No topic is currently more controversial in business circles than taxes. Tensions escalate over a new corporate tax.
Put simply, the business world hates taxes.
It’s no wonder, then, that when the US Senate last week approved a 1% tax on share buybacks to partially fund President Joe Biden’s climate and health bill, the proposed measure sparked much debate. Opinions vary widely on the pros and cons of buybacks.
The House of Representatives is expected to vote on the bill this week.
Enter Mark Cuban, one of the most heard and admired entrepreneurs.
The “Shark Tank” star has never hidden his aversion to share buybacks. He says buybacks “are not good for most employees at the companies that do them.”
Cuban reiterated his aversion to share buybacks in a lengthy exchange that consisted of multiple tweets on Twitter with Norbert J. Michel, vice president and director of the Center for Monetary and Financial Alternatives at the libertarian think tank Cato Institute.
Repurchase Premium holders looking to sell
“An underappreciated fact is that most stock repurchases either go to employees who later sell to investors, or are acquired to reduce equity dilution after employees sell shares,” Michel tweeted Aug. 10. Michel commented on a Wall Street Journal column entitled “The Virtues of Buybacks”.
“Why don’t you just buy back stock from these employees and eliminate their price risk when they sell?” Cubans commented.
“You could do both (compensate with shares and later buy shares from them?)?” Michel replied.
“But they rarely buy these stocks directly from employees,” Cuban argued. “And the staff can’t match their sales to the announcement. Therefore, the employees who are least able to afford the risk and perhaps the least financially savvy bear all of the price risk if they can or must sell.”
Stock repurchases, also known as stock repurchases, are one of the ways a company lets its shareholders share in its financial successes.
Scroll to Next
In a buyback, as the name suggests, a company buys its own stock in the market. Such moves reduce the company’s outstanding shares and increase the proportionate shares held by shareholders. They are also seen as a way for the company to invest in itself.
According to Cuban, share buybacks reward shareholders who want to sell all or part of their shares. He calls buybacks “the epitome of financial engineering.”
“I would have done the 2% tax”
“Buybacks, IMHO [in my humble opinion], are all wrong with what companies are doing. It’s a response to pressure from big investors, from CSuite, who want to develop EPS [earnings per share]to try to steal the stock, get bonuses,” the billionaire blurted out.
He says that “there are no good taxes,” but he seems to think the new tax can be justified, and he explains why: “[When] Congress sees financial engineering, excluding a significant number of stakeholders, from all the bad taxes that propel buyback taxation to the top of the list.”
He added:
“If I had my way, I would have created a tax exemption that said if all employees were paid shares in equal proportion to their W2 + Kx salary, then no tax,” Cuban argued.
“But we know that few CEOs would accept that,” he said.
He suggests that Congress should have doubled the announced tax on share buybacks.
“So I would have made the tax 2% 🙂,” said the billionaire.
“I think a buyback tax is actually a good idea,” Cuban reiterated in a phone interview with CNBC Aug. 11. “I have no problem with that at all. In fact, I think it’s a good idea.”
The proposed share buyback tax would come into effect in 2023. Some analysts say this could lead to a buyback frenzy for the remainder of 2022, which could boost markets.
In 2021, by some estimates, the S&P 500’s share buybacks totaled $883 billion, up 73% from the $511 billion paid out in dividends. Unlike dividends, stock buybacks increase earnings per share by reducing the number of shares. They also allow investors to defer or avoid paying taxes.