That tax incentive was set up deliberately. It's socially valuable for people to have retirement savings, so the rest of us are happy to subsidise you in that saving.
Buybacks are an accident of tax law and ought to be taxed the same way as dividends.
> Buybacks are an accident of tax law and ought to be taxed the same way as dividends.
The problem is it's really the other way around -- reinvested dividends should be taxed like buybacks, i.e. taxed when the purchased shares are sold.
By contrast, taxing buybacks like current dividends would create a really grisly incentive for corporations to hoard a giant pile of money, since that would be the remaining way to defer the tax. This is already what international corporations do with offshore profits because of a similar incentive to defer corporate income tax, and it's a huge problem.
We have a policy of allowing people to avoid tax on investment gains until the investments are cashed out -- this is what a 401k is all about. We might as well make it consistent across the board so it stops creating all of these perverse incentives. (That would reduce the amount of tax collected, but it would also remove most of the justification for taxing capital gains at a lower rate than earned income, so changing both at once would about balance out.)
I'd actually go the other route: tax investment gains like any other income, at the time when they happen, and then the incentive to do buybacks or cash hoarding goes away.
Then you have two new problems, because a lot of investments (e.g. real estate, small businesses) aren't liquid, and you don't necessarily know the value at any given time.
If you own a restaurant and a sports stadium opens next door which causes the value of the land to double overnight, you'd suddenly owe $50,000 in capital gains tax, but what if you don't have $50,000 in cash? You'd have to sell your restaurant to pay the tax on it.
If you write some software for your small business and start to license it to people for $50 each, how much is your corporation which owns the copyright now worth? Ten thousand dollars? Ten billion dollars? It depends how many copies you expect to sell. But the government would have to appraise it. What do you do if they appraise it as worth tens of millions of dollars? You'd immediately owe more than a million dollars in capital gains tax, but it's on the appraised value of an asset that may not turn into that much revenue for years -- or at all. And with no guarantee you could even find anyone willing to pay you that much for the business.
There are good reasons not to collect the tax until the investment is converted to cash.
Right, but none of those problems exist for listed stocks, which trade liquidly and can be readily converted back and forth to cash - indeed that's the whole reason a buyback works. I believe tax law already has a class of things that are considered cash-like - foreign currencies, bullion, that sort of thing - perhaps a good first step would be treating liquid stocks the same way.
Buybacks are an accident of tax law and ought to be taxed the same way as dividends.