Corporate stock buybacks are keeping your 401(k) afloat — why does Biden want to tax them more heavily?

State of the Union
President Joe Biden gestures toward first lady Jill Biden as he delivers the State of the Union address to a joint session of Congress at the U.S. Capitol, Tuesday, Feb. 7, 2023, in Washington. Jacquelyn Martin/AP

Corporate stock buybacks are keeping your 401(k) afloat — why does Biden want to tax them more heavily?

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What is the benefit of owning stock? From where does a stock derive its value? It’s actually a deeper question than you might think. But here’s the answer: Stocks derive their value either from the dividends they pay or from the potential for the company to buy them back.

For tax reasons, dividends have become less popular than they once were, although some stocks do still pay them. But buybacks remain very important. If a company’s stock goes down too far, the company can be counted on to buy it back at the lower price. This increases the value of the other shares in circulation.

Stock buybacks might sound like some kind of corporate loophole, if you are exceedingly ignorant. But if you, like most middle-class Americans, are passively invested in diversified mutual funds for your retirement in an IRA or 401(k), then you are counting on stock buybacks maintaining or increasing the value of the shares you control.

Joe Biden, in his State of the Union speech, just announced his intention to quadruple the tax he recently instituted on stock buybacks. Does that sound like a good thing? Or does it sound like the Biden-era stock market, which has languished since he took office, is going to slide even further if he gets his way?

© 2023 Washington Examiner

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