[tliltocatl]

But if buybacks are illegal and dividends are highly discouraged by taxation, what's the purpose of the stocks at all? How are stockholders supposed to get paid back if there is no flow of money from the companies? And no, "sell stocks for higher price to a greater fool^W^W^W another investor" cannot work on global level because if the company doesn't distribute it's profits to stockholders, stock price is purely speculative so it essentially becomes a Ponzi even if the is real value production getting done, because the value production doesn't find it's way back to the investors.

[rybosworld]

> what's the purpose of the stocks at all?

Dividends

> dividends are highly discouraged by taxation

This is only true today because buybacks aren't taxed

Buybacks are ultimately a way of saying "we don't have a better way to spend this money." Consider that, in a world without buybacks, execs have two choices. One is to pay dividends, and eat the tax implications. The other is to find productive ways to spend the money to increase the company's earnings. The taxation of dividends strongly motivates companies to innovate. Buybacks weaken that motivator significantly, because there's no tax implication. It's financial engineering and not a productive use of money.

Buybacks are also a pretty neat way for insiders to enrich themselves at the expense of shareholders.

Example: Insiders schedule a sell of their shares to occur right after announcing a buyback plan.

[woooooo]

Worth noting also that dividends aren't uniquely taxed. Worst case, they're taxed the same as income, but they can also be capital gains which are taxed at a lower rate.

So any talk of incentives should include a justification of passive investment being more valuable than work for income, if someone is asking for favorable tax treatment.

[tliltocatl]

Wasn't aware of that. Yes, I've no clue what I'm talking about. But if buyback gains are also taxed as income when cashing out, what is the advantage of buybacks then?

[loeg]

You can defer selling capital gains for decades in a buy-and-hold portfolio, while your portfolio continues to grow. Dividends are always taxed in the current tax year. One benefit here for investors is that you can defer taking capital gains until years when you are in a lower tax bracket (e.g. retired), which you cannot do with dividends. (The US capital gains tax rate is progressive, if with fewer buckets than income. There's a 0% bucket, a 15% bucket, an 18.8% bucket, and 23.8% bucket.)

[ac29]

Qualified dividends are not capital gains, even if they are taxed at the same rate

[loeg]

GP is clearly just talking about them being taxed at the same rate.

[ac29]

My point was that GP's assertion that "Worth noting also that dividends aren't uniquely taxed" is wrong - they are uniquely and specifically taxed, the rate just happens to currently be the same as capital gains rates.

[cherryteastain]

> stock price is purely speculative

Already is. There's a reason why many quant finance books model stock prices as martingales/random walks.

[Mistletoe]

Well we used to have this thing called a dividend…