There's an occasional call to "end the double taxation of dividends". Taxing interest paid and stock buybacks at the same rate would be equally effective. This would be a good time to do that economically, because interest rates are so low.

I'm in Australia where there's a system of dividend imputation. That means that together with dividends one will receive franking credits representing tax that a company has already paid. This has another advantage of really benefitting shareholders on a low income, few as there may be. The corporate tax rate is 30%. The highest marginal tax rate for the median income earner is 32.5%, meaning dividends, as paid out, will typically attract an effective 2.5% tax. Wonderful.

For someone receiving 70c in dividends and earning under $18k a year, they will get another 30c back through their tax return.

It's a pretty nice system and it's astonishing to me that the vast majority of other countries don't do this. It also means that domestic shareholders are advantaged over foreign ones.

Then there's also the government restriction on mergers/acquisitions among the four big banks, which provides stability, consumer benefits, a nice dividend for the shareholders - it provides an actual desire by the banks to create value.

http://en.wikipedia.org/wiki/Dividend_imputation

http://en.wikipedia.org/wiki/Four_pillars_policy

I will say that it is a complete mess. A lot of businesses today treat their customers and employees like garbage. On the other hand a lot of of the existing unions are parasitic so I understand criticisms on both sides. I can only suggest that it is because we have a very bad form of corporatism run amok in the US. Where regulation does exist it tends to support large companies (which I suppose is not much different from the picture in the 1970s).

The left is afraid of big heartless business. The right is afraid of big inefficient government. We have a wonderful mix of both. Both sides are too busy screaming about the splinter in the other's eye that they miss the log in their own.

Nationalized and regulated businesses were stable, but seemed inefficient. They had no incentive to take risks to improve. The history of the Reagan era is well known, so that doesn't have to be repeated here, but reviewing the history of deregulation is useful. What seems to happen in deregulation of regulated monopolies is that a large number of new companies enter the field, and prices go down. Then most of the new companies go bust, and the winners consolidate. The result tends to be deregulated monopolies.

How do you combat this? Both seem less than satisfactory.

Stock buybacks are mostly a tax dodge. But that's not the full reason for their popularity. For stockholders, they're no better than dividends.

Aren't they better for stockholders as well?

Suppose I have 1 share of stock, and I will sell it two years from now.

If the company pays out dividends, won't those be taxed as income at my marginal rate? Whereas if the company does a stock buy back, then two years down the road the marginal value that would have been paid out in dividends is now captured in the stock price. So instead of paying the marginal rate, I pay capital gains on that amount.

I might be missing something, but it seems like a tax dodge that benefits all (except the government).

Most people who follow financial news know that share buybacks increase EPS, but Animats goes a whole level deeper.

As we found out from Wall Street's behavior during the recent crash, executives are rational actors, and what they want is as much as they can take, economy be damned.

None of the examples you give show this. What they show is that, because of flaws in corporate governance, things that do not maximize shareholder value are being done in the name of "maximizing shareholder value".

In the 1980s, though, it became clear that the USSR couldn't make their system work.

It was clear long before then. There was a lot of fear of the USSR's military capability, but not their economy. One obvious example was Kansas was shipping wheat to the USSR starting in the early 70's to make up for Soviet agricultural shortfalls.

Japan doesn't allow stock buybacks for most types of corporations.

Where did you get this? Stock buybacks are commonplace in Japan. Try and search "ＴＯＢ 株" or "株式公開買い付け" on Google News (use Google Translate if you can't read Japanese).

Non-dividend-paying stocks are much less common than in the US, but that doesn't mean that buybacks aren't allowed.

How are buybacks a tax dodge? If they have the desired effect of boosting share price, then there will be increased taxes paid by shareholders when those positions are exited, no?

Dividends, interest, and repurchases aren't the whole picture. Especially when funders are also insiders, a variety of other (sometimes "soft") benefits reward investment. Much corporate behavior studied in the vein of management conflicts of interest relates to executive compensation and other benefits that may or may not contribute to personal tax base. There is also the matter of trade in securities based on valuation, on public markets and otherwise, by investors of all stripes. Many listed companies have never paid a dividend and probably won't ever pay a dividend. S-1s for well subscribed IPOs often warn pro forma this will be the case. Companies may also adjust the amount and kind of risk they bear to align with one constituency at the expense of another (e.g. management over outsiders, well organized institutional investors over the masses).

While leveraged buyouts are by no means dead, PE is far more than LBOs. The industry predates and has long outlived the 80s LBO boom. The term is a broad umbrella over many different kinds of operators leveraging (or suffering under) various features of our tax system.

Debt and equity still enjoy different rights in liquidation, and contractual covenants and controls accompanying credit are different than rights assigned to equity holders by statute, governing documents, financing agreements, securities laws, and exchange rules. Like the time-remote possibility of dividends from a growth company, different spots in line to the coffer of a healthy operation still affect valuation. Derivatives and public markets can facilitate decoupling of control rights from equity. Instruments can be designed to blend equity and debt characteristics. But debt and equity still confer different rights to affect operations.

It is difficult to speak of stock buybacks out of context; their use is varied, from purely financial to entirely structural. They are not entirely "unregulated", either. Background state corporate law, governing documents, exchange rules, and contracts (including debt documents) impose restrictions on when and how. The board is involved. Markets, public and private, may take note.

It is also difficult to make tax arguments out of context. Even statements about the macroeconomic effects of certain policies have to turn on the prevalence and kinds of tax situations meaningful populations of companies inhabit. Tying the tax effect to rising executive compensation requires at least time-correlating tax policy changes to compensation. I'm not sure that's borne out. There are many additional confounding variables.

Thanks for sharing your opinions. You've got some good back-and-forth started.

Edit: Changed "bankruptcy-remote", which is a term of art in bankruptcy, to "healthy", which makes the point with less risk of confusion.