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.
Source: Goldman Sachs
Brian Reynolds, asset class strategist at Canaccord Genuity, said the proposal to curb buybacks is simply the latest volley in a war on wealth that will continue during the election, and the stock market and buybacks are just the latest target.
“I would say it’s the beginning of the more public phase against the stock market. The stock market has has been under attack since Dodd Frank 10 years ago and since the push back against Worldcom and Enron. I would view this as another escalation in the war against the stock market,” he said.
Dan Clifton, head of policy research at Strategas, disagrees, and says Rubio entering the debate may be a contrarian sign.
“It is significant that a Republican who once proposed reducing the capital gains tax is now saying we need to increase the capital gains tax. It will embolden Democrats to continue to push this fight. My sense is this is a contrarian indicator and that we are at the end of this war on wealth and that wages for working Americans are finally going up,” Clifton said.
Clifton also said the criticism that companies are buying stock and not investing is misguided and the amount they invest will likely change, once Trump strikes a trade deal with China and removes uncertainty. “The premise is just wrong. 2018 had the fourth largest increase in capex in U.S. history despite a trade war. The idea that companies are not making investments is ludicrous,” he said.
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