Recently compiled data suggest that the 1% federal stock-buyback excise tax that went into effect at the beginning of 2023 will have little to no noticeable impact on the volume of corporate share repurchases. That’s good news for bulls, who feared that the tax would substantially reduce buyback activity, which has been a major prop under the bull market.
Yet a higher tax on buybacks ultimately might not be so benign. In his State of the Union address earlier this year, President Joe Biden proposed quadrupling the tax to 4%. That level could be high enough to dissuade companies from returning cash to investors via the repurchase of shares. Consider first the volume of buyback activity in 2022. Though the tax had not yet gone into effect, it became increasingly clear as the year progressed that it would be enacted. If the tax were going to have a big impact on firms’ reliance on buybacks, we might have seen companies significantly accelerate the pace of buybacks in order to avoid the future tax. But that didn’t happen. According to Jeffrey Rubin, director of research at Birinyi Associates, announced buybacks were only modestly hi …