The Political Notebook 2.10.23
The Democrats' stock buyback bugaboo; populist conservatives want to tell business owners what payment options they must accept.
In the State of the Union address, President Joe Biden called for increasing the excise tax on stock buybacks from 1% to 4%.
Stock buybacks are a widespread bugaboo among Democrats and also for at least a handful of Republicans. Why there is such an animus against stock buybacks among Democrats is a bit of a mystery, both substantively and politically.
Buybacks aren’t a way of evading taxes. The profits that are used to finance them are taxed at the corporate rate. Investors who take advantage of the offer are subject to capital gains taxation. There’s not a big enough base of annual stock buybacks for an excise tax on them to raise much money relative to chronic trillion dollar deficits.
The excise tax seems to be mostly a symbolic gesture of disapproval by politicians, and an attempt to discourage them at the extreme margins.
But why should Democrats prefer that big corporations retain their earnings rather than distribute them to shareholders?
Democrats say they want the companies instead to invest in their own enterprises. Corporate executives, however, are instinctively empire builders. If they see ways to use profits to grow their business, that will be their first option. Stock buybacks are always a secondary option.
Buybacks are economically efficient. If companies retain the earnings, the reinvestment options are highly limited. If they are distributed, the reinvestment options are unlimited.
Distributed earnings also make reinvestment decisions more diffuse. Instead of a small number of corporate executives making the decisions, myriad investors make the decisions.
Earnings can be distributed via dividends or buybacks. Both are economically efficient and broaden reinvestment decision-making. Buybacks also increase the value of remaining shares by increasing the percentage ownership each share constitutes. There’s nothing about that which should earn the wrath of politicians.
There are no losers in stock buybacks. Through retirement accounts and mutual funds, the benefits radiate broadly.
While Democrats are often oblivious to economic efficiency, the diffusion of reinvestment decision-making from stock buybacks ought to appeal to them. Moreover, I can’t believe that animus toward stock buybacks carries much salience as a political issue.
This isn’t much of a hobby horse to ride.
Respect and support for free markets and property rights was a fundamental tenet of traditional conservatism, as forged intellectually by Bill Buckley, pioneered politically by Barry Goldwater, and made temporarily triumphant by Ronald Reagan.
Among the populist conservatives who dominate today’s Republican Party, not so much.
A good illustration is the proposed legislation (House Bill 2555) by state Rep. Joseph Chaplik requiring all businesses with a physical location to accept cash in payment for goods and services.
For economic conservatives, the inappropriateness of this is self-evident. The business owner should have the right to run his business as he sees fit. What payment options he wants to accept is his business, metaphorically and literally. It should be none of the government’s business.
According to reporting by the indefatigable Howie Fisher of Capitol Media Services, Chaplik sought to justify this market intervention by citing the higher percentage of the unbanked among minorities. Getting banked, however, isn’t difficult. And among the businesses supplying necessities – grocery, clothing, and hardware stores – there are multiple outlets that accept cash.
Moreover, economic conservatives hold that both parties to a transaction should be free actors. If one of the parties doesn’t want the transaction to be in cash, there shouldn’t be coercion.
As a society, we have decided that the marketplace is a public space for certain purposes, such as civil rights, product safety, and fraud. The extent to which government should regulate private transactions in the marketplace used to be a demarcation between the parties, with Democrats wanting to expand where markets are regarded as public space, Republicans seeking to preserve their private character and treatment.
With populist conservatives in charge, the demarcation is becoming blurred. Populist conservatives wanted to forbid businesses from requiring Covid vaccinations or mask wearing for both employees and customers. Chaplik’s bill passed in committee unanimously. Nary a Republican voted against it. Twenty-four of the 31 House Republicans have sponsored it.
Property rights, which should include the right of business owners to decide what payment options to accept, is a core component of liberty. When populist conservatives call themselves a Freedom Caucus, they are being unintentionally ironic.
Reach Robb at firstname.lastname@example.org.