Buy Back Better: The Case for Raising Taxes on Dividends and Buybacks

Summary

This report is published in collaboration with IPPR as part of our programme of work exploring profits and corporate power post-pandemic. The authors would like to thank Shreya Nanda, Henry Parkes, Harry Quilter-Pinner, Carys Roberts, Carsten Jung, Mathew Lawrence, Amelia Horgan, and Abi Hynes for their feedback and work on this paper.

Households are experiencing a real-terms income squeeze while some of Britain’s largest companies transfer profits to their shareholders at record levels. Cash transfers to shareholders of FTSE companies, in the form of dividends payments and share buybacks, have rebounded rapidly since they slumped during the pandemic. Dividends are the primary mechanism through which shareholders are enriched when the company they invest in makes a profit, while buybacks inflate the value of a company’s stock and spread this value over a smaller number of shares. Levels of buybacks are now twice as high as their previous peak in 2018, having rebounded twenty-fold since their lowest point during pandemic. When combined with dividend payments, transfers to shareholders now exceed their previous peak by 30 per cent.

Taxes on shareholder transfers should be raised to ensure that companies are not channelling profits to their shareholders at a time of national economic crisis. In some cases, companies are making extraordinary profits that represent a direct transfer from households and customers. Research by IPPR and Common Wealth found that some companies are reaping the rewards of extreme price increases, while other firms may be using their market power to exacerbate inflation.

When these profits are redistributed to a company’s investors households may be losing out while shareholders reap the rewards.

The UK government can raise revenues by increasing taxes on dividends and buybacks. This is one mechanism which will allow the government to extend support for households and businesses through the cost of living crisis without resorting to public service cuts. The government should be prioritising progressive revenue-raisers which address growing wealth inequality, rather than turning back to the austerity cuts of the past.  

In this paper we find that:

1. A one per cent tax on the share buyback schemes of FTSE-listed companies could raise an additional £225 million in a single year at current levels of buybacks. In the US, the Biden administration is seeking to rein in rising levels of share buybacks with a one per cent tax on stock repurchasing schemes. The tax will raise revenues to reduce the deficit and invest in renewable energy.  
2. Introducing an emergency “windfall” tax on the buybacks of FTSE-listed companies, levied at a higher rate for a defined period of time during the cost of living crisis, could raise £11 billion in a single year at a rate of 25 per cent based on current trends in buybacks. The government could invest these revenues into support for households and businesses during the cost of living crisis.
3. Targeting a windfall buyback tax on the stock repurchases of Shell and BP alone would raise £4.48 billion in a single year if both companies pursued buybacks at the same levels seen over the last year. Shell and BP announced or implemented the most buybacks of any FTSE-listed company in 2022 after making record-breaking profits from rising prices in oil and gas.
4. A higher tax would also encourage businesses to find more productive investments of their profits than remuneration shareholders. It could act as a mechanism to change the behaviour of business, encouraging companies to find more productive investments for their profits than remunerating their shareholders. These investments are likely to have spill-over benefits for innovation, jobs, skills and prices.
5. The government could raise £6 billion a year by bringing taxes on dividends in line with income tax levels. This would ensure that the Exchequer does not lose out on revenues if companies choose to prioritise dividends over buybacks to enrich their shareholders. It would also close one of the loopholes which allows asset holders to accrue wealth while paying less tax than earners.