As my colleague Bob Kuttner explains today, Sen. Kyrsten Sinema (D-AZ) shielded the private equity industry from the crippling burden of minor taxation in the Inflation Reduction Act. Kuttner is right that tax policy isn’t really a good way to deal with the scourge of private equity; repealing the exemptions to the Investment Company Act of 1940 and ending the use of investment fund leverage would do the job much more cleanly. Fortunately, the industry is getting weaker amid sell-offs, so there may be a better time to deal with private equity down the road.
As a replacement to taxing fund managers, Sinema deigned to approve a 1 percent excise tax on stock buybacks. This creates a non-trivial financial transaction tax at the federal level for the first time in the U.S. since the mid-1960s. (There’s a tiny financial transaction tax currently in operation that funds the Securities and Exchange Commission.) In theory, getting Wall Street and CEOs who profit from buybacks to pay some of the freight for investing in the energy economy is a nice win.
But this is another scenario where taxation is a miscast solution to the problem. Most researchers who have studied buybacks, which involve companies using earnings to buy back their own stock in a manner that increases the share price, believe they manipulate markets, stifle innovation, dampen corporate investment and worker wages, and serve mainly to enrich shareholders, particularly insider executives. If you think…
