Democrats want to tax stock buybacks to help pay for President Joe Biden’s $1.75 trillion spending plan. Billionaire investor Charlie Munger isn’t happy about it.
“I think it’s insane. Literally insane,” Munger, the right-hand man of legendary investor Warren Buffett, told CNN in an interview.
The Build Back Better framework, released by the White House last week, promises the ambitious economic and climate agenda will be “fully paid for” in part by imposing a 1% surcharge on corporate stock buybacks.
But Munger, the 97-year-old vice chairman of Buffett’s Berkshire Hathaway (BRKA), worries this plan represents a slippery slope.
“It’s so irrational, and I think it sort of destroys the whole system, once you start tinkering from Washington,” said Munger, who describes himself as a Republican.
Companies frequently return extra cash to shareholders through dividends and stock buybacks. Wall Street loves buybacks because they simultaneously boost demand for shares and limit supply. They also inflate per-share profits, a key metric that drives stock prices. Added bonus: Buybacks can be turned on and off more easily than dividends.
Berkshire Hathaway (BRKA), Buffett’s holding company, spent $24.7 billion on stock buybacks last year alone. Under the Democrats’ proposed buyback tax, Berkshire would have owed $247 million to Uncle Sam on those purchases.
“I don’t think the dividend policies of American corporations ought to be determined from Washington,” Munger told CNN.
The Biden administration fired back after Munger’s criticism.
“We have had an economy based on tax breaks and tax evasion by billionaires for decades. That strategy has failed — as the 2017 tax giveaway to the wealthy and corporations demonstrated — and buybacks long have been used to increase executive compensation at the expense of our middle class,” a White House official told CNN in response to Munger’s comments. “President Biden instead believes we should shift to supporting families, getting to work and getting ahead. We understand why some billionaires might be disappointed.”
Buffett: ‘CEOs have an embarrassing record’
Critics of buybacks argue that some companies have abused them to the detriment of American workers and the broader economy.
The White House framework for Build Back Better says corporate executives often use buybacks “to enrich themselves rather than investing [in] workers and growing the economy.”
“In 2017 when taxes were cut substantially, you did not see any surge in investment spending,” Treasury Secretary Janet Yellen told lawmakers at a hearing last month. “Instead, what you saw was a surge in stock buybacks.”
Business spending on factories, equipment and software did not live up to the hype following the 2017 tax cuts. By early 2019, Bank of America declared it “the investment boom that wasn’t.”
Companies including General Electric (GE) and Sears have been criticized for blowing billions of dollars on buybacks at inflated prices — only to later face cash crises.
Even Buffett himself has been critical of excessive buybacks.
“American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked,” Buffett wrote in his 2020 annual report.
Yet the Oracle of Omaha is a big believer in buybacks — done at the right price — because they shrink the number of outstanding shares, allowing investors to own bigger pieces of companies.
“The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses,” Buffett wrote.
Munger: ‘No reason’ to remove Jerome Powell from the Fed
Munger also told CNN he’s in favor of Federal Reserve Chairman Jerome Powell getting four more years at the helm of the US central bank.
“If I were president, I’d reappoint him,” Munger said. “I regard him as very intelligent, very honorable and did the very best job he could. I see no reason to change him.”
The White House hasn’t said whether or not President Biden will reappoint Powell, whose term expires in February.
Democratic Senator Elizabeth Warren is urging Biden to replace Powell, who she recently called a “dangerous man,” as Fed chair. Warren argued the Powell-led central bank has been soft on regulating Wall Street.
Munger said Warren is “wrong about Powell,” adding the Fed chairman has been “okay” on regulation.
Yet Munger does support the need to keep a close eye on banks and Wall Street firms. “Here I am, a Republican, I agree with Senator Warren that there ought to be more regulation of our financial institutions,” Munger said.
‘We kind of overdid it’
The Berkshire Hathaway executive described himself as an “admirer” of the Fed’s response to the pandemic. In March 2020, the central bank dropped interest rates to zero, promised to buy $120 billion worth of bonds every month and rolled out a series of emergency programs that successfully unfroze credit markets.
“The Federal Reserve did a magnificent job when the Covid thing came,” Munger said.
Yet Munger was critical of the stimulus plans enacted by Congress and both the Trump and Biden administrations.
“I think we kind of overdid it a little bit, in retrospect,” Munger said. “We made some of the benefits for the working people so great that they stay home instead of going back to work. I think that was a mistake.”
The United States has a near-record number of job openings and businesses have struggled to hire workers. But it’s not clear that enhanced jobless benefits are to blame. The labor force shrank in September even though beefed-up unemployment payments expired that month and many Republican-run states had dropped those benefits earlier in the summer.
“We needed the stimulus and don’t like the worker shortage. It’s a problem,” Munger said. “God knows how you do it exactly right. We’re stumbling through as best we can.”
‘Democracies will have big problems with inflation’
In the longer run, Munger expressed concern about governments fanning the flames of inflation.
“Just as I expect that all human beings will die, I expect that in due course, all democracies will have big problems with inflation,” he said. “Because the politicians try and buy votes by spending money … That’s what happens eventually. That’s what happened in the Roman Empire.”
The current period of inflation has been stronger and lasted longer than many anticipated.
“This is the early harbinger of eventual trouble,” Munger said.
Munger really doesn’t like SPACs
Asked if he would consider investing in the SPAC (Special Purpose Acquisition Company) that former President Donald Trump’s media entity is merging with, Munger said no.
“I never invest in SPACs,” Munger said. “I hate SPACs. I think they reflect discredit on humanity.”
In February, the Berkshire executive warned that the surge in popularity of SPACs is an “irritating bubble” and the world “would be better off without them.”
What if Trump’s media company went public through a traditional IPO?
“I wouldn’t hate it as much a SPAC,” Munger said.