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DW's avatar

Tax on buybacks makes sense in the context that dividends are already taxed. In a world where dividends were not taxed, they would be practically equivalent to buybacks. That’s why buybacks are currently exploding, they are stealth dividends that IRS cannot currently grab.

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George Hariton's avatar

Dividends and buybacks are by and large equivalent. The main difference is that a dividend stream returns shareholders' money over time, while a buyback tends to be a one-time event.

Both have the very important effect of letting shareholders reallocate capital dollars from a company that does not have much use for the, e.g. in a mature industry, to one that has good opportunities for growth. Forcing a company to stop implementing buybacks, even when it doesn't have many opportunities to use the money internally, leads to stupid investments and excessive spending on management perquisites.

The main criticism of buybacks is that they "goose" the company's share price, and so holders of options (e.g. management) has incentives to declare buybacks even when the company could use the money productively. But that is exactly the same as declaring a dividend increase, which also results in a price pop and less money inside the company. Yet I have heard no proposals to tax dividend increases (as opposed to dividend levels).

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