Will the Inflation Reduction Act boost dividends over buybacks?

[FireLane]

The Inflation Reduction Act, just signed into law, imposes a 1% tax on stock buybacks beginning in 2023:

https://www.jonesday.com/en/insights/2022/08/inflation-reduction-act-imposes-new-tax-on-corporate-stock-repurchases

It seems like this is an incentive for companies to shift to dividends, rather than buybacks, as a way of distributing cash to shareholders. I read some analyses that say a 1% tax probably isn't enough to cause an across-the-board shift in corporate behavior, but I could see it creating a bump in the amount of dividends we get.

I have no strong opinion on this. I've read good arguments that buybacks and dividends are the same from a total-return perspective, and buybacks are arguably better from a capital-gains tax perspective. On the other hand, it sure feels good to have that dividend cash in hand and not have to sell any shares - especially now when the market is down!

[MDM]

"Follow the money."  An increased share price is more benefit to the CEOs who get bonuses in number of shares, so buybacks are likely to continue....

[ChpBstrd]

I did not know about this. Thanks for bringing it to my attention @FireLane .

There is another possibility: That minor tax on buybacks might incentivize companies to invest more in their tangible businesses - the only way to handle profits and not be taxed. For years, people have been complaining that U.S. companies are more interested in buybacks than investing in growth and innovation. That's an explanation for why various firms have lost their leading positions and fallen behind. Executive compensation schemes are a part of this problem, and the net result has been less R&D, less willingness to go after business opportunities, and lower employment.