Skip to main content
logo
  • Investment Strategies

    Investment Options

    • Alternatives
    • Beta Strategies
    • Equities
    • Fixed Income
    • Multi-Asset Solutions

    Capabilities & Solutions

    • Pension Strategy & Analytics
    • Global Insurance Solutions
    • Outsourced CIO
    • Sustainable Investing
  • Insights

    Market Insights

    • Market Insights Overview
    • Eye on the Market
    • Guide to the Markets
    • Guide to Alternatives
    • Market Updates

    Portfolio Insights

    • Portfolio Insights Overview
    • Alternatives
    • Asset Class Views
    • Currency
    • Equity
    • Fixed Income
    • Long-Term Capital Market Assumptions
    • Sustainable Investing Insights
    • Strategic Investment Advisory Group
  • Resources
    • Center for Investment Excellence Podcasts
    • Events & Webcasts
    • Insights App
    • Library
    • Market Volatility
    • NEW: Morgan Institutional
  • About Us
  • Contact Us
  • English
  • Role
  • Country
  • Morgan Institutional
    Search
    Search
    Menu
    You are about to leave the site Close
    J.P. Morgan Asset Management’s website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan Asset Management isn’t responsible for (and doesn't provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan Asset Management name.
    CONTINUE Go Back
    1. What will a buyback tax mean for dividends?

    • LinkedIn Twitter Facebook Line

    What will a buyback tax mean for dividends?

    2022-08-24

    David Lebovitz

    Dividend payments could increase more than expected when this tax goes into effect next year.

    David M. Lebovitz

    Global Market Strategist

    Listen to On the Minds of Investors

    2022-08-24

    Show Transcript Hide Transcript

    David Lebovitz:               

    Hello. My name is David Lebovitz and I'm a global market strategist at J.P. Morgan Asset management. Welcome to On the Minds of Investors. This week, I'd like to talk a little bit about what a buyback tax might mean for dividend payments in 2023.

    The Inflation Reduction Act is a legislative package that includes climate spending, prescription drug pricing reform, and tax reform. The IRA seeks to raise approximately $737 billion in revenue over 10 years through a 15% corporate minimum tax on companies earning over $1 billion in profits, a 1% tax on stock buybacks, greater IRS enforcement, and allowing Medicare officials to negotiate directly on prescription drug costs. The tax on buybacks will be particularly relevant for equity investors given the role share repurchases played in enhancing profit growth during the post GFC cycle. The big question is whether or not this buyback tax will lead companies to reduce share repurchases and increased dividend payments going forward.

    As a shareholder, distributions are always taxed. The question is when those taxes are realized and at what rate. Dividends are taxed as ordinary income, meaning the shareholder receives a portion of the dividend that a company pays on a recurring basis. Buybacks are technically distributions as well as they increase the share of earnings that each shareholder receives. Unlike dividends however, the tax on buybacks is realized in the form of capital gains and only when the security is sold.

    Using this framework, we looked at how dividend payments have historically responded to changes in the capital gains tax rate. In general, dividend payments rise over time as dividend cuts tend to be reserved for when a company is facing significant financial hardship or a changing regulatory environment. Since 1954, aggregate dividends paid rose by an average of 5.3% for every 1% change in the capital gains tax. If we isolate for periods when the capital gains tax increased however, dividends rose by 7.5% for every 1% change. While when the capital gains tax decreased, dividends rose at a slower rate. This suggests that dividend payments could likely increase more than expected when this tax goes into effect next year. At the same time, it also seems reasonable to expect that some future buyback activity will be pulled forward into 2022 before this tax goes into effect.

    The Inflation Reduction Act (IRA) is a legislative package that includes climate spending, prescription drug pricing reform, and tax reform. The IRA seeks to raise approximately 737 USD billion in revenue over ten years through a 15% corporate minimum tax on companies earning over 1 USD billion in profits, a 1% tax on stock buybacks, greater IRS enforcement, and allowing Medicare officials to negotiate directly on prescription drug costs.

    The tax on buybacks will be particularly relevant for equity investors given the role share repurchases played in enhancing profit growth during the post-GFC cycle. The big question is whether or not this buyback tax will lead companies to reduce share repurchases and increase dividend payments going forward.

    As a shareholder, distributions are always taxed – the question is when those taxes are realized and at what rate. Dividends are taxed as ordinary income, meaning the shareholder receives a portion of the dividend that a company pays on a recurring basis. Buybacks are technically distributions as well, as they increase the share of earnings that each shareholder receives (and in theory, the share price). Unlike dividends, however, the tax on buybacks is realized in the form of capital gains and only when the security is sold.

    Using this framework, we looked at how dividend payments have historically responded to changes in the capital gains tax rate. In general dividend payments rise over time, as dividend cuts tend to be reserved for when a company is facing significant financial hardship or a changing regulatory environment.

    Since 1954, aggregate dividends paid rose by an average of 5.3% for every 1% change in the capital gains tax. If we isolate for periods when the capital gains tax increased, however, dividends rose by 7.5% for every 1% change, while when the capital gains tax decreased, dividends rose at a slower rate (2.2%). This suggests that dividend payments could increase more than expected when this tax goes into effect next year. At the same time, it also seems reasonable to expect that some future buyback activity will be pulled forward into 2022 before this tax goes into effect.

    Buyback activity could accelerate into year-end

    S&P 500, trailing 4Q sum, billions USD

    A chart showing how buyback activity could accelerate into year-end.

    Sources: Standard & Poor's, J.P. Morgan Asset Management.
    Data are as of August 23, 2022.

    09pf221602182411

    EXPLORE MORE

    On the Minds of Investors

    What investment questions are on the minds of investors? Explore the questions investors ask frequently and find answers at J.P. Morgan Asset Management.

    Read more

    Guide to the Markets

    The J.P. Morgan Guide to the Markets illustrates a comprehensive array of market and economic histories, trends and statistics through clear charts and graphs.

    Read more

    Asset Class Views

    Get quarterly commentary and in-depth analysis on equities, fixed income and other asset classes, written by our senior investment teams.

    Read more
    • Equities
    • Economy
    J.P. Morgan Asset Management

    • About us
    • Investment stewardship
    • Privacy policy
    • Cookie policy
    • Binding corporate rules
    • Sitemap
    • Conflicts of interest disclosure
    Opens LinkedIn site in new window
    J.P. Morgan

    • J.P. Morgan
    • JPMorgan Chase
    • Chase

    READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

    The value of investments may go down as well as up and investors may not get back the full amount invested.

    Copyright 2023 JPMorgan Chase & Co. All rights reserved.