Sen. Marco Rubio (R-FL) is taking on an issue that you typically hear Sen. Bernie Sanders (I-VT) and progressive Democrats talking about: stock buybacks.
The Florida senator is looking at one of the Republican tax bill’s worst optical problems, corporations spending their big tax cut on inflating the price of their stocks instead of hiring workers or building new factories. US companies spent a record $1 trillion on stock buybacks in 2018.
Rubio’s proposal is, in essence, to tax stock buybacks more aggressively while extending a provision in the tax bill that allows companies to immediately and fully deduct the cost of new investments, thereby making it more attractive for companies to make those investments.
Rubio is framing his proposal as a necessary step for the United States to compete with China, in his view the country’s greatest geopolitical threat, but implicit in its design is a recognition the GOP bill didn’t have the desired effect on business behavior.
Experts say Rubio’s heart may be in the right place. “There’s good reason to believe companies underinvest,” said Alan Cole, a former Republican tax policy adviser now at the Wharton School.
But it’s not clear how well Rubio’s proposal — the details of which are still vague — would work and if it would actually do what he says he intends. Experts also point out that sometimes, buying back stock is the right thing for a company to do.
“If corporations don’t have use for the money, trying to punish them for sending the money to shareholders who have better use for it strikes me as counterproductive,” said Steve Rosenthal, a senior fellow at the Tax Policy Center.
Other Republican lawmakers seem uninterested in revisiting their new tax law or fixing its problems. Rubio’s office knows his idea probably isn’t going anywhere anytime soon. But he keeps talking about it anyway, floating the idea in a December op-ed in the Atlantic and making his case to Twitter last week.
“The only way to win a debate is to start one,” a top Rubio aide told Vox. “He’s playing a role in making sure that debate is front and center.”
Rubio’s plan to bump taxes on stock buybacks and increase investment
Two features of the American tax code, including one of the changes that was made in the Republican legislation, compound the issue and tip the scales in favor of buybacks.
First, the US tax code does treat buybacks more favorably than other financial transactions. Dividends that companies pay out to their investors, for example, gets taxed every year. But capital gains, which is what stock buybacks count as for tax purposes, only get taxed when a shareholder sells their stock; that could be 10 or 20 years down the line. That distinction raises the effective tax rate on dividends while reducing the tax liability of capital gains.
So it makes a lot of tax sense for companies and their shareholders to spend a sudden and unexpected influx of cash — like they enjoyed after a recent dramatic drop in their tax rate — on buybacks.
Second, the tax law did allow companies to fully and immediately deduct new business investments from their tax liability, which everybody agrees should encourage more of that pro-growth activity. But then that full expensing provision actually expires in 2022, limiting its effect on long-term investing, because companies know it will disappear in a few years.
In other words, the tax code makes buybacks an appealing option for companies with windfalls of cash and, at the same time, the new tax law didn’t make permanent the kind of pro-growth policy that might encourage companies to spend that money on new factories or more jobs instead. Rubio wants to realign those incentives.
“We want to make sure that if a company sitting on a bunch of capital, we have not as a country, over a course of decades, inadvertently created an incentive for them not to invest it in America,” the Rubio aide said. “Arguably you can say that we have.”
The senator’s solution is remarkably simple. First, stock buybacks would be treated like dividends under the tax code, which means companies would get taxed immediately on those transactions, instead of delaying the levy for years potentially until the shareholder sells their stock. Second, full expensing would be made permanent. The idea is to reduce the incentive for companies to funnel their excess capital to buybacks while increasing the tax benefits of more productive investments.
To be clear, right-leaning tax experts don’t really buy the idea that companies are doing stock buybacks instead of constructing new facilities or hiring more people. They think companies will still invest, and lenders will provide the necessary money, if they see the right opportunity. But if they didn’t see such an opportunity, then stock buybacks were an appealing option for businesses after the GOP’s big corporate tax cut: a one-time return to their shareholders.
The pros and cons of the Rubio plan, according to tax experts
There is reason to worry that companies underinvest in the US. As Cole explained, strong brands with a lot of market power that control certain markets can sometimes limit supply to command higher prices — Apple, for example, could probably make more iPhones and charge less for them, but it doesn’t. And the business tax code, beyond expensing, can be biased against investment. “Rubio’s proposal would fix this,” Cole said.
Most conservative economists love full expensing. Kyle Pomerleau, an economist at the right-leaning Tax Foundation, called it “the most powerful pro-investment thing you could do.”
Rosenthal said he sees Rubio’s proposal specifically as a shot at getting foreign shareholders, already big winners of the 2017 corporate tax cuts, to contribute more to the US tax system. Currently, capital gains are tax-free in the US for foreign shareholders (though those investors may have to pay taxes on them wherever they live). Dividends are subject to US tax withholdings for foreigners. “This is not about US shareholders, this is about foreign shareholders,” Rosenthal said, assuming the Rubio bill would change the way capital gains are taxed for foreigners, which isn’t clear.
But there are reasons to be skeptical of Rubio’s proposal as well.
Many dividends are already taxed at a capital gains rate, so the change Rubio is proposing might not make all that much of a difference, New York-based tax analyst Bob Willens explained. “I suppose what he’s really aiming for is to ensure that dividends resulting from stock buybacks are taxed at the highest marginal rates, i.e., 37 percent, and that, he believes, will discourage buybacks. I would beg to differ,” he said.
And stock buybacks aren’t, by definition, bad. Sometimes, they make sense for a company to engage in because they really don’t have anything better to do with their money. When firms engage in stock buybacks, they put money back in the pockets of shareholders who presumably can invest in other — and perhaps better — companies. Buyback proponents also argue that buybacks are good, because they put money back into the economy, and they lead to a rise in stock prices, which can have a marginally positive effect on consumer confidence and consumption.
Moreover, even right-leaning tax experts argue that it doesn’t make much sense to target buybacks specifically rather than looking at changes to how all capital gains are taxed — unless, that is, a big consideration here is to fix the GOP tax plan’s political problem, with the steady stream of headlines about companies splurging on buybacks.
“I understand the politics of that,” Pomerleau told Vox. “But it’s just the policy aspect: Why target this small sliver of gains when there are so many more gains deferred for a long time or forever?”
How to get companies to make more productive investments is an important question to ask
Rubio’s bill — which has yet to be introduced — isn’t going to become law overnight. But that he’s talking about these kinds of issues at all is notable. There’s been a lot of chatter about stock buybacks on the left (Sanders and Senate Minority Leader Chuck Schumer earlier this month said they planned to introduce legislation to put certain requirements on buybacks), and Rubio, a Republican, is paying attention to the issue.
The GOP promised Americans the tax bill would lead to a boom in economic growth, more jobs, higher wages, and more business investment. But when they look at this flood of corporate stock buybacks and their paychecks look more or less the same, it becomes apparent those promises weren’t real.
“People still aren’t comfortable that the tax cut, particularly the corporate tax cut, was meaningful for them as individuals and families,” Dean Zerbe, managing director at tax consultancy Alliantgroup and former tax counsel to the Senate Finance Committee, said.
Republicans could have put more guardrails in to make sure the 2017 tax cut bill more broadly benefited the American public. They just didn’t, and Rubio seems to want to try to rectify that with this measure to try to encourage more business investment. “I don’t think that’s a bad North Star to have,” Zerbe said.
To be sure, the rise in corporate stock buybacks isn’t a new trend. Shareholder primacy, where corporate boards prioritize maximizing profits and returns to shareholders above all else, and a short-term focus have been on the rise since the 1980s, often at the expense of workers and investment. But the tax bill appears to have made the problem worse, not better.
In that regard, the conversation Rubio is trying to start is a good one, many of his ideological peers agree — whatever you might think of the specific prescription that the Florida senator has offered.
“Rubio’s complaining about stuff tends to push the needle somewhat with the tax debate,” Pomerleau said. “Maybe it starts a conversation about the treatment of shareholder taxation and treatment of capital gains.”