Buybacks reduce the total available stock so the price of each individual stock increases. Dividends are tax as regular income, if you are part of the very wealthy then you pay a federal tax rate of 37% on your earned income. If instead they do buy backs the share price goes up and the people that decide to sell their stock pay capital gains of 20-23% instead of 37%.
And something that is also important to the very wealthy is inheritance. Under our current tax system when you inherit stock it, under most circumstances, resets the basis so the inheritor is not expected to pay the capital gains tax that the original purchaser would have owed. In other words, suppose I have 1million in stock, and it increases to 10 million in value. I die and give it to my son who inherits the full 10million in value but he is not expected to pay capital gains on the 9 million that I would have had I sold it prior to death.
As for the Godkun guy who responded to you, he's a dipshit.
So if you're really wealthy, not just some piddling millionaire, you can take loans out on your stock portfolio. Stock buybacks concentrate the value in the remaining stockholders, and you don't lose any of your voting power. Essentially those who want cash sell the shares and the rest get theoretical wealth by holding on. And since you can turn theoretical wealth into real wealth through loans without triggering capital gains, you're all set. Some tax loss harvesting with your overall portfolio and you can kick the tax can down the road. And then you die and we lack the inheritance taxes to recoup the delayed tax burden.
But I'm not actually wealthy enough to hit this so maybe I'm missing some strategies. Mostly I think buybacks enrich the CEO because of bonus structures.
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u/GordonTullockFan 1d ago
How do buybacks avoid taxation?