Not only are share buybacks by public companies the ultimate insult to the spirit of American innovation but an indirect form of share price manipulation that should be taxed to protect workers and taxpayers. From 2017-2019 companies in the S&P 500 bought back $2.05T of their own shares and since 2009 share repurchases totaled $7.0T. In 2018 alone, buybacks by S&P 500 companies totaled 68% of net income. These are staggering numbers. The cost of these share repurchases have diverted resources from research and development, new investment and underfunded pensions. So, who benefits? Mostly corporate management, insiders and investment banks reap the rewards of this financial engineering tactic.
While the financial math of share buybacks boosts earnings per share and lowers dividend payouts, for many participants it has impaired their financial resilience. No better example of this is when Boeing and US Airlines petitioned the Trump administration in March 2020 for a $110B bailout after spending $90B on share repurchases over the previous 10 years. And according to Barron’s, Boeing, American Airlines, Delta and United Airlines were among the top 10 US corporations with underfunded pension obligations in 2018.
The earnings per share rush that share buybacks deliver has also caused many corporate management teams to abandon capitalism’s sacred re-investment principal. According to the Harvard Business Review only 43% of S&P 500 companies recorded any R&D expenses in 2018 with just 38 companies accounting for 75% of the R&D spending of all 500 companies. Share buybacks have undoubtably also contributed to the US falling from 1st to 8th place in global spending on basic science and R&D. This R&D underinvestment by S&P companies is especially troubling while the China Tech Cold War is heating up with military and economic preeminence at stake.
It is time for Congress to work with the Biden Administration and enact tax legislation to end this wasteful corporate practice. The basis for such a tax scheme could disallow public companies with share buyback programs from deducting a certain portion of its interest expense when calculating taxable income. For example: The XYZ company repurchased $20B of its own shares and has $300B in outstanding debt. The share buyback tax legislation would require XYZ Corp to exclude $20B of its most expensive debt from its interest expense deduction for five years. Any additional share repurchases by XYZ would exclude the same amount of debt from the calculation of deductible interest expense. Granted this may be simplistic but it’s a start and history has proven that only federal government intervention can end callous and wasteful corporate behaviors like share repurchase programs epitomize.
My hope is that Senator Charles Schumer of New York will lead this effort to change the wasteful share repurchase practice stated in a February 3rd 2020 NY Times Op-Ed piece that he and Senator Bernie Sanders of Vermont authored on the subject.