Subject: Buyback tax
In Thursday’s State of the Union address, President Joe Biden is expected to propose tripling the tax that companies pay when they buy back shares of their own stock. If approved (something that’s questionable in an election year), the White House hopes raising the tax rate from 1% to 4% will spur companies to use that money for either additional hiring or spending on things like new facilities or research and development.

https://www.fastcompany.com/91...


I'm trying to ignore the implicit Fast Company calculation that says that 3 times 1% gives you 4%, and focus on what a 4% buyback tax might mean for Berkshire shareholders. If the utilities are no longer a reliable sink for investing float at low but reliable rates of return, and big public companies are trading at high valuations, and big private companies are few and far between, then what's left? Dividends and buybacks, really, as Buffett has said he could not really justify holding huge sums of cash year after year.

Berkshire shareholders have been consulted about whether they want a dividend, and 97% of shareholders not called Buffett voted against a proposal to instate a dividend, 10 years ago.

So that leaves buybacks. The current 1% tax is probably too small to change Buffett's thinking very much, but a 4% tax might make him think twice, and already in the 2022 annual letter, Buffett showed that he is worried about this:

“When you are told that all repurchases are harmful to shareholders or the country, or particularly beneficial to CEOs, you are listening either to an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

'Silver-tongued demagogue' is not the description that springs to mind when one thinks of the current president, but the idea is back with a vengeance. I suppose it would need congressional approval, which is probably not in the cards, unless the previous guy also likes the idea. Might he? The 2018 tax cut was supposed to encourage companies to invest in factories, workers and wages, and companies using tax savings for buybacks may be something Trump is not enchanted about.

If a 4% tax were adopted, that might bring us back to liking dividends more. I'm trying to figure out how to quantify this. Obviously it depends on a lot of factors, like whether your shares are in a tax-sheltered account or not, what rate of tax you pay on dividends in your country, and how future capital gains will be taxed, but going from 1% to 4% would probably make enough of a difference to change priorities for a lot of shareholders. Any thoughts on this?

DTB