February 6, 2019

Breakingviews: Stock buyback ban idea is topsy-turvy

by Breakingviews.

Share buybacks are a questionable habit, but an attack by U.S. Senators Chuck Schumer and Bernie Sanders misses the point. The two veteran Democrats have suggested banning companies from repurchasing stock until minimum wages, a certain level of benefits and pensions are covered, claiming the practice starves businesses of investment.

The case put forward by Schumer and Sanders in the New York Times on Sunday may only be helped by a tweet arguing against it from Lloyd Blankfein, the former boss of Goldman Sachs, on Tuesday. Yet the senators are wrong, all the same.

S&P 500 Index companies bought back more than $4 trillion in shares over the past decade, more than they paid in dividends. But not all public or private businesses habitually repurchase stock, and not all have shares. Why would the senators limit their concerns about broader communities of stakeholders to those that do?

If they want a higher minimum wage, they can legislate that directly. If they want better minimum healthcare standards, they could set federal levels for that too – or, perhaps more comprehensively and more efficiently, push toward national healthcare available to everyone rather than an employer-dependent system.

If they want companies to think beyond short-term shareholder value, that’s tougher. But lawmakers have tools, including the tax code. They can use it to encourage investment, though simply banning buybacks, or other distributions, won’t make companies invest unless they can do so productively – essentially Blankfein’s point.

Meanwhile, buybacks have exceeded dividends partly for reasons of tax and accounting, including their flattering effect on earnings per share. These incentives could easily be removed. And buybacks and dividends alike are sometimes funded by debt, encouraged by the tax deductibility of interest – another easily rectified quirk.

To reduce inequality, more progressive tax ideas – like upstart Democrat Alexandria Ocasio-Cortez’s proposed 70 percent marginal income-tax rate – should be on the senators’ agenda. Unifying the levies on regular income, capital gains and inherited wealth would also help if that’s their wish.

All this said, buybacks are undesirable. But that’s because they can be used to obscure huge stock handouts to company executives and to massage earnings-per-share figures, among other financial tricks. That’s not lost on Sanders and Schumer. But they can find better, more lasting ways to achieve most of what they wan


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