Warren Buffett used his annual shareholder letter — practically required reading for the business community — to clap back at fellow Democrats who are trying to rein in stock buybacks.
Over the weekend, the 92-year-old investing legend decried buyback critics as "economic illeterates" or "silver-tongued demagogues." Buffett isn't one to name names, but he is clearly alluding to people like President Joe Biden, whose administration just imposed a 1% tax on buybacks, and Senator Elizabeth Warren, a longtime critic of the practice. Biden even elevated the issue to the State of the Union, calling for that tax to be quadrupled this year. (It'll never happen under the current Congress, but a man can dream I guess.)
Let's try to clear some of this up...
In simple terms, a buyback is when a company purchases its own shares on the open market. When you do that, you reward existing shareholders by increasing the value of their stakes. Plus, you signal confidence in your company's long-term value. Proponents say buybacks, which work like dividends, return cash to investors — and, like, that's kinda the whole point of investing.
But in the past few years, "buyback" has become a byword for corporate greed, at least among those "silver-tongued demagogues," to borrow from Buffett.
Critics argue that big companies are too often using buybacks to fatten executive pay while keeping their workers on barely livable wages. Why not reinvest the profits in the company, improving infrastructure and rewarding the employees who keep the trains running on time?
The fact that Buffett, a Democrat who openly supported Hillary Clinton's presidential run, is now grumbling about the left's rhetoric on buybacks might be a sign we've all lost the thread on what we're fighting over.
I'm not an economist, nor much of an investor for that matter, so I asked Josh Bivens, the director of research at the left-leaning Economic Policy Institute, for some help wrapping my head around the issue.
"While I'm a supporter of the stock buyback tax, I confess that I do find some of the accusations about their evils a bit overdone at times," Bivens said.
If the US were to ban buybacks, companies would simply return cash to shareholders through dividends, Bivens explains.
"Buybacks by themselves can't really be the root cause of, say, too-low investment or too-low wages," he said. "The roots of these problems are in other policy realms, I think, and won't be fixed by a tax (even a much higher one than what the Biden admin is proposing) or even a ban on buybacks."
That said, there are still good reasons to tax buybacks, according to Bivens, as it can help level the taxation playing field between dividends and buybacks. Taxing buybacks may also help shift the taxation of corporations away from "highly manipulable measures like accounting profits and towards more-transparent measures like buybacks and dividends."
MY TWO CENTS
Are buybacks great? No. And especially from a PR standpoint, you probably don't want to brag about them, especially if your name is Exxon or Chevron. But I agree that taxing them makes sense, given how widespread their use has become and how easily corporations evade taxes in the first place.
Are they inherently bad? Probably not.. Like most things, they are complicated. As Wall Street Journal investing columnist Jason Zweig wrote recently: "Buybacks are neither bad nor good. They are simply a tool. Just as you can use a hammer either to build a house or knock one down, buybacks are useful in the right corporate hands and dangerous in the wrong ones."
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