Would the Lib Dems’ plan to tax share buybacks raise £1.4 billion a year?
After the debate between Rishi Sunak and Keir Starmer on Tuesday, ITV’s Anushka Asthana challenged Liberal Democrat leader Sir Ed Davey on whether his party’s proposed share buyback scheme would raise £1.4 billion a year, saying the Institute for Fiscal Studies (IFS) believed that because of the way people will change their behaviour, it will raise “next to nothing”.
A share buyback is a purchase by a company of its own shares. The Liberal Democrat policy proposes a 4% share buyback tax, paid by the 100 biggest corporations on the stock exchange, which the party claims “could raise around £1.4 billion a year” to pay for extending free school meals to an additional 900,000 children.
Mr Davey suggested he disagreed with the IFS analysis and claimed “last year if we had this share buyback scheme we would have raised £2.3 billion”. He also claimed the Liberal Democrat calculations “allowed for behavioural change”.
In a press release the Lib Dems claimed that, based on current buyback levels, “a 4% tax would raise around £2.2bn a year”. It noted: “We have taken a cautious approach to account for potential changes in company behaviour, estimating it would raise around £1.4bn a year.”
Mr Davey also pointed to the success of a similar scheme in the US, saying “they raised a huge amount of money” through this approach.
Stuart Adam, a senior economist at the IFS, told Full Fact that he’d be “surprised if a 4% tax on share buybacks in the UK raised much revenue”. He added: “To a large extent I would expect companies simply to stop using share buybacks, and to pay dividends instead if they wanted to return money to shareholders. More importantly, however, there is no clear justification for the policy: it seems a particularly distortionary form of tax rise.”
The Liberal Democrats pointed Full Fact to their blog post on the policy and highlighted the think tank Institute for Public Policy Research’s (IPPR) tweet welcoming the policy.
The IPPR called for a share buyback tax in 2022 “to ensure that companies are not channelling profits to their shareholders at a time of national economic crisis”.
However, they called for a 1% tax instead of 4%, and warned “levying a higher tax on buybacks is likely to discourage companies from repurchasing their own stock” so it is “fair to assume that the revenues raised from a buyback tax will change in line with the level at which they are taxed”.
Separately, the Lib Dems have also promised to make personal care for the elderly and the disabled free, and raise care workers’ pay, which they estimate will cost £2.7 billion, funding it by “reversing tax cuts given to big banks” which they calculate will raise £4.3 billion a year.
However, independent experts warn the policy is going to cost more than £2.7 billion.
The King’s Fund welcomed the plan but cautioned “the true cost of reform will be much more than stated”. The Health Foundation estimated that introducing a Scottish-style model of ‘free personal care’ in England, similar to what the Liberal Democrats have suggested, could cost around £6 billion extra in 2026/27, rising to £7 billion by 2035/36.
When questioned about the policy yesterday on Newsnight [25:27] Sarah Olney, the Lib Dem treasury and business and industrial strategy spokesperson, said: “We are, I think, the only party that is really coming forward with a serious plan for social care”, adding: “We will be bringing forward our manifesto, obviously, in due course, it will be a fully costed manifesto.”
Image courtesy of members.parliament.uk