The Biden administration wants to quadruple taxes on stock buybacks

• The Biden administration wants to quadruple the stock buyback tax to 4%.
• A 1% tax on stock buybacks was introduced in 2023, but it has not slowed the pace of buyback programs.
• An estimated $1 trillion in stock buybacks are on schedule for 2025, according to Goldman Sachs.

The Biden administration wants to quadruple taxes on corporate stock buybacks.

Ahead of President Joe Biden's State of the Union address, the White House put out a fact sheet detailing some of the initiatives that will be discussed.

One of those initiatives includes "quadrupling the stock buyback tax" to 4% from 1%.

"President Biden would quadruple the stock buyback tax from one percent to four percent to address the continued tax advantage for buybacks and encourage corporations to invest in productivity and the broader economy rather than windfalls for investors," the White House said.

The first-ever tax on stock buybacks went into effect in 2023, and is estimated to have raised about $8 billion in tax revenues in its first year.

The 1% tax has done little to slow down the pace of stock buybacks, and Goldman Sachs estimates that there will be a record $1 trillion worth of buybacks in 2025. If Goldman Sachs is accurate, $10 billion in taxes would be raised in 2025 from the stock buyback tax, and if Biden gets his way, that tax bill would jump to $40 billion.

Stock buybacks are a tax-efficient way for companies to return capital to shareholders, as opposed to dividends, which get double taxed: first when a company pays taxes on its profits, and again when investors pay an income tax on their dividends.

The 1% tax rate on stock buybacks is tiny compared to the Federal income tax rate investors pay on dividends, which can range anywhere from 10% to 37% depending on the amount of income.

The Biden administration is seeking to close the tax advantage of stock buybacks relative to dividends. But with a split Congress and looming Presidential election, the tax hike proposal from Biden has slim chances to turn into a law anytime soon.

Some of the biggest stock buyback programs come from mega-cap tech companies. In February, Meta Platforms announced a $50 billion stock buyback program, which will raise $500 million in taxes. That tax bill would surge to $2 billion if the 4% stock buyback tax is implemented.

Regardless of the taxes, companies appear adamant about returning excess capital to shareholders, both via stock buybacks and dividends. Meta and Salesforce are two tech companies that recently initiated a dividend for the first time in their history.