Eliminating Buybacks Isn’t A Free Lunch

Politics is much different from finance and economics in that it is agenda driven. If you have an agenda in macroeconomics or investing, your return of/on capital will suffer. However, if you have an agenda in politics, you gain momentum the more you dig your heels into an idea. That’s why the national public is discussing buybacks again as if they are the devil even though they simply are a form of cash returned to investors. Buybacks are the target of some politicians and it doesn’t matter what the truth is.

Before you stop reading this article, let us say up front that there are issues with buybacks, such as when companies leverage themselves using debt so that management can take out lofty bonuses instead of investing capital back into the business. But in finance, you cannot paint everything with a broad brush. There are nuances that are important to review. The distinction is that some, not all, companies sending capital back to shareholders in the form of buybacks are misappropriating capital.

If a politician is against corporate profits, then they should just propose to tax them higher (not something we encourage). The concept of singling out buybacks and lately even dividends is a mistake. Firms return capital to shareholders after they invest in their businesses and make acquisitions. You can’t force a firm to make investments that aren’t there. It’s notable to point out that when firms make acquisitions, investors in the acquiring company and investment bankers make a lot of money. If the goal of eliminating buybacks is to tax the rich and corporations, it won’t work well.

The reason why some politicians don’t want to raise corporate taxes directly to extreme levels is that they know it will cause businesses to lower hiring and investment. They want a perfect world where businesses only invest in paying workers more and growing employment. There is no way to do this other than encouraging more competition, unlike many industries which have become monopolies/oligopolies or outright government ownership of firms. Businesses will never collectively forego working in the best interest of shareholders to hire new workers that won’t be productive. Taxing dividends and eliminating buybacks are a free lunch mirage. Only without critical thinking does this legislation make sense. The best way to get businesses to hire more workers is to lower the regulations that make it expensive to hire and fire people.

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