Someone is probably going to tell me why this idea doesn’t work, but I don’t see a reason now. Section 531 of the IRS Code levies a tax on excess accumulated earnings. I will quote from an IRS document here: (https://www.irs.gov/irm/part4/irm_04-010-013)
Accumulated Earnings Tax (IRC 531)
- The purpose of the accumulated earnings tax is to prevent a corporation from accumulating its earnings and profits beyond the reasonable needs of the business for the purpose of avoiding income taxes on its stockholders.
- Liability for the accumulated earnings tax is based on the following two conditions:
- The corporation must have retained more earnings and profits than it can justify for the reasonable needs of the business
- There must be an intent on the part of the corporation to avoid the income tax on its stockholders by accumulating earnings and profits instead of distributing them
- Any corporation within a chain of corporations can be subject to the accumulated earnings tax. A subsidiary corporation can be subject to the accumulated earnings tax even though the parent corporation is not subject to the accumulated earnings tax and vice versa
- The accumulated earnings tax is computed on the corporation’s accumulated taxable income for the taxable year in question
- The accumulated taxable income is the corporation’s taxable income with various adjustments. These adjustments are made primarily for the purpose of arriving at an amount that corresponds more closely to financial reality and thus, measures more accurately the corporation’s dividend paying capacity for the year.
The audit guidelines for this specifically exclude “sleight of hand” type adjustments that don’t affect their ability to pay dividends. The tax is 20% of excess retained earnings.
I would submit that share buy back programs are prima facie evidence the corporations have excess earnings that should have been distributed as dividends and thereby subject to income tax. My “quick and dirty” analysis shows this might generate $100B in revenue per year. This would not require any new legislation, just enforcement of existing law. Why hasn’t this been investigated?