The American capitalist system has a surprising past of legitimizing unethical practices, one of which is stock buybacks. Before 1982, buybacks were either illegal or presumed to be so, but President Ronald Reagan’s SEC chairman, John Shad, changed this. Shad came from Wall Street and as soon as he took charge, he lifted the ban on buybacks through Rule 10-b-18, leading to a massive increase in the number of buybacks. Last year, buybacks reached a record of $1.26 trillion. Buybacks are a corrupt way for corporate leaders to enrich themselves as their compensation and that of their boards are linked to the stock price.
Now, President Joe Biden has proposed a 4 percent surcharge on stock buybacks in his State of the Union Address. He pointed out that oil companies used their profits from last year to buy their own stock and reward their CEOs and shareholders. This is a problem that extends beyond the energy sector. All big corporations do it. The 1 percent tax was levied on stock buybacks in August but it remains to be seen if House Republicans will support increasing it to 4 percent. The Tax Foundation estimates that the 4 percent tax would raise about $185 billion, which would act as a disincentive for corporations to engage in excessive buybacks. It is a positive step taken by President Biden, but this important move received little attention.
DQ: Do you think increasing the tax on stock buybacks is a viable solution to curb the unethical practices of corporations and improve job creation in the long run? Why or why not?
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