Aching stupidity over tax on stock buybacks

Leave aside which political party this comes from for of course we don’t do party politics here. Without that party politics - and the possible effect on political fortunes - it’s an achingly stupid idea.

The plan, the set-piece announcement of Saturday’s first full day of the gathering in York, would impose a 4% tax on any share buybacks by FTSE-100 companies, which on the basis of the past two years of such activities would raise about £2bn annually.

As a taxation idea, this would have the appeal of being most probably popular, given that critics of share buybacks say the practice – used to inflate share prices – is often done at the expense of spending on investment, and can be a way for executives to cash in on their stakes.

…

The party argues that many buybacks are launched by corporations in areas such as banking, food and oil and gas, and that in the latter case the money could instead be used for more investment in green energy.

So, let us start by at least taking the idea seriously. The claim is that if a corporation buys back its shares then that money leaves the company and is not invested by that company. OK, that’s true.

The further claim is that the money which is paid out is not invested anywhere. At least, that’s the implication of what is being said. If it stayed within the company it would be invested, if it leaves it won’t be.

That’s crazed.

For that is then going on to say that only money which stays within the company which made the initial profit is invested. As we say, crazed.

Money that is paid out - whether as a dividend or as a share buyback - can do only one of two things. It can be spent upon consumption by the recipient. Or it can be re-invested in something else. That is all that can happen to it. Money that stays within the company can also do only one of two things. It can be spent upon consumption - say, higher incomes for the workers - or re-invested. That the money is inside or outside the company changes nothing about the only two things that can happen to it.

Except, of course, what the money might be invested in. Take, just as an example, BP. So, they’re good at - optimised for - finding hydrocarbons, pumping them up and delivering them to market. Capital which remains inside BP will be optimally used - because BP is optimised to do this - only if it is used finding, pumping and delivering more hydrocarbons. BP is no good at - say - solar as they’ve already proven. BP used, after all, to be the world’s largest producer of solar panels. They really weren’t all that good at it.

However, we have other companies out there too. Dale Vince at least claims to be good at building windmills. Ecotricity (?) Tesla and so on claim to be good at solar cells. Pensana is - perhaps not well but still - trying to sort out the rare earths supply chain. And on and on - there are other organisations already optimised to do this other green investment apparently desired.

We therefore desire the past profits of fossil fuel production to move out of organisations optimised for fossil fuel production into other, newer, organisations optimised for the challenges of this Brave Green New World.

That means surplus capital crossing the boundaries of these organisations.

The recipients are, largely enough, us. Or at least our pensions funds. There’s whatever it is, £6 trillion, £8 trillion of household wealth tied up in those pensions funds. None of us change our decades long consumption plans because, or despite, capital earnings being returned to us as a share buyback rather than a dividend. The surplus today over current consumption desires (and for decades for a pension fund, that’s all income in whatever form) gets reinvested.

It’s not that we desire to stop this capital reallocation from those optimised for the old economy to those struggling with the new. Nor is it that we’re indifferent to such capital movements. We positively lust after the process happening.

Now some fool wants to tax the very thing we desire? As we say, a proposal of aching stupidity.

Just the one dig at party politics - apparently this is supported by SirEd. Ho Hum. It’s still an achingly stupid idea, a tax on the very solution we desire - moving capital from the old to the new. So, you know, let’s not embed crazed nonsense in the tax system, eh? We’ve quite enough of that already, thanks very much.

Yes, we know the Biden Administration is trying this, we know that Senator Elizabeth Warren desires it too. What other proof does anyone require that it’s crazed?