While the 1% excise tax that went into effect on January 1st is raising concerns on Wall Street, the tax won’t affect the overall stock market that much and could actually help it, contends an article in MarketWatch. Wall Streeters are even more concerned with the Biden Administration’s proposal to raise the tax to 4%, as buybacks were thought to be a major support for the bull market of the last decade.
But the tax applies to net buybacks, which are in excess of the amount of shares a corporation has issued. The repurchases that companies have been making scarcely cover the new shares they issue, so the number of net buybacks that will be hit by the tax are much smaller than gross buybacks. And the tax could be beneficial to a company’s dividend policy. Before the tax was imposed, companies had an incentive to buyback their shares instead of paying out dividends when they wanted to give money back to their shareholders. The tax lessens that incentive, and could lead to more dividend payouts, as much as a 1.5% increase, according to estimates from the Tax Policy Center that is cited in the article. That would obviously be good news for shareholders, and “a higher dividend yield has more bullish consequences than a higher buyback yield,” the article maintains. So while some on Wall Street may be fretting over the new tax, and the potential for it to be raised, it’s likely that the tax will actually do more good than harm.