicles and appliances, and its funding of conservation on private farms and ranches around the country. The Institute on Taxation and Economic Policy, a nonpartisan, nonprofit think tank, has also praised the IRA's raising of the minimum corporate tax to 15% and funding to hire more IRS agents with the intent to audit wealthy individuals and corporations in search of tax cheats, while other groups have spotlighted the bill's strengthening of Affordable Care Act protections and lowering of prescription drug costs.
But one last-minute addition to the IRA received relatively little attention, and it could stand to be one of the most transformative policies in the bill.
When Arizona Senator Kyrsten Sinema cited "encouraging continued growth" as a reason to kill the IRA's provision to close the carried-interest loophole, which allows private-equity and hedge-fund executives to be compensated in investment funds that are taxed at 20% rather than the traditional salary tax of up to 37%, many progressives were outraged. They saw Sinema's action as a move to protect billions of dollars in tax-free profits for the wealthy (Sinema has been the recipient of half a million dollars in private-equity lobbying funds in the past year alone).
But the 1% stock buyback excise tax that Sinema approved as a replacement for the carried-interest tax could prove to be just as good of a deterrent for wealthy shareholders looking to profit off of stock buybacks that take money out of worker's pockets.
Curbing record-high stock buybacks
Stock buybacks are the mechanism through which CEOs and executives pay a corporation's profits out to the shareholder class. In other words, they take billions of dollars in profit that could be invested into the corporation's future, research and development costs, and employee wages and hand them out to shareholders with no strings attached. And because more than half of S&P 500 CEO compensation is now in stock, some of the biggest beneficiaries are the CEOs who approve the buybacks in the first place.
Stock buybacks were illegal until the Reagan Administration legalized them in 1982. Since that time, they've become one of the biggest contributors to American inequality. The wealthiest 10% of American households own about 90% of all available shares, and the top 1% owns about half of all stocks.
The pace is only accelerating. Stock buybacks hit a record high last year, with just shy of $290 billion of buybacks in the fourth quarter of 2021 alone. Goldman Sachs predicts that 2022 will be another record-setting year, with about $1 trillion in total projected annual buybacks.
A 1% excise tax on stock buybacks isn't likely to discourage too many corporate executives from following through with their buyback schemes. But should it survive this week's passage through the House, the tax is expected to raise $73 billion in revenue that will be put toward combating climate change. And now that every single penny of corporate profits won't be handed over to an elite class of shareholders, executives will at least have to think twice before pitching buybacks as an efficient use of funds. The added "friction" of a tax will hopefully at least slow the record pace of buybacks.
Room to improve
There's still plenty of room for lawmakers to continue to act on stock buybacks even after the IRA goes into effect. They could increase the excise tax for additional revenue, outlaw buybacks again, or ensure that the workers who generated profits get a cut — like when Senator Cory Booker of New Jersey introduced legislation in 2019 that would require corporations that buy back stock to allocate a share of profits for worker dividends.
For now, though, we should be relieved that Congress has finally taken a modest step toward recognizing buybacks as a central pillar of wealth inequality.
Thanks to the IRA, buybacks are no longer the pure, unadulterated transfer of wealth from workers to the richest 1% that they once were, even if just by a little bit. That's cause for celebration.
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