The point is both the companies in question and the ultra-wealthy that are the beneficiaries of the vast majority of these buybacks AREN'T paying taxes, so it's another way for the government to at least attempt to capture the $$ that should already be going into the treasury instead of offshore accounts/subsidiaries/whatever double dutch triple lux tax evasion scheme of the month they're using.
How are they not paying taxes? The people selling their stock to the company in the buyback have to pay taxes on any gains and the people holding onto the stock long term will eventually have to pay taxes on any gains when they finally do sell (they're not going to hold onto a stock until the heat death of the universe so they are going to realize their gains and pay taxes on them at some point).
The companies are in many cases doing things like this:
1) their revenue they classify is centered in a different country like Ireland
2) they setup a massive line of credit with an international bank
3) they take out massive loans against the money they have “overseas” that is not taxed
4) they then pay the buybacks and other things to their investors with that loaned money in US
5) they then pay back the bank at their international site
6) the bank then borrows more money from federal reserve at nearly zero interest rate
Rinse and repeat.. tons of companies have done this. So sure some investors will eventually cash out but companies should also be taxed if they derive some benefit from the country they are from or selling products. I would argue those taxes should be low but allowing companies to totally dodge them seems like a bad setup long term.
What I don't understand about this is... Why can't I partake? If my employer is based out of these havens for tax purposes, why can't they pay "me" by paying into the bank account of the foreign on-paper-only company I own, whose line of credit with a foreign bank I then use for my own expenses?
I feel like this must be against the law somehow, but I don't quite understand where the line is.
> What I don't understand about this is... Why can't I partake?
Honestly: because you're not rich and connected enough to have the rules written for to your benefit your naked self-interest. If it was legal and economical for ordinary people to evade taxes, too many people would do it and the country would collapse.
It's not against the law at all. It's just expensive because you forgo labor protections, social security contributions, medicare contributions, paying for accountant's time to file for international income, etc.
Wages are taxed differently than a company's income. If you were to distribute the income to yourself every 2 weeks, you'd end up paying all the same taxes as wages.
It's pretty straightforward to determine where someone works. You are physically in the USA when you do the work so you're on the hook for income tax. What the companies do is set up a bunch of companies in different locations. Then they manipulate their books so that the low tax companies show profit while the high tax locations don't.
But you're not getting paid. Your company is getting paid, and then you're using credit against your company's assets to pay your expenses. You, for all intents and purposes, are volunteering.
Maybe your company has to sell something to be legit? Okay, you sell the people who are paying your company toothpicks. They pay your company for the toothpicks, the labor is just incidental.
Because the Department of Labor has actual real teeth and staff, whereas the IRS is drastically understaffed.
Also the situation you describe would make your life incredibly complicated. The logistical hoops necessary to pay your rent make it extremely unappealing, IMO.
Wouldn't it be hilarious if the bank prior to the buyback bought a bunch of the stock (I don't know if this is true, but seems plausible). Then in that case the company would literally be taking out a loan from the bank in order to buy the stock from the bank. So then the question is if its possible for the bank to claim some sort of thing where when they sell the stock to the actual company that it is some special type of transaction and maybe gets favorable tax treatment? Wow I want to look into that.. sounds interesting / shady if thats possible to do..
I believe your comment is referencing normal people paying taxes, where the comment you are replying too is referencing the ultra-wealthy and corporations paying taxes.
The ultra-wealthy and big corporations take advantage of schemes to lower their taxes.
Corporations are paying taxes. US corporate tax receipts as a percentage of GDP are a tick higher than the OECD average. Also, it’s not the “ultra wealthy” primarily benefitting from these buybacks. Most corporate equity is owned by the bottom 99% and pension funds.[1] (Someone with a $5 million retirement account may be very comfortable, but they’re not hiding their money in offshore accounts.)
[1] Most corporate equities are held by retirement plans or foreigners. Just 25% are held in taxable account. Of those, the bulk is owned by people outside the top 0.1%.
Considering the US’s keystone position in global economics, providing safe passage for trade (and relatively stable oil/NG prices, but never mind that) at the cost of a large standing navy, I think a single tick over other OECD countries is a joke. The multinationals owe the US better infrastructure.
Good it's called capitalism. We need creative destruction to move forward.
>> Retirees and the public were left holding the bag.
This!
Largely because the finance industry(or perhaps the world) is run by sales people.
Don't be a sucker, if you don't understand your financial assets in detail(e.g. if you are buying an index fund, understand why, not just based on past performance, go deep, what's the weighting?(currently float weighted which makes it easiest to sell to you, but the worst possible weighting makes it buy high and sell low).
Fuck that's a shit fuck ton of work for just a surface level analysis. But you should do much more research into your mutual funds/stocks than you do your next car purchase.
So yeah, it's not that they were left holding the bag, it's that they were sold free money that turned out to be not so free. Imagine that.
> the ultra-wealthy that are the beneficiaries of the vast majority of these buybacks
The S&P 500 is > 80% owned by institutions. That is mutual funds, pension funds and insurance companies. The main beneficiaries arent fat cats, but rather anyone with a 401k.
Are you claiming that a mutual funds' performance evenly benefits anyone with a 401k?
In the last 40 years 0.00025% of Americans have tripled their share of the wealth. Of course everyone with a 401k has benefited but they are nowhere close to the main beneficiaries of capital gains.
No. The share of wealth of the top 0.00025% has tripled.
The pool of people people in that quantile is dynamic.
In 1980, that was about 600 people. In 1980 the richest person in the United States was J. Paul Getty. I imagine most of those people are no longer alive.
In 1980, Jeff Bezos was 15, Bill Gates was 24, Larry and Sergey were 6, and Sergey had been living in the United States for 1 year. It's likely that the effect you're seeing is an artifact of the role technology plays in the economy rather than exploitation or rent seeking.
Your data does not say what you are claiming it says. It is possible (or even probable) for the ultra-wealthy to have retirement accounts. Once we admit that, then the obvious question becomes: Who do you think owns most of the money in those retirement accounts, the rich or the poor?
Retirement accounts are limited by the amount one might deposit annually. The most perhaps one can make is 19k in 401k and perhaps somehow max out SEP IRA - $56k (which I find quite tough to max out). Regular IRAs are out of questions, since at the income level dealing with 401k and SEP IRA, one does not get any benefits of funding regular IRA afaik.
So... The best-case scenario is $75k per year someone might be able to stash away in a retirement account. Let's say someone is able to do it for 50 years - it leads to $3.75m. It is a decent amount for retirement in my opinion, but 1) it is unlikely to optimize it fully to get there, and 2) doesn't really look stratospheric to make a difference in retirement funds ownership categorizations (i.e. 0.1% owns large part of retirement investments).
There are lots of IRA accounts with far more money in them. We have the data (from 2011) which shows it.
==As of 2011, 314 multi-millionaires had more than $25 million saved in their IRA, with average holdings of $258 million, the GAO reported. About 9,000 taxpayers had at least $5 million in their IRA, with average holdings of $16 million.==
==All told, 630,000 millionaires — about 1% of all IRA savers — cumulatively had more than $1 trillion in IRA accounts, accounting for 22% of all IRA assets.
Meanwhile, the other 99% — the 42 million taxpayers whose IRAs held less than $1 million — had average savings of just under $100,000.==
Thank you for sharing this link. Not sure what to think about it tho...
"In essence, Bain would value the special, riskier shares at pennies on the dollar. In one deal, employees invested about $23,000 in their IRAs. When the takeover target went public, those shares were worth about $14 million, and were worth about $23 million they finally sold the shares. That’s a 100,000% return."
Meaning, someone was risking their $23k in IRA. And looks like that investment opportunity was given to regular employees as well, meaning it wasn't a rigged up illegal trade based on some kind of insider information?
One legal (AFAIK) method:
The company had low/no valuation, and it was private. Those shares were sold to the employees (likely of the vehicle containing the company) at the stated valuation. Once they went public, there was a valuation event. Roughly, they snuck through the 409a before it had to be reported.
So if shares had a low valuation, employees buying these risked that they will worth nothing in the future. I.e. not really different from buying AMZN shares in IRA.
Unless, shares were valued low on purpose, and were offered to buy at that price as another form of compensation (so compensation was difference between "as valued" and "real value"). In that scenario, it appears that these employees had ordinary income, which was not declared as such... And of course, that smells "fraud"...
So the question is - was the original investment truly at risk?
$75k per year is a pretty insane amount of disposable income for most Americans, where median household income is 63k[1], per capita disposable income is 45k[2], and 78% of people report living paycheck-to-paycheck[3]. Anecdotally the only people I know who are funding their retirement well in there 20’s are generationally wealthy and got a house from mom and dad. Many, even those with some disposable income, live paycheck to paycheck.
Also, as my sister comment points out, rich people can still have ridiculous retirement accounts. Saying that “everyone gets a piece in retirement” ignores a large portion of our society.
That's the wrong type of investment for a retirement account with a 50-year horizon. An account like that is (should) be invested in a diversified portfolio of stocks and bonds, such as one composed of low-cost index funds.
By definition not the rich, since retirement accounts are capped by law to relatively low yearly contributions.
Sure the ultra-wealthy can have their retirement accounts too (if they even bother), but they can't be any larger than anyone else's. Just a tiny tiny tiny sliver for them, really.
Since the ultra-wealthy are by definition a small portion of the population, and retirement contributions are capped at a low annual rate, it does in fact make the point that the parent commenter is trying to.
==All told, 630,000 millionaires — about 1% of all IRA savers — cumulatively had more than $1 trillion in IRA accounts, accounting for 22% of all IRA assets.==
1 million dollars in a 401k is not the same as a 1 million dollars in a house. When the median american makes 65k per year and has 45k in disposable income it takes a lot of luck to put a million dollars into a 401K. There are 300 million+ americans, of which only 650k have a million or more in the 401k. How can we call the top 650K middle class?
We can assume that the 650k people with $1 million in just their IRAs also have significant other assets. I’m not really sure what you are arguing here.
Why would a retirement fund want a buyback? They would prefer a healthier company in ten years rather than a lump sum they need to pay someone to reinvest.
1) Because buybacks and dividends are what produce the entire value of stock at the end of the day. 2) Buybacks don't need to be reinvested, they already are by definition. 3) Rebalancing your portfolio due to buybacks is done automatically by your fund that you already pay a small maintenance fee for.
There's nothing unhealthy about buybacks, that's a total misconception that needs to die. They're just treated differently from unqualified dividends for tax purposes.
1)The value of the stock is based on the value of the company, a better performing company produces more value than a buyback. 2) I'll admit I'm not too knowledgeable about every kind of buyback, but surely some involve buying back stocks. For some kinds, you're probably right. 3) I would be surprised if many funds existed where there weren't transaction fees or a percentage based fee, giving them reasons to prefer buybacks even if it doesn't help the actual owner.
>They're just treated differently from unqualified dividends for tax purposes
At the end of the day it's not much of a tax loophole. The same total amount of money ends up getting taxed, it's just that shareholders can decide whether they want to opt-in to realizing their capital gains. Some choose to sell back fewer shares (frequently none) and some choose to sell back more shares (especially stock-receiving employees, who may feel a need to diversify). Hardly something to get upset about.
A retirement fund may not want the tax event of a dividend.
A retirement fund needs $x/month: things may work out such that they receive too much cash from dividends in any given month/quarter. So they're receiving, and being taxed on, cash that is not needed.
With buybacks a retirement fund can determine how much money they need and can cash out only what is required, and only take the tax hit on that.
Retirees are also going to be selling down their portfolio as they age for living expenses. The ultra-wealthy are probably not systemically selling out of the equity market.
The beneficiaries of these buybacks are the general public, these are public companies. They are your pension funds, your rainy day funds, they are government healthcare programs, Norway's Oil fund... They are everyone. The reason they aren't paying taxes on buybacks is because they haven't actually made any money until someone sells stock.
To add to this, the ultra-wealthy, university funds, funds-of-funds, etc. are interested in capital preservation, according to the article. This means they likely will not reinvest their profits into companies that will grow; they're more likely to reinvest into other companies that will do buybacks.
