The broad-based rally in U.S. equities faded a bit on Wednesday after Senator Marco Rubio announced a bill to tax buybacks on equal footing with dividends.
The S&P 500 Index pared gains after Rubio, a Florida Republican, tweeted a series of nine messages about his buyback proposal.
"The justification for corporate buybacks is company has no better investment available. This may be true for any company from time to time. But what does it say when it is true for many companies year after year?" Rubio asked in the first of nine tweets.
"Will soon file bill making immediate expensing permanent & tax corporate buybacks same way as dividends. No tax advantage for buybacks over dividends. But we’re going to give permanent preference to investments that will drive the creation of jobs & increase in wages," Rubio's ninth tweet read.
"Right now don’t have a “free market”. We have tax code which engineers economy in favor of inflating prices of shares at the expense of future productivity & job creation. If we are going to use tax code to incentivize behavior, it should be investing in productivity & jobs," Rubio's eighth tweet said.
That squelched a rally driven by optimism that President Donald Trump is closer to accepting a border deal that would avoid another government shutdown.
Rubio is taking on the GOP’s 2017 tax law by saying it’s encouraging companies’ rush to buy back stock, hurting the economy.
The Florida Republican, as chairman of the Senate Committee on Small Business and Entrepreneurship, released a plan Tuesday that would curb incentives for companies to use excess capital to buyback shares, a move that investors like because it can increase the stock price.
Buybacks should be taxed the same as dividends and companies should be able to immediately write off the costs of more capital assets and research and development expenses, according to the plan.
"Cash spent on share repurchases is not cash spent on capital investment," according to the plan, which echoes comments Rubio made in December. "Building a more productive industrial base will require more investment in tangible assets."
Rubio, who voted for the tax law, echoes the message Democrats have used to criticize his party’s signature legislative achievement under President Donald Trump. They’ve said the 2017 law, which slashes the corporate rate to 21 percent from 35 percent, is a handout to corporations, many of which are using their savings to repurchase stock. The tax law also includes some tax breaks to invest in equipment and property, but those expire in 2022, while the corporate rate cuts are permanent.
Key defenders of the Trump tax plan have sought to downplay the benefit for corporations. Chairman of the White House Council of Economic Advisers Kevin Hassett said in an op-ed in April that those who described the tax cuts as helping corporations at the expense of the working class were “wrong.” Treasury Secretary Steven Mnuchin has said that buybacks help recycle capital through the economy, which ultimately is good for all Americans.
Aggregate share repurchases, also known as buybacks, increased by almost 50 percent to $384 billion in the first half of 2018, the six months following the passage of the tax law, according to research from Goldman Sachs. Business equipment orders, a proxy for capital investment, has missed estimates in recent months.
Rubio, who ran unsuccessfully for president in 2016, has previously criticized his party for directing too much of the 2017 tax cut to corporations and not enough to families. In the final days of debate in the Senate, Rubio, along with Mike Lee of Utah, pushed to increase the corporate tax rate to pay for a more generous child tax cut. After lawmakers agreed to increase the refundable portion of the credit, Rubio supported the law.
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