Repeal 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 capital gains but introduces and worsens biases between debt and equity financing and between corporate and noncorporate taxation. The excise tax increases the cost of financing for corporations, reducing investment, the capital stock, and economic output.

This option repeals the stock buyback excise tax, which would increase incentives to invest, expanding the capital stock and economic output.

On a conventional basis, this option would increase the primary deficit by $118.5 billion over the budget window. Long-run GDP would rise slightly, while long-run GNP would be unaffected. On a dynamic basis, the primary deficit would increase by $93.2 billion from 2027 through 2036, $25.3 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 176.6 percent by 2056.

On average, in 2036, taxpayers would see increases in their after-tax incomes of 0.1 percent. The top quintile of taxpayers would experience a 0.1 percent increase, whereas the bottom quintile would experience a less than 0.05 percent increase. On a long-run dynamic basis, taxpayers would see a 0.1 percent increase on average.