DragonFireCK t1_j6kpydg wrote on January 31, 2023 at 12:34 AM

A stock buy back is when a company buys some of its own stock. As doing so reduces the amount of shares available, it results in the stock price going up - the whole supply and demand idea.

This is one of two ways a company can distribute cash to its investors, with the other one being to pay a dividend. With this, the company just directly pays the owner of each share of stock some amount of money.

The rich will generally prefer a buy back due to how it affects taxes, at least in the US. Notably, the rich can take loans using the stock as collateral allowing them to defer paying taxes, often permanently as no tax is owed until the stock is actually sold. Dividends get taxed immediately, using the same rate as if you sold stock.

A common complaint is that the same companies performing the buy backs are saying they cannot afford to pay their workers more, despite spending many thousands per year per employee on the buy backs. This is also at the same time the company is trying to get tax breaks or stimulus money so they can stay in business.

highvelocityfish t1_j6kzxmk wrote on January 31, 2023 at 1:48 AM

Another reason that buybacks are preferable to shareholders is that the upper middle class and below will likely not pay tax when selling stock due to capital gains tax law, while they do at their standard income tax bracket for dividends.

Not sure that the theory about loans holds water though. You have to pay the piper one way or another, and whatever you do to earn that money is a taxable event unless you're living on a small enough amount of money to keep your sales under the threshold for 0% cap gains tax.

ContinuousZ t1_j6kyj7m wrote on January 31, 2023 at 1:38 AM

>the rich can take loans using the stock as collateral allowing them to defer paying taxes, often permanently as no tax is owed until the stock is actually sold

you imply they do this to avoid taxes which isn't the case and you say "permanently" which makes no sense. You realize they have to pay back these loans, right? So what ever income they've made will be taxed and will go towards the loan(which btw has a small interest rate). The reason the rich get loans because they believe their stock will go up so they want to hold on to as long as possible. So if A rich person wants 100mil instead selling the 1mil shares, they get a loan and when they have to pay off the loan they might have to only sell 300,000 shares.

DragonFireCK t1_j6l18kz wrote on January 31, 2023 at 1:58 AM

It does need more elaboration, but using loans with stock as collateral is a way to avoid, or at least minimize, taxes very long term. If the collateral raises in value at least as fast as the interest rate, you can take out more loans to service the initial debt. If the collateral raises faster than the interest rate, this can be extended to add on more debt load in total. Using this is risky, in the same way that margin stock is dangerous: losses are magnified more than gains are, and a stock drop can wipe out many times the amount of wealth from the owner.

The loans will also let them do better timing with sells, delaying payments such that they can liquidate a stock that lost value at the same time as stock that gained value, reducing the taxable liability when they do actually sell. This is presuming they hold any stock that actually lost value.

Most of the rich will have outside sources of income that they can use to service any debts they have. This will include items such as base pay and stock grants from the companies they own.

If they manage to delay the repayment until death, proper estate planning allows other tricks with minimizing tax liability.

ContinuousZ t1_j6m7fu4 wrote on January 31, 2023 at 8:58 AM

>avoid

You just said avoid. There is no avoiding just delaying. You still have this impression this practice is done purely to "avoid" taxes. You don't pay interest on a huge loan to delay paying taxes.

>If the collateral raises faster than the interest rate, this can be extended to add on more debt load in total. Using this is risky

the banks that are giving out the loans don't like risky

>The loans will also let them do better timing with sells.

You're just reiterating what I just said.

>If they manage to delay the repayment until death

Banks are in it to make money. They aren't going to let Jeff Bezos take out a huge loan and not pay it back for 40 years.