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Stock Buybacks Make Your 401(k) Bigger

By Ryan Ellis

In recent weeks, Americans have begun to realize that Congress and President Trump have cut their taxes. According to a recent poll reported by the New York Times, 51 percent of Americans now view the Tax Cuts and Jobs Act favorably–a huge increase from December, when it was unpopular because of daily misinformation campaigns from Congressional Democrats and a compliant liberal press.

The timing isn’t accidental. Starting in February 2018, payroll companies began to implement the new, post-tax cut withholding tables. As a result, the direct deposit number on payday for virtually every American worker has risen or soon will.

If that isn’t clear enough to people, the recent bonus their boss gave them might be. Americans for Tax Reform tracks the tax cut bonuses, and they document that 3.8 million Americans have seen tax cut-related pay hikes, bonuses, and profit shares. Congressional Republicans have had a lot of fun contrasting all this good news with House Minority Leader Nancy Pelosi’s elitist dismissal of the same as mere “crumbs.”

As a result, Congressional Democrats are in a white-knuckled panic. As the popularity of the tax law his risen, polls which once showed a slam dunk Democrat takeover of the House and Senate have come back down to earth. In their desperation, Democrats on Capitol Hill are trying to find other ways to slam the tax cut, and have turned of late to arguing that greedy corporations are using their tax cut winnings to buy back their own stock.

There’s just one problem with that argument: stock buybacks make middle class savers better off. Oops.

Here’s why. Suppose a company has 1000 shares of outstanding stock, and they are all valued at $5 per share. That means the stocks have a total equity value of 1000 x $5, or $5000.

The company announces a stock buyback of 200 shares. That means only 800 of the original 1000 shares are still out there. If the equity value is still $5000, the price of each share rises from $5 per share ($5000/1000) to $6.25 per share ($5000/800). Every remaining stockholder just got richer.

Whom does this benefit? Well, only everyone with a 401(k) plan, IRA or 529 education savings account. In other words, all of us. Congressional Democrats pretend that stock owners are rich people who live on the other side of town. In fact, it’s you and me.

According to the Investment Company Institute, 54 million Americans are active participants in 401(k) and other defined contribution retirement plans at work. There are nearly 12 million 529 education savings accounts. The numbers are similarly flush when it comes to IRAs.

When a company does a stock buyback, it’s all of us–54 million 401(k) participants, 12 million 529 customers, and 43 million IRA owners–who benefit. By attacking stock buybacks, Congressional Democrats are threatening the retirement and education savings of the middle class.

UPDATE: Scott Hodge of the Tax Foundation also pointed out to me after publication another important point. Because stock buybacks make the price of stocks rise, they also help fund defined benefit pension plans. Reducing the unfunded liability of these plans is not only an important fiscal challenge (especially for state and municipal governments), but it also happens to be a key priority of the same Congressional Democrats attacking stock buybacks.

But there is more–stock buybacks not only have to have a willing buyer (the company), but also a willing seller (the shareholder who consents to sell). When the shareholder relinquishes his stock back to the company, he is given money by the company. That’s generally what happens when something is sold between two parties.

Our investor friend, now given extra cash, does what with this money? Chances are, he invests it in other companies. The money isn’t lost, in other words, when stock buybacks occur. Rather, investment capital is redistributed efficiently to other companies to grow and compound. It really is a win-win.

Attacking middle class savers and the accounts they are relying on for retirement and their kids’ college is not a smart election tactic by Congressional Democrats.

Read more here.

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