Increase the Stock Buyback Excise Tax

Corporations can return after-tax profits to shareholders through dividends or stock buybacks (also called share repurchases). When firms issue dividends, all taxable shareholders immediately incur tax liability, but when firms repurchase stock, only shareholders who sell face an immediate tax liability, while other shareholders can continue to defer taxation on their capital gains. This results in more favorable tax treatment for share repurchases than for dividends.

The Inflation Reduction Act of 2022 introduced a 1 percent excise tax on stock buybacks. The excise tax lessens the difference in the treatment of dividends and share repurchases, but it causes other distortions, including applying to gross returns and worsening the biases between debt and equity financing and between corporate and noncorporate entities. The excise tax increases the cost of financing for corporations, reducing investment, the capital stock, and economic output.

This option raises the stock buyback excise tax to 4 percent. This would reduce incentives to invest in the United States, shrinking the capital stock and economic output.

On a conventional basis, this option would decrease the primary deficit by $373.6 billion over the budget window. Long-run GDP would fall by 0.1 percent, and so would long-run GNP. On a dynamic basis, the primary deficit would decrease by $292.7 billion from 2027 through 2036, $80.9 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 174.0 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.2 percent. The top quintile of taxpayers would experience a 0.2 percent decrease, whereas the bottom quintile would experience a 0.1 percent decrease. On a long-run dynamic basis, taxpayers would see a 0.3 percent decrease on average.