Florida Republican Sen. Marco Rubio proposes changing the capital gains tax as a way to discourage corporate buybacks, a position that could spook the stock market if other prominent Republicans get behind the idea.
He said companies were not using funds they would have used for capex, and instead were using the cash hordes they had kept overseas until the tax law change. “The money came from repatriation. It was a one-time boost that was leading to this increase in share repurchases. They have have no understanding of what’s driving the dynamics of a bill they voted for,” he said.
Reynolds said banning buybacks would surely backfire, and companies may instead be encouraged to do total buybacks of their stock and take themselves private. He said legislation is unlikely to be passed with a Republican Senate and Trump in office, so it would be at least two years before it has a chance of becoming law.
Tom Block, Washington strategist at Fundstrat, however, said Trump could fall behind an idea if he thought it was expedient.
“Donald Trump can turn on a dime and can be against the stock market as easily as he was for the stock market,” he said. But he too said the plan to limit buybacks would backfire.
“The government does poorly when they micromanage corporate finance … If they wanted to say something is illegal, they could do that, but it just means that bright CFOs are going to find ways of achieving the same benefit,” Block said. “It just never works when they try to manage corporate buyback behavior.”
Rubio’s staff explained that under the plan, any money spent by companies on buybacks would be considered, for tax purposes, a divided paid to shareholders — even if investors did not actually sell their stock.
Every shareholder would receive an imputed portion of the funds equivalent to the percentage of company stock they own. The plan is expected to result in fewer companies pursuing buybacks. But if they do, the proposal could raise revenue by both broadening the base by increasing the funds that can be taxed, and it could result in higher rates if shareholders are subject to ordinary dividend rates.
CNBC’s Ylan Mui contributed to this report