A stock repurchase is when a company buys back its own shares through tender offers or the open market. Buyback programs, with little regulations such as in the U.S., can lead to much of the company’s profits going straight to the stock market, sitting there appreciating in value without incurring taxes until they are withdrawn.
Keep in mind: the wealthiest 1% own 56% of the U.S. stock market. Since they can keep it there as long as they please, they can theoretically never pay taxes on all of the company stock they hold. Stock repurchases allow the wealthiest to essentially store their profits without having to pay taxes on profits.
Massive stock repurchases mean the American public arguably gets ripped off of:
- Improved social services (e.g. access, effectiveness, scope, etc.) funded by taxes collected on company profits
- Job opportunities that come when a business uses its profits to expand
- Earlier retirement or retirement in general, as profits could go to providing more funding for workers’ 401(k)s and IRAs
- Increased worker wages
Do you think the capital gains tax rate creates an investor class? Have your say by joining the Zero Theft voting platform…
Crucial Questions to Consider
The Zero Theft Movement is dedicated to eradicating the rigged layer of the economy. Stock repurchases are one instance where crony capitalists could be rigging the system against us. We ask you to consider the following questions as you make your own decision on the matter:
- Could stricter regulations on stock repurchases lead to many more job opportunities and better worker wages?
- Is the American public at large receiving its fair share of the growing production it’s responsible for, or are we getting ripped off, for one, by crony capitalists buying back company shares?
Note : In part I(Stock Buyback) of this series on share repurchases, we explained what they are, how U.S. regulations are debatably rigged in the form of the Securities Exchange Act and its Rule 10b-18. We strongly urge you to go back and read that article if you haven’t already. It provides context to much of what we will discuss here.
Tax Avoidance and Price Boosts with Buy and Hold Tactics?
U.S. News states, “For the investors companies serve, buybacks are also kind at tax time. Dividends are taxed the year they are received. But if a buyback succeeds in raising the share price, there’s no tax until the shares are sold.”
Stock Analysis makes similar assertions: “Most investors need to pay a tax on their dividend payments, which amounts to 0-40% in the US. On the other hand, investors don’t need to pay a tax from the share price going up until they sell, when they will have to pay a capital gains tax…For long-term holders, it can be better to have the shares gain value from buybacks instead of getting a dividend and having to pay a tax right away. In this way, the money stays in the investment and can gain compound interest over time.”
Not only are assets exempt from getting taxed until their indefinite withdrawal (reducing government revenue), but they also tend to appreciate in value. By simultaneously absorbing its own stock and reducing the number of shares on the market, the business increases its relative ownership stake. The market also perceives share buybacks positively, further hiking up share prices.
KEY QUESTIONS
- Do investors not have to pay tax if they buy back shares and hold them?
- Do share buybacks drive up prices?
INVESTIGATIONS INTO THE FINANCE SECTOR
➤ AIG: The One-Way Bet Behind the 2008 Financial Crisis?
➤ Corporate Tax Evasion: Individuals vs. Big Business
➤ Dark Pool Trading: An Introduction to ‘Invisible’ Exchanges
Share buybacks > U.S. Workers and the Economy?
If U.S. share buybacks were under the same or similar regulations as German firms, what could our economy and average pay look like? Profits, instead of appreciating in the stock market, could go into growing the company and economy, creating jobs, and increasing salaries.
The Communications Workers of America writes: “While buybacks are very beneficial to corporate executives and wealthy Wall Street investors, they end up harming workers. Before the stock buyback explosion, companies would often use excess profits to increase worker pay and benefits, to invest in new equipment, or to expand into new markets and create more jobs.”
The New York Times opinion piece cited in part I states:“…when trillions of dollars of corporate cash are extracted from companies through buybacks, on top of dividends, the result is a dramatic concentration of income among the richest American households and the destruction of middle-class employment opportunities.”
Forbes, the major business magazine, published an article, stating, “But right now, without shareholder approval, corporate boards freely swap a safe asset (cash) for a risky asset (stock). In the end it’s not the executives who get hurt. It’s the rank-and-file employees, as well as the investors who will see their pensions and 401(k)s decline.”
KEY QUESTIONS
- Could stricter regulations on stock repurchases lead to many more job opportunities and better worker wages?
- Could and should a significant portion of the funds for stock repurchases be redirected to providing more for pensions/401(k)s/IRAs?
Corporate taxes accounted for just 6.6% of the U.S. government’s revenue in FY 2019. Does that sound fair to you? Help your fellow citizens identify whether the current tax system is rigged….
How Much Money Could Have Gone to the American Public?
Annie Lowrey, staff writer at The Atlantic, wrote a piece entitled ‘Are Stock Buybacks Starving the Economy?’ Lowrey specifically covers one alleged instance of stock buyback in the U.S.
“…take Craig Menear, the chairman and CEO of Home Depot. On a conference call with investors in February 2018, he and his team mentioned their ‘plan to repurchase approximately $4 billion of outstanding shares during the year.’ The next day, he sold 113,687 shares, netting $18 million. The following day, he was granted 38,689 new shares, and promptly unloaded 24,286 shares for a profit of $4.5 million. Though Menear’s stated compensation in SEC filing was $11.4 million for 2018, stock sales helped him earn an additional $30 million for the year…By contrast the median worker pay at Home Depot is $23,000 a year. If the money spent on buybacks had been used to boost salaries, the Roosevelt Institute and the National Employment Law Project calculated, each worker would have made an additional $18,000 a year.”
Research by the National Employment Law Project
Lowrey draws much of her evidence from research conducted by the National Employment Law Project (NELP). NELP researchers Irene Tung and Katy Milan, in collaboration with the Roosevelt Institute, published a report stating that publicly traded companies in the U.S. spent “almost 60 percent (58.6 percent) of their profits on buybacks between 2015 and 2017.”
Perhaps even more startling is Tung and Milan’s claim that: “More than 2 out of 5 public companies (42.2 percent) spent over half of their profits on buybacks over this period. This figure is even higher for non-financial, insurance, and real estate companies, with almost 60 percent (59.6 percent) spending over half of their total profits on buybacks.”
The following are the key findings from the report. We have quoted them directly from the Roosevelt Institute.
- The restaurant industry spent more on stock buybacks than it made in profits, funding buybacks through debt and cash reserves. Buybacks totaled 136.5 percent of net profits.
- Companies in the retail and food manufacturing industries spent 79.2 percent and 58.2 percent, respectively, of their net profits on share buybacks.
- McDonald’s could pay all of its 1.9 million workers almost $4,000 more a year if the company redirected the money it spends on buybacks to workers’ paychecks instead.
- If Starbucks reallocated money from share repurchases to compensation, every worker could get a $7,000 raise.
- With the money currently spent on buybacks, Lowes, CVS, and Home Depot could give each of their workers raises of at least $18,000 a year.
Are Stock Repurchases Theft?
“Instead of putting resources into innovative ways to build their businesses or hire new employees, corporations are pumping their record-breaking profits into buying back their own stock and increasing dividends to benefit their executives and wealthy shareholders at the expense of their workers.”
Tung and Milan, in the report cited above, state: “For decades, U.S. workers have seen stagnant wage growth despite rapidly increasing productivity, and the U.S. have reinvested less and less of their profits, now at a record high, into their employees, operations, expansion, and new job creation. Our analysis confirms this by showing an outsized share of corporate profits being spent on stock buybacks.”
With the information presented to you in our two-part examination of stock repurchases, it is now up to you to play your part. If we can pinpoint which economic areas are rigged, how much is getting ripped off and by whom, then we, the American public, can start holding those in power accountable. All of that must be decided by all of us, by a vote.
Is the American public at large receiving its fair share of the growing production it’s responsible for, or are crony capitalists ripping us off by buying back company shares?
If you are still undecided, your fellow citizens have investigated the issue and presented their own cases for why they believe or don’t believe stock repurchases should be viewed as rigged economy theft.
Eradicate the Rigged Layer with the Zero Theft Movement
Crony capitalists and corrupt officials have created a rigged layer of the economy that enables them to unethically profit off of the everyday American. This corruption has led to the 50 years of wage suppression, 50 years of price fixing and anti-competitive markets, and 50 years of legislators and regulators who work to satisfy moneyed interests, not our interests.
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The ZeroTheft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. ZeroTheft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.