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that's why I propose we quadruple the tax on corporate stock BuyBacks and occurs long long-term Investments two weeks ago Joe Biden at the State of the Union continued his strong stance against corporate distributions proposing a four times increase in the tax on share BuyBacks and today Warren Buffett has fired shots back at Joe Biden calling those who view BuyBacks as harmful to the country economic illiterates and silver-tongued demagogues Warren Buffett the billionaire chairman and CEO of Berkshire Hathaway is a strong advocate for corporations using BuyBacks as a means for Distributing Capital to shareholders and explained in detail why this is the case in his annual shareholder letter that was published today so what are share BuyBacks and how do they work how will Joe Biden's new tax reform on BuyBacks impact corporations and why is Warren Buffett so opposed to the idea all of these questions will be answered in today's video this video is sponsored by sharesight try it out for free via the link in the description and start accurately tracking your Investment Portfolio today as the CEO and chairman of Berkshire Hathaway Warren Buffett writes a letter to shareholders each year outlining the recent performance of the company but additionally Warren Buffett has always used these letters as an opportunity to share some of his investing and business wisdom for those who are looking to maybe achieve a small slice of the massive investing in business success that Buffett has experienced throughout his life in this year's letter that was released a couple of days ago along with berkshire's annual report Buffett spent some time sharing his thoughts on share BuyBacks as a very useful tool for distributing some profits of the business to its shareholders but first what exactly is a share buyback and how do they work it makes sense to First understand share BuyBacks by using a really simple example imagine a company that has five shareholders each holding one share out of a total of five therefore equally owning 20 of the company each one day one of the five shareholders meets with the other four and says that he wants out of the business he wants to sell his share of the company the other four agree to do a share buyback whereby they take some of the profits of the company that they own from that year and pay the fifth shareholder to buy his piece of the business now there are just four shareholders and each now owns 25 of the company in essence the company spent some of its profits to buy back some shares and the remaining shareholders who held on to their piece of ownership saw an increase a percentage increase in how much of the company they own and while this is a very simple example it's effectively the same thing that happens when large public companies choose to use a portion of their profits to repurchase or buy back stock take Apple Incorporation for example in 2022 Apple produced 99.8 billion dollars worth of profit the company then took 90 billion dollars and used it to buy back 568 million shares ultimately reducing the total number of shares by 3.5 percent which means that those who held Apple stock throughout 2022 saw their percentage ownership increase by a small amount there are two main types of share BuyBacks that companies can do they can do an open market purchase or they can do a tender offer a tender offer is where the company announces a fixed price for which shareholders can sell their shares back to the company shareholders can decide if they want to participate or not and how many shares they'd like to sell back but the most common method for buying back stock is by doing an open market purchase which actually represents about 95 percent of all share BuyBacks done in the United States an open market purchase is where the company simply takes some of their money and goes on to the public stock markets and buys the shares and when they do that they essentially absorb those shares into the company or in other words those Shares are deleted meaning there's less shares outstanding and the value or the percentage ownership of each remaining share has gone up and share BuyBacks have a pretty clear Advantage for long-term investors because it allows them to increase their percentage ownership of the company without experiencing an income tax event instead of Apple spending 90 billion dollars on doing Sherry purchases instead they could have distributed the money to shareholders by paying a dividend a dividend being a simple cash payment to the shareholders of the company after they received their dividend payment if they wanted to shareholders could take the dividend and buy more Apple stock therefore increasing their ownership in the company in the same way that their percentage ownership in the company would increase if the company had just done the share buyback however when a dividend is paid to an individual it counts as income and therefore income tax would need to be paid on that money first before it could be used to purchase more Apple shares this tax event doesn't happen when the company just chooses to repurchase the shares which is a huge Advantage for long-term investors well I should say that the tax used to not occur in the United States because the inflation reduction legislation that was recently passed includes a unique tax on share BuyBacks I'll get back to this in just a little bit in the shareholder letter Warren Buffett rhetorically questioned what was the issue with the transaction has this transaction harmed anyone is the management somehow favored over the continuing passive owners has the public been hurt he went on to say when you were told that all repurchases are harmful to shareholders or to the country or particularly beneficial to CEOs you are listening to either an economic illiterate or a silver-tongued demagogue characters that are not mutually exclusive and while not mentioning by name it's reasonable to assume Joe Biden is one of these so-called economic illiterates as his administration has been fairly persistent about restricting the use of share BuyBacks there has been significant debate for a long time about the introduction of taxes on corporate share BuyBacks but it wasn't until late 2022 where some legislation was actually introduced on the 27th of July 2022 a 738 billion dollar bill called the inflation reduction Act was introduced to the Senate which included significant climate spending and tax reform the bill initially include included a two percent excise tax on share BuyBacks which would raise about 160 billion dollars in annual tax revenue Democratic senator Chuck Schumer who was one of the Senators introducing the bill said I hate stock BuyBacks I think they're one of the most self-serving things that Corporate America does instead of investing in workers and in training and in research and in equipment they don't do a thing to make their company better and they artificially raise the stock price by just reducing the number of shares their despicable I'd like to abolish them on August 7th after a 16-hour Amendment voting session the Act was passed by the Senate on a 51-50 vote with all Democrats voting in favor and all Republicans voting against in order to get the Swing Vote of one of the independent Senators ultimately the two percent excise tax was dropped to just one percent the Act was then passed by the democratically controlled house on the 12th of August and signed into law by Biden on the 16th unsurprisingly many corporations came out vocally against the new legislation although it didn't really seem to do anything to actually deter companies from doing BuyBacks so far this year Chevron announced a tripling in their Buy-Back budget to 75 billion meta announced a 40 billion program and the S P 500 companies are expected to have completed 220 billion dollars of BuyBacks during the fourth quarter of 2022 an increase from the third quarter so that brings us to two weeks ago February 8th when Joe Biden gave his annual speech at the State of the Union corporations ought to do the right thing that's why I propose we quadruple the tax on corporate stock BuyBacks and encourage long long-term Investments during this speech Biden once again to a game at corporations suggesting a four times increase in the tax on BuyBacks which would of course increase the current one percent tax to four percent and as he says this you can perfectly see the split opinion on BuyBacks taxes by the reaction of Vice President Camilla Harris and Republican Kevin McCarthy behind Biden as he speaks the argument against share BuyBacks is really an argument of corporate responsibility it's an argument for deciding how corporations should spend the capital that they produce there's a Vox video on YouTube that does a great job at explaining the choices corporations have for using their Capital they can reinvest into long-term assets to expand the production capabilities of the business they could raise wages for employees and they can distribute Capital to shareholders as dividends or by doing share Buybacks in the early 20th century Capital was primarily reinvested for growth and increasing wages but in the last 40 years corporations have not needed to increase wages to see and increase in productivity and this is something that's likely been caused by a number of different factors including the rapid technological innovation particularly around Computing over the last 40 years the declining interest rates over the last 40 years as well as de-globalization but also during this time over the past 40 years there has been some significant changes that allowed the use of share BuyBacks to come back in a meaningful way one of the biggest arguments against share BuyBacks is how they disproportionately benefit corporate Executives over regular employees and this is because a lot of companies choose to pay Executives based on achieving earnings or profit per share targets and the easiest way to increase profit per share is to buy back some of the shares it doesn't actually increase the profits of the whole business but on a per share basis it does those who support the use of share BuyBacks will point to the fact that there's no real link between the use of BuyBacks and how corporations spend on reinvesting back into the business it's also economically more efficient for a business to distribute Capital when they have no profitable way within the business to reinvest by Distributing Capital to shareholders through dividends or by doing share BuyBacks they're essentially allowing money to leave the company and be invested in other businesses where it can be invested profitably and that arguably is much better for the economy than that money simply sitting on a corporate balance sheet waiting for an opportunity to Arise at that business and then add an even more basic level many will just argue that it's not the place for government to decide how corporations allocate capital and that ultimately if a corporation decides to overly enrich its shareholders at the expense of the underlying businesses health and performance then they'll just simply lose their competitive position to a business that does choose to reinvest in their employees wages and the expansion of the business the debate over share BuyBacks is one that you're likely to see play out in the news and media over the next couple of years as Joe Biden and his Democratic party attempt to crack down more on corporations particularly with tax reform related to share BuyBacks do you agree with Biden that share BuyBacks increase corporate greed and de-incentivize economic growth or do you agree with Warren Buffett that BuyBacks are just a means for companies to distribute capital and ultimately contribute to a more efficient allocation of resources in the economic machine either way I'd love to hear your thoughts on it down in the comments section below this video is 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