It's exactly the same as a dividend, except the tax consequences are opt-in for shareholders. Only those who sell their shares are affected, unlike dividends which are equivalent to forcing all shareholders to sell an equal portion.
Buybacks are just tax efficient dividends, and all of the hate against them is from people who don't realize this and haven't thought through the math.
In the article it says this rule applies to dividends, too. So at least it's not pure pandering.
The rage against buybacks is how many are funded - through debt. Boards are gearing their companies to the hilt to fund shareholder returns (in whatever form), to the point the ship itself is rendered unable to whether significant storms.
If bailouts are normalized, there is no disincentive against such reckless behavior. I would like there to be permanent cash buffers to fund 1 year HR costs before any form of shareholder returns are allowed.
Fine, but then rage against that debt regardless of whether it's used for dividends or buybacks. Focusing such hate on buybacks per se is still confused.
Also, it might be worth probing the cause of bizarrely low rates, or wondering if it's a good idea for a high corporate tax rate that distorts behavior so much. (If you're going to reply that the effective corporate tax rate is actually low because they engage in complex schemes X, Y, Z, to reduce their effective rate, then you're agreeing it's distortive and encourages socially-wasteful activity.)
Your company makes 2 million profit per month. You don't want to sit on the cash for 12 months just to pay out 24 million, you want to give the money to shareholders immediately. That's a pure liquidity problem so the answer is to just get a dirt cheap loan.
In a year's time, weirdly there isn't 24 million cash profit to pay off the "cheap loan" and the company go bankrupt. In hindsight it's obvious the "profit" was illusionary. Your million dollar "performance" pay for orchestrating this is securely in your personal bank account, the auditor's million dollar "consultancy fee" in theirs, and employees, the tax man, and shareholders are left with nothing. Yet another "success" for capitalism.
Yes... except the risk of this happening is theoretically priced into the interest rate on the loan. If it’s dirt-cheap it must also be a low-probability scenario. (Not that I necessarily disagree with you on principle.)
That's the theory, but that assumes all stakeholders aligned incentives (or it ignores employees as stakeholders). In the real world it is far easier to fire lots of employees than it is to stop paying the bank loan. So being only sort-of wrong by giving a company a loan they can't quite afford to pay back doesn't hurt the bank at all - they still get their money.
The entity "pricing" the consequences has few consequences if they get it wrong, so why wouldn't they err on the side of doing more business and making more money?
>"Buybacks are just tax efficient dividends, and all of the hate against them is from people who don't realize this and haven't thought through the math."
No, the issue people have is not with the buybacks themselves but the massive debt binge many companies went on in order to buy these shares back. It's precisely because people have done the math.
> Buybacks are just tax efficient dividends, and all of the hate against them is from people who don't realize this and haven't thought through the math.
No, a lot of it is from people who aren't too keen on capitalism or the means by which corporations return capital to the capitalist class in general, and particularly when it is “tax efficient”.
> Buybacks are just tax efficient dividends, and all of the hate against them is from people who don't realize this and haven't thought through the math
Or from people who do exactly realize this and have though through the math. I mean, its not like there is no reason why dividends tend to be taxed ...
well, that's not how it should work or is intended.
if my monthly paycheck is 13k eur before taxes and i live of 5k easily, i cannot say, take only 5k and pay taxes on that and for the other 8k give me stocks untaxed, and i will probably pay some tax when i sell the stocks (and different rules applay).
My guess would be that it directly increases the value of stock options and unvested equity, which dividends don't. Dividends are good for people who currently hold shares, but not for people who have shares promised to them in the future.
In my opinion that is absolutely illogical because share prices can skyrocket even with weak fundamentals. Dividends should be taxed less because companies can't hype up their stocks to pay out a higher dividend (hype would actually decrease yields). Each dollar that is paid out as a dividend had to be earned by the company.
