Calvin H. Johnson (Texas), The Misfocused Excise Tax on Stock Buybacks, 185 Tax Notes Fed. 1745 (Dec. 2, 2024): 

In this article, Johnson argues that the Treasury green book proposal to increase the excise tax on stock buybacks to 4 percent would do more harm than good because it would shift distributions from buybacks to unjustly taxed dividends and increase corporate accumulations and already excessive CEO salaries.

Conclusion
The proposed increase in the rate of tax on corporate buyouts to 4 percent would shift distributions from redemptions to dividends. That is unfortunate because the full tax on dividends when the shareholder has no gain is unjust.

The excise is also endorsed to suppress all distributions in any form, but suppressing distributions will hurt shareholders and increase the rents in excessive CEO salaries without helping rank-and-file workers. Far better to take away the interest deduction on LBOs, which compels the corporation to fire workers to avoid bankruptcy.

Stock buyouts are said to further manipulation, but they leave the shareholders in the same place as same-amount dividend distributions, measured by fractional share of corporate assets. If they increase stock price, it is only in the face of a well-advised, skeptical, and smart market that thinks the corporation’s prospects have improved.

Pretax, stock buyouts are a bit better than dividends because they identify the stockholders most willing to reduce investment in the corporation. It is a shame to punish the distribution form that is better pretax.

The tax policy ideal for distributions is to tax the shareholders to the extent of their gain, measured by the quoted public stock price, and then reduce basis only after all gain is taxed. Distributions are the recognition of shareholder gain for the first time, to the extent thereof. The excise tax does not lean toward that ideal because the shareholders who would be willing to sell, but do not get the offer because of the 4 percent excise, tend to be the shareholders with the least gain.

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