New U.S. buyback tax will force companies to think twice on how to use cash

U.S. Senate Democrats’ so-called “Inflation Reduction Act,” about which there’s low confidence that the legislation will have any positive impact on the rate inflation (currently at a 40-plus-year high of 9.1%), according to the nonpartisan Penn Wharton Budget Model (PWBM), also contains a proposed 1% levy on corporations’ share repurchases will force chief financial officers to think twice about how they use their cash.

In April, Apple’s board of directors authorized an increase of $90 billion to the company’s existing buyback program.

New U.S. buyback tax will force companies to think twice on how to use cash

The bill also proposes that corporations with at least $1 billion in annual income will have a new corporate minimum tax rate of 15% which, of course, will not be paid by corporations but instead passed on to consumers in the form of higher prices and/or to employees in the form of lower annual raises and/or reduced corporate profits which could hurt employees’ 401(k) and other investors’ mutual funds.

Kelly Anne Smith for Forbes:

According to the Congressional Budget Office (CBO), a federal agency that provides budget and economic information to Congress, the bill would barely make a dent on inflation in the near term — and could even nudge it upward.

If the bill passes in 2022, the CBO estimates that it would have a “negligible effect on inflation,” and in 2023 it would change inflation somewhere between 0.1 percentage point lower and 0.1 percentage point higher than it is currently.

The CBO also estimates the bill would decrease the deficit by more than $100 billion over the next decade. The federal government ran a deficit of $2.8 trillion in 2021, according to the Bipartisan Policy Center.

For further perspective, the U.S. has already committed $54 billion to Ukraine since the Russian invasion. In 2021 alone, not over a decade, the U.S. federal government spent $100 billion on highway grants ($43 billion) and health insurance premium tax credits ($57 billion).

Joe Woelfel and Rupert Steiner for Barron’s:

It is set to be a record year for U.S. buybacks, with some $1.2 trillion forecast to be spent, including bumper programs under way at Apple and Google owner Alphabet.

When choosing how to reward investors, companies like buybacks compared with dividends because they increase per-share measures of earnings and cash flow and benefit return on equity. They can be directors’ way of trying to put a floor under the share price—although they look wasteful if the stock drops.

For investors, buybacks result in capital gains that may never be taxed at all, whereas dividends require income tax to be paid.

MacDailyNews Take: As with most bills proposed in the U.S. House and Senate over past decades, this one is egregiously misnamed and may actually end up causing the exact opposite of its titled intention.

Stop the misguided crusade against domestic energy production and profligate federal spending and inflation will be stopped dead in its tracks. It’s not difficult.MacDailyNews, May 11, 2022

We’ll find out at the end of next April, when Apple normally updates its annual capital return program, if Apple’s buyback program is affected by passage of the bill.

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