The Stock Buyback Tax and Its Impacts: Transcript

0:00:04.1 Cara Griffith: Welcome, everyone. I'm Cara Griffith, the president and CEO of Tax Analysts. Thank you for joining us today. We have a very timely discussion planned on the new 1 percent excise tax on corporate stock buybacks. Today's event is another in Tax Analysts’ series of public discussions that we call Taxing Issues. We launched this series as another way for Tax Analysts to encourage debate on tax issues. We've been bringing the tax community together with leading policymakers and experts for bipartisan discussions on the future of tax policy. We will be hosting in-person events on occasion, but we will mainly host these discussions in a virtual format, and we welcome your feedback on how to make them more interactive. We also welcome your suggestions on future webinar topics. You can send your feedback and suggestions to events@taxanalysts.org. We also welcome your questions for today's event. Thank you to those of you who emailed questions in advance. Please use the chat feature to submit questions during today's event.

0:01:02.9 CG: For our panel discussion, I will begin by asking a few questions, and then I will turn to questions from you, our audience, and I promise to get to as many of your questions as time permits. Now, let's turn to today's topic. The Inflation Reduction Act, or IRA, established an excise tax on the repurchase of corporate stock by certain publicly traded corporations. A repurchase or buyback is when a corporation uses its cash reserves to reacquire its own common stock. Congress added the tax to the IRA at the last minute after the proposed changes to the carried interest rule were dropped. The addition was a surprise to many, including many in the tax world. Although corporations use stock buybacks as a common way to return capital to shareholders, many Democrats think that, in the words of Senate Majority Leader Chuck Schumer, "buybacks are," and I'm quoting here, "one of the most self-serving things that corporate America does." Rather than invest in workers, training, research, and equipment to make a company better, Senator Schumer said that corporations choose instead to artificially raise their stock price by reducing their number of shares.

0:02:11.7 CG: That, according to Senator Schumer and other Democrats, benefits just a subset of their shareholders. But those who oppose the new tax say that stock buybacks typically take place after a corporation has exhausted its investment opportunities, that stock buybacks serve an important function for shareholders, and that income generated by stock buybacks is already subject to tax. Now, before the IRA, shareholders who sold back their stock after a corporation announced a repurchase were taxed on any capital gain. And if the buyback raised share prices, the remaining shareholders would pay capital gains tax on the increase in the value of their shares when they sold them. Now, post-IRA, domestic corporations with stock traded on an established securities market must also pay 1 percent excise tax on the fair market value of any corporate stock that they repurchased during the taxable year. The excise tax would equal 1 percent of the fair market value of the stock that a corporation repurchased in the taxable year minus the fair market value of the stock that the corporation issued in that taxable year.

0:03:16.9 CG: Now, of course, we need guidance from Treasury or IRS on how precisely we're going to determine fair market value. It's one of the many questions we'll discuss today. And another question that we'll discuss today is how the tax will affect certain domestic special purpose acquisition companies or SPACs. SPACs are publicly traded corporations that are formed for a limited period to effectuate a merger with a private company to enable it to go public. Will SPACs be subject to the new tax? And if so, what does that mean? The tax is scheduled to take effect on January 1, 2023. That is less than seven weeks from today. And because the IRA doesn't include a transition rule for transactions that have already started, the tax will likely apply to any repurchase that occurs from January 1st onward. Now, not surprisingly, practitioners are scrambling to figure out what to do. They've sent letters asking Treasury and the IRS to issue immediate guidance, but it's unlikely we will see much, if any, guidance before the end of the year.

0:04:17.9 CG: As a result, corporations and their advisors are scratching their heads or pulling their hair out, either literally or figuratively, as they try to understand how to apply this tax. While we at Tax Analysts don't have all the answers yet, we do have a wonderful panel today to flesh out some of the issues and to provide some valuable insight. So let me introduce them. First, we have Samantha Jacoby, senior tax legal analyst with the Center on Budget and Policy Priorities. Samantha focuses on federal budget and federal tax issues. Next, we have Joel Rubinstein, a partner at White & Case and a member of the firm's capital markets practice. He has particular expertise when it comes to advising on the IPOs and SPACs. And finally, we have Alex Durante, an economist at the Tax Foundation, where he works on federal tax policy and model development. I want to thank all of you for joining us today. And so let's get right to it. Samantha, I did the very sort of 30,000 feet overview of the tax. Could you give us a little more background on the stock buyback tax and also talk about the policy behind it? Why should we tax stock buybacks?

0:05:30.5 Samantha Jacoby: Sure. Thanks, Cara. So just I'll also keep it fairly high level here and we can get into more detail as we go on. But as you mentioned, this generally affects publicly traded corporations and the tax is equal to 1 percent of the fair market value of the corporation's stock that either it or an affiliate repurchases. And there are two ways in a statute for a transaction to constitute a repurchase. It's either a redemption within the meaning of section 317(b) of the code or an economically similar transaction, which the statute leaves to Treasury to define that one. There are also some important exclusions that I'm not going to get into yet and some Treasury authority to implement further guidance. But I'll note quickly that section 317(b) is a fairly broad definition. It includes sort of what we think of as a traditional stock buyback where a corporation buys back its stock from electing shareholders and that typically results in a higher stock price for the remaining shareholders, at least in the near term. But that also includes other types of repurchases.

0:06:49.3 SJ: So those exceptions will be important. I'll also note the tax is applied on a net basis. So stock issuances in a given year are subtracted from stock repurchases to calculate the basis of the tax. And as you mentioned, the tax applies to repurchases beginning after December 31st, so pretty soon. And in terms of the policy reasons for the tax, I think that we've sort of seen an increased trend toward buybacks since the 1980s for a variety of reasons, both tax and non-tax. In 2017 with the Tax Cuts and Jobs Act, the law cut the corporate and let U.S. corporations repatriate earnings from offshore at no marginal tax costs, which sort of led to an increase in funds for all kinds of corporate distributions. And then in 2018, we saw record buybacks that year, topping a trillion dollars for the first time. So yeah, I think that is really what prompted a number of policymakers, both Republican and Democratic, to call for policies to rein in buybacks.

0:08:07.4 SJ: If you look at member statements from the last few years, there's a clear concern that corporations are using buybacks to unduly enrich shareholders instead of investing in the business or increasing wages. So that's one potential policy concern. There are others which I think were a little bit less talked about in the debate over the Inflation Reduction Act this summer, but may actually be more compelling than what I just mentioned. For several reasons, it may be desirable to reduce the tax benefits of using buybacks to distribute profits to shareholders relative to dividends. One reason is because of stepped-up basis at death. Long-term shareholders can hold stock in highly successful companies over decades and decades and hold that stock until they die and permanently avoid a great deal of income tax. And buybacks let those companies distribute profits in the meantime without triggering tax for those non-tendering shareholders.

0:09:27.8 SJ: A second reason kind of similar to that relates to the taxation of foreign shareholders who now hold around 40 percent of U.S. corporate equity, and that share has gone up significantly over the last years and decades. Those foreign shareholders are subject to U.S. tax on dividends but not on most capital gains, including from buybacks. So you can kind of also take the view that by indirectly reducing the relative tax advantages of buybacks compared to dividends, the new tax will effectively collect tax from two groups that currently avoid a great deal of U.S. tax. So just to kind of sum up quickly, there may be a policy goal of reducing the volume of stock buybacks and encouraging companies to invest more in their businesses or alternatively distributing profits to shareholders via dividends rather than buybacks. It remains to be seen whether a 1 percent tax is enough to significantly change behavior in this way, but in any case, the tax will sort of modestly increase the relative cost of buybacks and raise revenue from those groups that I mentioned.

0:10:56.4 CG: Excellent. That's very interesting. Alex, I want to turn to you and give you an opportunity to respond to Samantha, and also provide your perspective on the policy of taxing stock buybacks. Is it good tax policy? And also, what are the downsides of it?

0:11:13.8 Alex Durante: Sure. Thanks for having me on. Yeah, so sort of my high-level response is that the stock buyback tax is a solution in search of a problem. I think it's really just based on the fundamental misconception about stock buybacks. And I think it would be helpful for the listeners if I kind of walk them through what transpired after the 2017 tax reform and explain some of the economics behind that. So as part of the Tax Cuts and Jobs Act, we cut the corporate tax rate from 35 percent to 21 percent. And it really has two main effects. So one is that it actually increases the after-tax return on investments by reducing the cost of capital. So that increases incentives for businesses to pursue new investments. But it also, in the short term, provides a windfall for those investments that have already been made. Now, if you were, say, a large corporation that's been operating for a long time, you're a more mature firm, you might not have as many potential investment opportunities as a younger startup or more growth-oriented firm.

0:12:28.5 AD: So now you've received this corporate tax cut, and you're suddenly awash in cash. And you really have two options here. One is that you can keep this cash on your balance sheet, or you can return some of this to the shareholders. But I think it's important for people to keep in mind, contrary to what Senator Schumer and some of the comments he made, is that these are really... This is residual cash flow that's occurring after all these profitable investments have already been undertaken. So it's not actually displacing new investment or displacing increases in wages that could occur from capital investments in the future. And this isn't just a theoretical view. I mean this is also borne out by the economic evidence. There was a paper from two Federal Reserve Board economists from a couple of years ago that looked at cross-country evidence over a period of time. And they didn't find any negative impacts of repurchases on investments based on that evidence. And I would also go a little bit further, actually. And I would argue that buybacks themselves actually create new investment opportunities.

0:13:40.1 AD: And one of the primary reasons that's the case, and this is again, this is coming from a paper by law professor at Villanova University, Richard Booth. He looked into this and found that 95 percent of the money from repurchases was actually invested in other public companies, which includes IPOs, as well as the purchase of smaller private firms through acquisitions. And again, this is in part due to the fact that a large percentage of corporate stock is actually held in these retirement accounts, more than one third, in fact. So a lot of this money tends to get reinvested, even more so because early withdrawals from these accounts tend to be subject to tax penalties. So there's a built-in incentive to continue to reinvest this money rather than to use it to finance immediate consumption or the purchase of a larger house or a new car or something. So in that regard, overall, I would say that stock repurchases actually allow cash to flow to new investment and allow the economy to operate more efficiently and dynamically.

0:14:52.2 AD: And I would also add, again, just going back to the immediate aftermath of a tax reform, I think some of the concern about the size and scale of these repurchases was a little bit overblown. And one of the reasons for that is if you look at some of the economic evidence. So Joel Slemrod, economics professor at University of Michigan, he and his co-authors looked at the first quarter of 2018 immediately following TCJA, and they were only able to identify about nine or 10 firms that actually announced a repurchase that could be attributed to the tax reform. And then in a follow-up analysis years later, so looking at all of 2018 and 2019, when they looked at repurchases, their general finding was that it was more inconclusive in terms of what the impact was and that a lot of this might have just been due to changes in timing. So some firms might have planned to announce repurchases in 2017, and then they just shifted that till after the tax reform had occurred. And then finally, I would say just talking about getting into our own modelling of this, what do we actually find here at the Tax Foundation?

0:16:05.4 AD: So when we modelled the stock buyback tax, we found that we raised about $55 billion in revenue over 10 years and reduced GDP by a small amount because the tax does itself raise the cost of capital. There is some degree of uncertainty about this estimate in regards to some behavioral responses, and maybe I'm sure we can get more into that later on the panel. And finally, I just want to just take a minute or two just to respond to some of these other ancillary points that were brought up. There's concerns that the tax code favors stock repurchases rather than dividends, and this would be equalizing treatment across those types. And there's also concerns that shareholders, if the value of their asset goes up, they're not paying tax on it until they sell it. So they're experiencing an appreciation in this asset, and they're not actually paying any tax on it. To that, I would just say, this is sort of a fundamental problem with the income tax system itself.

0:17:05.9 AD: And certainly here at the Tax Foundation, we're very much big advocates for transitioning to consumption tax bases. One, because we believe the economic evidence shows that taxes on savings and investments tend to disproportionately hurt economic growth. And when you think about this also from a say, an inequality perspective, right? I mean, people that are expressing concerns about stock buybacks, I think they have this perception in their mind that, okay, well, this asset's appreciated, this person's cashing out, they're taking their money, they're going and financing these large purchases. And if you were concerned about that, a progressive consumption tax would be a much more effective way to address this problem rather than a stock buyback tax or some of these other wealth taxes. And there's several different ways that you could implement one of these systems. Probably that would have to be the subject for another panel discussion. But yeah, I'll just close with that for now.

0:18:09.0 Griffith: Excellent. Thanks. Yeah, we need a whole ‘nother hour, maybe two to get into the alternative consumption. So Joel, I want to turn to you. Good policy, bad policy, it's here. And it looks like it's going to be somewhat of a nightmare for some corporations that are trying to comply with it. Could you briefly outline some of the challenges that are facing corporations and their advisors right now as they try to figure out what to do with this new tax?

0:18:35.0 Joel Rubinstein: Sure. And I think that's right. The policy we can debate for a long time, but in my world, when we're dealing with transactions and capital markets offerings, any type of uncertainty makes it really difficult to move forward. And because of the way this was passed and all the uncertainty surrounding it, and I think some of the history was right, it wasn't really part of the act until the last minute when there was a horse trade for the carried interest. So it kind of got put in there and in this form where there's so much uncertainty. And so because of that, whether you think it's good or whether you think it's bad, just trying to navigate around it has proven a challenge. So, one of the things you mentioned was SPACs. So, I'm sure at this point many listeners know what they are. But in brief, a SPAC is essentially a public shell company that all it does is have cash. And it's got to do a deal within a certain period of time, find an operating company to effectively take public by merging with it. Otherwise, it has to redeem all of its shares for cash.

0:19:51.9 JR: Also, when it does find a company, any shareholder who doesn't like the deal can choose to have their shares redeemed for cash. These are embedded into the charter of the SPAC. So there's no choice. This is not a large corporation with a lot of cash on its balance sheet making a decision that it wants to return cash to shareholders through a stock buyback, this is something that is required. But when you read the text of what came out, there's a concern that it gets swept up because of the breadth of the language. And you can't always... So take even in liquidation, the way these SPACs are structured, it's technically a redemption of the shares right before. So the question is, is that a redemption that's subject to the buyback tax? Redemption is in connection with a transaction. As someone mentioned earlier, there's a netting concept. So that theoretically, if there's a transaction where the SPAC is issuing tons of shares and it may be buying back some shares that are being redeemed, you could net them off. But first of all, questions of when you value the different shares are coming up, the fair market value.

0:21:08.2 JR: So it could be, for example, that the trading price might be moving in a different direction. So, how you value the shares that are being issued might be different than what you're buying back, number one. Number two, there are a lot of transactions that are done in structures where you have one entity in the corporate family doing the buyback and another issuing the shares. And so questions have arisen as to whether you can actually net those two. You would think you should be able to, but that's a question. So, what's happened is that because of all this uncertainty, SPACs that, for example, were going to expire in January or February, if they don't have a deal, et cetera, they're choosing to accelerate into December when there is no excise tax, to avoid this uncertainty. So as you said earlier, people are writing letters and things like that. And it's, I think, one thing to talk about the policy as to whether it's a smart policy for any public company. But the issue that SPACs are encountering, and by the way, this applies to other things, you've got redeemable preferred stock issued by a lot of companies in pipes and other transactions.

0:22:28.4 JR: Also, they have no decision to make as to whether to buy back their stock, they have to do it. And there are other types of transactions, hedges and other things where it's all coming up. So to me, and I think a lot of participants in the transactional side, the policy reasons that were articulated earlier broadly by Samantha don't make sense in these contexts. It doesn't make sense in the SPAC context. The company isn't choosing to return capital this way as opposed to another way, et cetera. Yet, unfortunately, the language is capturing it. So, that's where a lot of people are trying to get guidance and to say, "Hey, these situations which are not consistent with the policy behind this, whether you like it or not, should be excluded." But of course, Treasury and the IRS are scrambling, and they have indicated that it's a high priority, but there's a lot to think through. And so I think even with the best of intentions, it takes a while to come out with clear guidance. And so it's left a tremendous amount of uncertainty in the market. And as everyone knows, when markets have uncertainty, they don't function well. So I'll pause there.

0:23:42.3 Griffith: No, I think that's absolutely true. And we got a couple of questions in right off the bat that, you know, where do you report and pay excise tax? These are all things that everyone is waiting for to hear on when we get some guidance. So I want to ask you all first, do you have... Have you heard anything ears to the ground? Have you heard anything on timing of guidance other than that it will likely be sometime in the first quarter of the next calendar year? No?

0:24:09.8 Rubinstein: I don't think we've heard anything more specific, again.

0:24:12.8 Griffith: Yeah that's... I mean, that's...

0:24:13.0 Rubinstein: Except for that it's a priority, but you know, nothing more specific [0:24:18.1] ____.

0:24:18.2 Griffith: Yeah. And so the second one, and Samantha, I think I'll start with you on this question of, the stock buyback tax as it is written seems excessively broad. Do you have a sense of whether there's a lack of discussion around the buyback tax being added into the IRA, certainly. Is this not a concept that was previously vetted that we just grabbed from the shelf and plunked into the IRA? Or should this — even if we go back and say that all of the policy needs for this are correct, should this have gone and had more consideration put into it before it was included? And would that have helped taxpayers and maybe not been so broad and encompassing?

0:25:02.1 Jacoby: Yeah. I mean, I think a little of both. I think, it... You could have sort of seen something like an increase in the corporate rate of a point or two and gotten the same amount of revenue. And that would have had more predictable and certainly easier, easier for people like Joel. But for a number of reasons, that's not what happened. But I don't think it was a completely new concept, either. The Build Back Better Act that the House passed late last year included the same provision. And I think academics have been talking about it for a while too. So, it wasn't completely new, but it is new for Treasury, certainly.

0:26:08.1 Rubinstein: Yeah, I mean, to me, just to jump in, I think one of the things that it's the law of unintended consequences, right? It's really when these things come out, I'm not sure what the process was, particularly with this and thinking through the consequences for different things. The policy may have been something that people wanted to do. And you're right, obviously, it was in the Build Back Better Act. So the concept has been out there for a long time, but the devil is always in the details. And to me, it would have been not that difficult. And maybe they did, right? But to consult with people in the market to really understand exactly how this would roll out and what would happen.

0:26:53.9 JR: And look, there's obviously a legislative imperative that came in here to kind of stuff it in here and get this done. So I get that. But it does really come at odds with good rule-making, and good legislation, let's say, which is that, again, we should always be thinking about how this impacts capital formation. Regulation always needs to balance these things out. And I think here is just a great example of how there really wasn't enough consideration, I think, of how this would impact things. And we're seeing what comes out of that and everyone kind of in this uncertain world. And it's... By the way, it's not great for Treasury and the IRS either to be scrambling to have to deal with this in the way they probably are.

0:27:41.0 Griffith: Yeah, without a doubt, Treasury and the IRS have... I cannot, I feel for them, because they are scrambling to put out a lot of guidance. There's a lot of questions not only on this, but on the new corporate AMT and there's other things that are also in play. Do you, and I open this to anyone who wants to answer it. Do you think the 1 percent is going to be enough to actually change corporate behavior, or is this going to be something where the corporations just learn to live with it and factor it into the overall cost of doing business?

0:28:10.0 Durante: Yeah, I'll jump in here. So, when I was discussing earlier about our Tax Foundation results, I was saying there was some uncertainty around those estimates, but the uncertainty is coming from mainly what is — Are companies going to switch to paying out dividends and said there was an analysis by the Tax Policy Center that they were using another... An estimate from another academic paper. And I think they conclude that this, the tax of this size, the 1 percent exercise tax and stuff buybacks would increase corporate dividend payouts by about 1.5 percent. So, it's not huge, it's not necessarily clear how that would also impact the revenue estimate in the sense that I believe that the average tax rate on dividends tends to be a bit higher than the average tax rate on capital gains. I think it's about 17 percent. So it's possible that if the companies switch to dividends and avoid paying the excise tax, it's not super clear what the overall revenue impact would be, it could potentially be a wash. And again, I think there was an estimate I read, their names escape me, there were two law professors that put out their own proposal of a stock buyback tax.

0:29:29.9 AD: And I think they conclude that it would have to be somewhere in the range of 4 percent to completely eliminate buybacks, if that's what the intended goal was. And I would also just add, I mean in terms of, when it comes to raising revenue to finance proposals, it's not really a great idea to use what the columnist called Pigovian tax. [inaudible] That you're trying to raise taxes on a behavior that you want to deter, which means that the amount of revenue you can collect from that is likely going to fall over time. And I think that if they were looking to fill this revenue gap in their own proposal to get over the finish line, one area they could have pursued, which I think was discussed early on was maybe a one-year extension of the SALT cap, and maybe — the state and local tax deduction for listeners — and perhaps raising that cap to $80,000. And I think when we modelled that here, we felt like a one-year extension would have brought in pretty close to the revenue that they were looking to fill with the stock buyback tax. But yeah, so I would say overall, I think we would have to see, I think to have a really significant effect, the tax would have to be quite a bit higher. And I think that's what I'm hearing on the ground as well. But I'm curious here if the panel has any other perspectives on that.

0:31:03.4 Jacoby: Yeah, I mean, I think I've seen a lot of just statements about this not being, this being a relatively modest tax and probably won't change behavior too much. And I think that's probably consistent with that Tax Policy Center estimate that Alex mentioned. And I agree with what Alex said about the revenue estimates sort of depending on what you assume about behavioral change, the Tax Foundation's estimate is what I think Alex said, $55 billion and that's compared to JCT's at $74 billion. So, JCT may be assuming less of a behavioral change. Unclear.

0:31:48.2 Griffith: So, if we think that 1 percent is "not enough", and businesses may then just take this in as the cost of doing business. Does that hinder efforts by business lobbying groups to get a change or to get a repeal if they want it? If this just sort of becomes, “Well, it's just something that we have to factor in. . .”?

0:32:12.1 Durante: Also, I want to also hop in with another point that I think is worth pouring out. But we actually neglected to mention a lot of the exclusions from the stock buyback tax. So I believe that payouts to pensions and retirement accounts as well as employee compensation plans are actually explicitly exempt. So, the base itself is quite smaller than it could potentially be and that in itself I think is going to reduce, have a dampening effect on some of the behavioral changes that you could see there as well.

0:32:46.4 Griffith: Alex, I'm glad you brought that up. Could you or Samantha or Joel go into a little bit more depth on what those exclusions are? Because we didn't really get into that in our opening.

0:33:00.3 Jacoby: Yeah, I can, unless someone else wanted to jump in, I can sort of give a quick background on what some of the exclusions are, and then maybe Joel or Alex can go into more detail. But there's a, one of the exclusions is repurchases that are part of a tax-free reorganization. There's repurchases where repurchase stock is contributed to an employer-sponsored retirement plan or similar plan. There's a de minimis exception where the total value of repurchase stock in a year is a million dollars or less. There's a broker exception, exception for RICs and REITs and then an exception for repurchases that are treated as dividends. And then I mentioned before, but Treasury also has some authority there. So they can sort of decide what, if there are additional exclusions that are within their authority that should be given.

0:34:08.7 Rubinstein: Yeah. And one of those is exactly preferred stock, different classes of stock. So, that could be the area where something like the SPAC shares, which are, where there are terms embedded in the instrument, may be right squarely within that. But even like in the list that Samantha read, there's uncertainty, right? Like what's an employee stock ownership plan? Does it cover stock option? But there's a lot of, there are things that are unclear even in the exclusion list. And so I think that what everyone's saying is sort of away from my purview as a lawyer, but 1 percent, it’s true. If you're a large corporation, you have tons of cash and you're just looking to give some money back to shareholders, it's hard to see how that's really going to impact the decision. It does do what it needed to do, I suppose, if the math works in the sense of they needed to find revenue from somewhere. And so maybe you have 1 percent, but is it really accomplishing the policy goals in terms of the behavior? I think that that's very uncertain.

0:35:23.7 Griffith: Yeah. I mean, I think that's what we're going to keep coming back to on all of this, is that there's just still so much uncertainty and so much guidance that is needed. Samantha, one thing you mentioned was the discretion that Treasury has to apply the excise tax to transactions that it determines that are economically similar or likewise exclude. This level of discretion that the Treasury Department is given here seems overly broad to me. I will admit, I thought the same thing of the corporate AMT, that the level of discretion that Treasury was given there was broad without sufficient guidance that has yet been provided. But I'm interested in what you all hear on, if you have any idea of what types of transactions might fall into this bucket of those that are economically similar and what you think of the broad grant of power.

0:36:12.0 Jacoby: Yeah. I mean, I'm not sure what they'll sort of put into that bucket. I think one thing that we've seen in the last few years after the 2017 law, that similarly had a pretty broad authority for Treasury to make regulations implementing those provisions. And Treasury didn't always use that authority to maybe to the extent it could have. But yeah, so I think there's just, yeah, I think there's not much we can really say. Maybe others have additional thoughts, but I don't think there's too much we can really say about what they will or won't do. And it probably partially depends on their view of what their authority includes as well as what they think the legislative purpose was.

0:37:11.6 Griffith: It's going to be a waiting game to get guidance, I suppose. So I mentioned in the outset, we'll go and we'll do some more speculating on that, on things that might ultimately change, but we'll speculate nonetheless. On the opening that fair market value and how fair market value is going to be determined was an outstanding question. Do any of you have thoughts or insight into how you believe fair market value will be determined for purposes of the tax? No one has any thoughts on that? [laughter]

0:37:47.1 Rubinstein: Yeah, I mean, look, it could be the price of the trading price and the day it's bought, right? And the question is exactly when. Obviously, for different purposes, people... In different situations, is it the day before? Is it the closing price on the day of purchase? Presumably, it will relate to the... You have a market price, and so you do have something. The question is exactly how it's measured. But there are other situations, as I mentioned earlier, even in the SPAC context, it's like you've got repurchases going on and there's different... And this comes up in a few other situations, there's different timing of things. There's when something is set into motion and then there's when it closes. And the question is, when do you value it for different things? And you have hedging situations and automatic stock repurchase programs. And there's a lot of different situations where when you determine the value is going to make a huge difference. So I think that it's not that people say, there's no... Who knows what fair market value is? It's probably related to the trading price of the stock. But exactly when you measure it, I think is going to be the key.

0:39:04.4 Griffith: Yeah, no, that makes 100 percent sense. Well, we have one audience question in asking if anyone has insight into whether the excise tax will be deductible for income tax purposes. I have no insight into that, but I don't know if either one of you might. Is it likely that it would be deductible? I don't know either. This is going to be... This is such a...

0:39:35.9 Rubinstein: Look, I'm not a tax lawyer, but I don't believe generally that an excise tax like this would be viewed as something that you could deduct. But who knows? This is obviously its own animal here, so I don't know how you look at it, but I don't think generally it's the kind of thing you would expect would be deductible.

0:39:54.6 Jacoby: Yeah, I don't think that it is.

0:39:56.4 Griffith: Yeah. It's... I think there will be a lot of these types of questions that come in where people are hoping that there will be some sort of offsetting, that this is... You're going to take a hit here and you're going to get a benefit there. One question that I had thought about, and I think I posed to you guys at some point was whether this would have any impact on compensation packages that are provided to top executives. And if a prospective employee believes that the stock that they have been issued for joining the company isn't going to increase because that company is not interested in doing buybacks, does it have an impact on competition for talent? Is that sort of an unintended consequence of this type of a tax that maybe was not foreseen and that ultimately will be looked at and say, "Hey, we don't... This actually is bad policy because of this," or something that goes into that bucket? I'm kind of curious, Alex or Samantha, when you put on your policy hats, could that be an interesting tidbit going forward?

0:41:03.0 Durante: Yeah, I mean, that's certainly possible. I mean, it's not something that we had really considered in our modelling. I think that's just because I haven't myself seen... I mean, again, this is like a new and untested tax here in the U.S. But yeah, I think that's certainly something to think about. I mean, going back to what we said earlier, it really just depends on if the tax is high enough to really influence behavior that significantly. I mean, my prior right now is that it's probably not that high enough to have that much of an impact on hiring top talent in that regard. But I think it's certainly just another policy consideration to keep in mind, and something that we should be aware of and continue to think about.

0:41:51.0 Rubinstein: Yeah. I mean, I think a corollary to that is really what we talked about a little bit earlier, the alternatives, right? So sort of saying that, "Oh, well, if this discourages stock buybacks, they'll invest more in their business." But if the company already has determined that there isn't what to do with it, are you forcing companies to start spending on their business in ways that maybe they ordinarily would not have done? So, that seems like not necessarily a great incentive, right? Not every investment in a business is positive, right? Buying another company, right? Sometimes it works out, sometimes it doesn't. But if people... And again, the 1 percent may not be enough to really change the behavior, but assuming that it is, assuming that it accomplishes what it's supposed to do, that's a question. It was like, do you want to force companies to spend their money in other ways? Is that really a good use of capital to encourage that?

0:42:50.4 Griffith: Yeah, I guess that's an interesting point as to what should we be forcing companies to do and when should we be allowing them to make their own choices? So we've talked a lot and there's so many unknowns with this. I can only imagine there's a lot of lobbying going on right now to try to shape the guidance that is going to come out. Do you have any sense of how those lobbying efforts are going? And again, I may be asking Samantha and Alex here. Joel, if you have any insight as well. But what is that looking like?

0:43:21.7 Durante: I mean, I wish I could say I have a special insight on this, and I unfortunately don't, but I will say I think kind of our view here is that... And I'd be interested in hearing what the other panel thinks about some of these policies overall. But I mean, I think our view is that it seems like this is something as a policy that is probably unlikely to last for very long just because it is so complicated to administer and it's certainly possible down the road, depending on who's in Congress and who the president is, that they might decide, hey, maybe this wasn't something that was really worth exploring. Maybe they'll consider other options to raise revenue going forward. But yeah, fortunately, I mean, we don't have any special insight beyond that, other than we don't anticipate that this is a policy that's likely to last for very long. And again, mainly due to the fact that just it's administratively complex.

0:44:34.7 Griffith: We did a previous panel on the corporate AMT, and the comment was made that perhaps the corporate AMT was a constructive bridge to something better. If this was a constructive bridge to something better, what would that something better be?

0:44:49.1 Durante: Well, I sort of gave my spiel in the beginning about how... I mean, our perspective here would be to just move towards consumption tax bases and not focus on taxing unrealized capital gains. Precisely because it is a very difficult and complex tax to administer. And also, I mean, savings and investment is good for the economy. That's something that we want to encourage. We'd rather encourage that rather than consumption. And then also, we think if you're very concerned about income inequality, that that would be the approach to take to make that tax... Keep the progressivity that we currently have in the system, but just change the tax base. But that's obvious... I mean, obviously, this is very much a pie in the sky proposal. But [chuckle] there were proposals many years back from different congressmen to kind of move our tax system in that direction, incrementally. And I think those are some.

0:46:15.4 Jacoby: I could take the opposite view that... I mentioned before the policy reason for this tax might be to sort of get at the unrealized gains that particularly sort of very long-term shareholders or founders of very successful companies, they just go decades and decades without paying tax, and then they die and pass their assets onto heirs, and that tax is never paid. You could see this being maybe a bridge to sort of a tax on unrealized gains at death, or even a mark-to-market tax. But that's also, I think, many years down the road.

0:46:54.4 Griffith: That may face a difficult political challenge. Joel, from your perspective, in the business community, looking at and saying, "Well, we needed X number of dollars as a pay for in the IRA." This is not a particularly palatable solution for many reasons, particularly from people in your seat. Is there something that would be better, that would likewise generate revenue, that's easier to comply with?

0:47:26.1 Rubinstein: Well, I mean, look, there was an obvious tradeoff between this and the carried interest, right? And politically, that seems to be just surviving pretty much on either side of the aisle, right? Like just continuing on, however you think of it. Obviously, there are a lot of arguments advanced by private equity industry of why it's appropriate. But that was the obvious trade at the last minute, to plug that hole. So, I mean, look, I think that part of it is really like, what are you getting at? Samantha really articulated three... I think it was basically three main reasons for this. And so they each really address different things, and how you would then devise an alternative, really, I think, depends on what you're trying to do. If you're trying to regulate corporate behavior, that's kind of one thing. If you're trying to get at unrealized gains, that's different. If you're trying to get to the offshore people, that's another thing.

0:48:26.4 JR: So I think it really depends on how you look at it. I mean, it's really a hybrid of all those three things theoretically. And I think as Alex said, the unrealized gains... And Samantha also, like there's other ways you could go after that. If you want to go in that direction, but that may not accomplish the corporate behavior aspect of it. So I think that's what it really depends on. And it'll be interesting to see how the regulations or guidance come out, because I think to some degree, what they have to struggle with is exactly, what did Congress intend to do here? What was the driving, motivating factor? And how you then look at the exclusions, and how you deal with it to a large degree is going to depend on, what was Congress really trying to accomplish here? So, there's a lot to chew on here in terms of how they come up with it.

0:49:22.8 JR: I will say again, in the end, no matter what you're trying to do, there are certain things, [0:49:25.1____] stocks, SPAC stock, things like that, where it's automatic, it's embedded, that doesn't seem to really implicate any of the things that really we're trying to go after and to change. And so obviously, people hope that those will get excluded. And the only way people sort of justify is to say either number one, they'll feel constrained because the language says what it says, or simply, look, there's revenue to be had. Statute says what it says, let's take in the revenue, right? I mean, hopefully that won't prevail, because again, obviously, we hope there's some... There should be some integrity to the process in terms of like, this should accomplish what it's supposed to do. And even in the broadest reading of the different things, as I said, there are a lot of different things where it should just not apply.

0:50:14.9 Griffith: Yeah. And I think that I had initially asked Samantha a question and I was kind of getting to that. And here we've got very little legislative history, because this was so quick. And so we don't have a great picture into what Congress was intending with it. So I think this could be quite a bit of a challenge. And I guess I have to wonder at the end of the day, whether there were a lot of policy considerations, and it did go to... Because I think that Samantha makes a very compelling case for why we should regulate some of this behavior. But I do sort of wonder, was it just a pay-for? Were these policy considerations really outlined, and are these the... Is this what Congress cares about? Or did they just care about getting the right score?

0:51:01.3 CG: And I, of course, don't know the answer, but that's sort of where I end up getting to. Well, let's... We're going to take our last eight minutes or so. We'll try and do a few of the audience questions that have come in. You guys can feel free to speculate where you can feel comfortable, and where we don't, we're just simply going to have to acknowledge that we don't have all of the answers here. And we hope and hope and hope that the guidance will come out sooner than later. One of the questions was, what's the justification for the exclusions, and do they signal that even proponents know that the tax is harmful and want to reduce the harm for favorite entities and transactions? Yeah, Samantha or Alex, I may turn to you for this.

0:51:50.9 Durante: I mean, yeah, my answer to that would be a resounding yes. I mean, a lot... To go back to what I said earlier, I mean, a large portion of corporate stock is held in retirement accounts, more than a third in fact. So yeah, so my view is that I think that they wanted to kind of minimize the harm that this could do to the broader economy by doing that. And I would also just add, those accounts in themselves are an important source... The retirement accounts and the pensions, I mean, that is an important source of middle-class wealth, even though I think the Survey of Consumer Finances shows that the median household doesn't have any direct ownership in stocks and they certainly have these... They certainly have some ownership through whatever retirement accounts or pensions that they had, and they would almost certainly have been disproportionately affected by this policy if the tax base had been broader.

0:53:00.1 Jacoby: I think the exclusions weren't just pulled out of a hat. I think they represent sort of clear cases where the policy concerns aren't implicated. You have tax-free reorganizations, which Congress has intended to be tax-free. The repurchase shares for purposes of employer-sponsored retirement plans, that's... It's not really like what we're talking about, like these repurchases for purposes of sort of distributing profits to shareholders. And then maybe the de minimis exception, you could see Congress thinking, "Well, this is... It's sort of administratively somewhat complicated, so let's exclude these smaller cases so they don't have to deal with all of the transaction costs of figuring this out."

0:53:55.5 SJ: And then the one I mentioned of repurchases that are treated as dividends, so that's a pretty clear case, right? Like if we’re thinking about the excise tax being intended to sort of more... Like, not equalize, but treat more similarly dividends and stock buybacks. Well, if they're treated as dividends already, that clearly isn't what we're talking about. So, yeah, I do think there was some thought put into it. I think Congress probably didn't or couldn't think through all of the potential cases where. . . . Like Joel has talked about some of these cases where maybe we're not really getting at the policy issues. But those exclusions, I think, are some of the bigger, more obvious cases where the policy concerns aren't implicated.

0:54:52.2 Griffith: Another question we got in, which is somewhat interesting was, why was this done as an excise tax and not a corporate level income tax? I see Alex thinking about that. [chuckle]

0:55:06.8 Jacoby: Well, as mentioned... In terms of like, you could have increased the corporate rate, I think that was talked about, but for political reasons, it wasn't done. I won't talk about details there, but I think that there have been, I think, also more complicated proposals to treat buybacks as dividends. There's a decades-old academic article by Professor [0:55:32.5 ____] that has a much more complicated proposal than this. So in some ways, this was the simple way to do it, which may give Joel nightmares. But yeah, I think that's probably why this ended up the way it was.

0:55:51.5 Rubinstein: Yeah, I think that's right. I mean, there's a lot of pushback on income tax, income tax rates get a lot more. This was sort of viewed as an easy grab, where, "Look at these people, they've got so much money, they don't know what to do with it that they're buying back their stock. Let's take a little slice from it." And it just doesn't have the same sort of... And at the end of the day, true, it's a tax and it's money coming out of the company to the federal government, but it just... It doesn't have the same sort of resonance. This one is easy for senators to get up and speak about how this looks on its face, to be rich companies enriching their shareholders. It's a little different than just an income tax. So, it seemed easier to kind of push through.

0:56:33.7 Griffith: I think that's absolutely true. It was an easier sell. And sometimes, that's what you end up having to go with. Looking back on other similar taxes, someone asked, do you have any insight into timing as to when this would be due? Would it be monthly, quarterly? Do you have any... Just looking back on other types of taxes that might be similar, on what the filing is going to look like for this? It's all going to be left up to chance.

0:57:00.4 Rubinstein: I think it's right, you get the whole year, right? Because there's this netting concept, so you do get to net... And that's an important part of it, right? If we're in a quarterly basis, you'd end up with a transaction that bridges it. Of course, you still could have transactions that bridge the year, and so... But there is... They did a cutoff in that way. And so I think I've heard that it may be... The timing of payment will be the same timing as income tax payments, but I'm not sure all that's finalized yet.

0:57:34.0 Griffith: Well, I want to thank you guys. There is so incredibly much uncertainty surrounding this. And I think that we'll have to get this panel together again when we actually have some guidance, which is hopefully going to come out sometime shortly after the first of the year. I think we would be lucky if we saw anything in December. But you never know, miracles can happen. But I learned a lot today. I probably have more questions now than I did going in, and that is never a bad thing. We will look for answers going forward. And I always hope for lots of guidance, and where there isn't any, Tax Analysts will go and find it and bring it out. So I want to thank you guys so much for your time today. And I want to thank our audience for their questions and for tuning in again. Have a great rest of your day, everyone.