Lawmakers propose quadrupling tax on stock buybacks

Lawmakers proposed lifting the federal excise tax on stock buybacks from 1 percent to 4 percent, reviving a familiar fight over what corporations do with profits after taxes are paid. The levy applies to repurchases by publicly traded companies, which are one of the two main ways firms distribute earnings, alongside dividends. Supporters see the tax as a way to push cash toward investment and labor; critics see a penalty on a common capital-allocation tool.

The politics of the proposal turn on who benefits from buybacks and who would absorb a higher tax. The Congressional Research Service says repurchases can be used to return free cash flow, signal undervaluation, or offset dilution from employee stock compensation, and notes that some evidence links buybacks to short-termism and higher executive pay, though those findings are disputed. Tax Foundation research adds that some of the largest beneficiaries are institutional investors, including pension funds and other retirement plans; its data show the top 1,000 retirement funds held $10.3 trillion in assets, with public funds accounting for $4.25 trillion of that total.

The direct tax falls on corporations, but the economic burden is broader than the bill itself. Penn Wharton Budget Model estimated that raising the rate from 1 percent to 4 percent would generate about $265 billion over 10 years and erase roughly 85 percent of the current-law tax preference for dividends over buybacks for domestic shareholders. The Tax Policy Center says buybacks still retain a tax edge even after the 1 percent excise tax because some buyback proceeds are treated as untaxed capital recovery and because dividends face different tax treatment, especially for foreign investors.

The last increase did not stop the buyback boom. The 1 percent excise tax took effect after Dec. 31, 2022, yet Goldman Sachs still expected S&P 500 repurchases to reach $925 billion in 2024 and $1.08 trillion in 2025. That suggests the tax has been more of a cost than a deterrent, leaving companies still willing to return cash to shareholders rather than sharply changing their capital plans. If Congress pushes the rate to 4 percent, the real question is whether executives will redirect money into wages and investment, or simply keep repurchasing shares and pass more of the cost on to shareholders and retirement savers.