Warren Buffett generally doesn’t use his yearly letter to shareholders to push for policies that would line his pockets or those of his company’s, Berkshire Hathaway, and doesn’t often use the platform to criticize or condemn. But his 2022 letter was a bit of a departure from that norm, reports an article in The Wall Street Journal, especially when it came to the subject of buybacks. Wrote Buffett: “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
Buffett was referring specifically to the 1% excise tax that went into effect earlier this year, and that President Biden proposed raising to 4% in his State of the Union address. The 1% tax could have a lasting impact on a company like Berkshire, because rather than enriching its executives, it uses stock buybacks as its only method of returning cash to its shareholders. Meanwhile, companies like Meta who use those buybacks to give their executives lucrative share-based bonuses will sneak through a loophole that gives them a tax deduction on that executive compensation, avoiding most if not all of the buyback tax. So while Buffett’s “silver-tongued demagogues” were denouncing corporate greed, they were also creating a way for corporations to keep being greedy, the article contends.
Taxing capital returns does not keep money from investments, but it could complicate the choice a corporation has to hang onto the cash or return it to their investors, resulting in harm to returns. Though repurchases can bolster a company’s stock, it actually lowers its market value; companies that stockpile their cash and use it for expansion or acquisitions instead of funneling it back to their shareholders gain a bigger market capitalization. But buybacks also aren’t a way to avoid taxes, as some on Wall Street will posit, though they can offer a way out of a future taxable event for that would otherwise be forced on them.
In fact, dividends and buybacks are quite similar as methods of giving cash back to a company’s shareholders, especially given that long-term capital gains and eligible dividends in the U.S. are taxed at the same rate, the article points out. While dividends become an instant liability to investors, someone out there is also paying a capital-gains tax on a buyback. And at the corporate level, that money has already been taxed; in Berkshire’s case, that amounts to $32 billion over the last decade. Noted Buffett in his letter, “When it comes to federal taxes, individuals who own Berkshire can unequivocally state ‘I gave at the office.’”