Why Stock Buybacks Are Dangerous for the Economy

Corporate buybacks are dangerous when <i>when the taxpayer bails out the shareholders</i>.<p>Major companies loaded up on debt because a decade of low interest rates made it cheap to do so, then purchased stock because shareholders wanted them to (paper gain and get taxed later on sale, so more flexibility for taxation timing).<p>So companies have no wiggle room in a crisis. So what? Bankruptcy, hose the shareholders, sell the assets to a new company, and the market will learn. But no - bailouts for everyone! The Fed buys their old junk bonds and even new ones! No one ever feels any pain. The government isn’t allowing natural business processes to happen and then some dumb idea like “ban stock buybacks! That will solve everything!” is promoted.<p>The government has trained the market so that if a recession happens, it will backstop everything. It’s ridiculous.

The best excuse for buybacks are that they are &quot;tax efficient&quot; which is another way of saying they are about tax evasion. I don&#x27;t care how you feel about tax rates, if you think corporations should pay less taxes lower the rates. We just did that in the US.<p>Less legitimate (but I would argue as common) reasons are to prevent excessive dilution from stock compensation plans and to prop up the value of shares tied to compensation packages. Studies show that companies buy shares when the price is high, so I doubt on the whole shareholders benefit. It feels good to see a stock go up, but dividends are nice too.

Yawn. If you look at why companies like Apple use debt for buybacks, it’s because the US corporate tax system traps earnings overseas. Sure the Trump tax cuts made things slightly better, but returning foreign profits still cedes about half of them to the tax man.<p>Buybacks are just dividends with a more tax efficient method of distribution.<p>I still don’t understand why we tax savings and investment, which is what corporate income taxes do. Make the corporate rate zero, and compensate by raising capital gains and dividend tax rates to individual income rates. That rewards reinvesting into American production and pulls back all those foreign profits.