WHAT IS THE US TAX ADVANTAGE OF STOCK BUYBACKS OVER DIVIDENDS?

For foreign shareholders, the US generally does not tax their capital gains but imposes a “gross basis” withholding tax on the dividends paid to them (“gross basis” is gross income without deductions).4 We estimate, in the absence of any excise taxes, the US tax advantage for buybacks over dividends would be 7.2 percent.5 About two-thirds of the total US tax advantage is attributable to foreign sh. [...] US TAXATION OF DIVIDENDS AND BUYBACKS In this section, we estimate the average marginal tax rate for dividends and buyouts, which we base on a weighted average of: (1) the marginal tax rates on dividends and stock sales for three groups of shareholders, and (2) the dividends and stock sales for each group of shareholders. [...] CALCULATING THE US TAX ADVANTAGE OF BUYBACKS OVER DIVIDENDS To estimate the average US marginal tax rate on a buyback or dividend distribution, we answer the following question: how much tax is collected, on average, on an additional $1 of buyback or dividend? We use average marginal tax rates, rather than maximum tax rates, to approximate the tax collected from the marginal dollar of distribution. [...] Note: The percentage reflects the estimated average share of tax revenue collected by the US government for $1 in buyback, depending on the composition of stock ownership. [...] The shares of US taxable and foreign ownership represent the assumed shares used when calculating tax collections for buybacks versus dividends To find the present value of future tax gains and losses, we assumed a discount rate of 7 percent.