Executive Summary

• The Inflation Reduction Act of 2022 created a one-percent excise tax on certain stock repurchases by publicly traded U.S. corporations; Senators Chuck Schumer (D-NY), Ron Wyden (D-OR), and Elizabeth Warren (D-MA) recently introduced legislation to quadruple the tax rate to four percent.
• Supporters argue that increasing the tax rate on stock repurchases would raise additional federal revenue and incentivize businesses to prioritize productive investments over stock buybacks, but this argument misrepresents the role stock repurchases play in capital markets and fails to acknowledge the significant distortions a higher tax rate would create.
• Quadrupling the tax rate could reduce economic efficiency, discourage productive investment, impair capital allocation, and weaken the means through which capital flows to its highest value uses.
• While the policy would generate additional revenue in the short run, it could come at the expense of productivity and economic growth in the long run.

Introduction

The Inflation Reduction Act (IRA) of 2022 created a one-percent excise tax on certain stock repurchases by publicly traded U.S. corporations. Senators Chuck Schumer (D-NY), Ron Wyden (D-OR), and Elizabeth Warren (D-MA) recently introduced legislation, the Stock Buyback Accountability Act of 2026, to quadruple the excise tax rate to four percent. Supporters argue that increasing the tax rate would raise additional federal revenue and incentivize businesses to prioritize productive investments over stock repurchases. This argument misrepresents the role stock repurchases play in capital markets and fails to acknowledge the significant economic distortions a higher tax rate could create, however. Quadrupling the tax rate could reduce economic efficiency, discourage productive investment, impair capital allocation, and weaken the means through which capital flows to its highest-value uses. While the policy would generate additional revenue in the short run, it could come at the expense of productivity and economic growth in the long run.

The Current One-percent Stock Buyback Excise Tax

The IRA created a one-percent excise tax on the net value of certain stock repurchases made by publicly traded U.S. corporations. The tax does not apply to businesses with repurchases of $1 million or less or to regulated investment companies or real estate investment trusts. The excise tax applies regardless of whether a business has taxable income and is not deductible from the income tax. Certain transactions are exempt from the excise tax. This includes repurchases that are part of tax-free corporate reorganizations, repurchases treated as dividends for tax purposes, stock contributions to employee retirement plans, and purchases by a securities dealer during ordinary business.

The amount of tax owed is calculated as the net difference between the fair market value of shares repurchased during a given tax year and the fair market value of new shares issued by the business during the same year.

To illustrate, suppose a publicly traded corporation repurchased $10 billion of its own stock during a taxable year and issued $2 billion of new shares to its employees through stock compensation plans and other equity issuances. Under the parameters of the one-percent excise tax, the net taxable repurchase amount would total $8 billion ($10 billion of stock buybacks minus $2 billion of stock issuances). The business would owe a one-percent excise tax on the net amount, meaning its tax liability would be $80 million.

The Proposed Four-percent Stock Buyback Excise Tax

The Stock Buyback Accountability Act of 2026 would increase the federal excise tax on corporate stock repurchases from one percent to four percent. It would also limit a perceived loophole in the IRA-enacted policy. Under current tax rules, businesses can reduce their taxable repurchase amount by the amount of new shares issued in a given tax year, including shares issued to executives as compensation. The Stock Buyback Accountability Act would limit this practice by excluding stock issued to certain highly compensated executives, known as covered employees under federal tax law, from the offset calculation.

Here’s how the proposal would work. Suppose a corporation repurchased $10 billion of its own stock during a taxable year and issued $2 billion of new shares to its employees, of which $500 million was stock issuances to top executives. Under the proposal, the $500 million of executive stock issuances would not count toward the offset. The net taxable repurchase amount would total $8.5 billion ($10 billion of stock buybacks minus $1.5 billion of non-executive stock issuances). The business would owe a four-percent excise tax on the net amount, meaning its tax liability would be $340 million.

Implications of a Higher Stock Buyback Excise Tax

Supporters of raising the tax rate argue it would raise additional federal revenue and incentivize businesses to prioritize productive investments over stock repurchases. This argument misrepresents the role stock repurchases play in capital markets and fails to acknowledge the significant economic distortions a higher tax rate could create, however.

The Role of Stock Repurchases in Capital Markets

Stock repurchases are one way a business may return excess capital to its shareholders. When a business generates profits beyond what it can profitably reinvest, management faces a choice. It can either retain the excess profits, distribute it through dividends, or repurchase shares. In well-functioning capital markets, stock repurchases allow capital to flow from businesses with limited investment opportunities to investors who can redeploy the capital elsewhere in the economy. This helps ensure that capital is allocated to its most productive uses rather than remaining within businesses that have exhausted their high return opportunities.

Raising the excise tax rate on stock repurchases would interfere with this process by quadrupling the cost of returning capital to shareholders. Although a four-percent tax rate may appear modest in isolation, it represents a fourfold increase from current policy and would create a significant distortion in corporate financial decision-making. Economic growth depends on both the quantity and quality of investment. By penalizing one way in which excess capital is redistributed through higher taxes, lawmakers risk encouraging businesses to retain excess capital or to undertake projects with lower returns.

Also, a higher excise tax rate could increase the cost of capital throughout the economy. Investors provide capital to businesses under the assumption they will earn a return on their investment through dividends, capital gains, or repurchases. If lawmakers impose additional taxes or increase existing taxes on these channels, investors could demand higher returns. Higher capital costs could reduce business investment

The Impact on Economic Growth and Business Investment

The argument that taxing stock repurchases incentivizes businesses to prioritize productive investments over stock buybacks rests on the flawed assumptions that corporations are forgoing profitable projects to repurchase shares. Businesses generally pursue investments when the expected returns exceed the cost of capital. If attractive investment opportunities exist, businesses have strong incentives to pursue them because doing so would increase their value. Stock repurchases usually occur when businesses conclude that additional investments would generate lower returns than returning capital to their shareholders.

Taxing stock repurchases merely changes the incentives around how businesses manage excess capital. As a result, quadrupling the tax rate on stock buybacks could encourage inefficient rather than productive investments. Businesses may feel pressure to deploy excess capital into projects with lower expected returns, pursue acquisitions with no long-term value, or maintain excess cash balances that generate little returns. These outcomes would not strengthen economic growth. They’d weaken it by reducing the efficiency with which resources move throughout the economy.

The Impact on Shareholders

Those in favor of raising the excise tax on stock repurchases argue the benefits of the buybacks are heavily concentrated on wealthy investors. Yet  roughly 46 percent of U.S. corporate equity is owned indirectly through retirement accounts, pension funds, mutual funds, and other investment mechanisms held by millions of Americans.

To the extent that a higher tax on stock repurchases reduces equity valuations, diminishes investment efficiency, or slows economic growth, the costs of such a policy are likely to be spread across a wide range of households saving for retirement and long-term financial stability. The costs would not fall exclusively on corporate executives or wealth investors as supporters of the policy claim.

The Distortions to Corporate Financial Decision-making

One of the strongest arguments against the current one-percent excise tax and the push to quadruple the tax rate is the distortions it creates around the different ways to return capital to shareholders. Dividends and repurchases are similar in that they both distribute corporate earnings to shareholders. Buybacks, however, offer flexibility that dividends do not: Businesses can increase or decrease their repurchases in response to changing economic conditions without sending strong negative signals to the market. Dividends, meanwhile, create an expectation of permanence. Investors often react negatively to dividend reductions, even if business and economic conditions justify them.

Raising the tax rate on stock repurchases would effectively favor dividends over repurchases. This could lead businesses to adopt a less flexible payout structure, which could make them less able to adjust to recessions, industry disruptions, or unexpected economic shocks.

Moreover, companies may respond to higher taxes on their stock repurchases by restructuring transactions, altering the timing of repurchases, or pursuing alternative strategies to reduce their tax liability. Such responses would consume company resources and require managerial attention while generating little economic value.

Conclusion

The debate over corporate stock repurchases should center on whether businesses are allocating capital efficiently, not on whether they are distributing capital. Repurchases are not at odds with investment, innovation, or economic growth. In fact, they are an important mechanism through which financial markets direct capital to its highest value uses.

Raising the excise tax rate on stock repurchases from one percent to four percent would make this process less efficient, increase distortions in corporate decision-making, and slow the reallocation of capital that supports long-term economic growth. While lawmakers may seek to boost federal revenue collections or wish to address concerns about corporate behavior, quadrupling the stock buybacks tax would be a costly and poorly targeted approach that could undermine the very investment and growth objectives it seeks to achieve.