Companies love to buy back stock. A tax could deter them.

Corporate America has been feeding a stock buyback boom for decades, with companies spending trillions of dollars to repurchase their shares without paying any taxes on those transactions.

That could soon change.

In President Joe Biden’s roughly $2 trillion Build Back Better Act, which narrowly passed the House on Friday but faces a tough fight in the Senate, Democrats have proposed a 1% tax on stock buybacks. Although it may not seem like much, the tax is a way to raise as much as $124 billion over 10 years, according to government estimates, and could help pay for the social spending and climate package.

Both supporters and critics of the proposed surcharge say it could alter the behavior of companies but in ways that would have very different consequences for the economy.

To carry out a buyback, a company typically uses its excess cash — or even borrows — to repurchase shares from investors. The goal is to lift the price of a stock by reducing the number of shares outstanding, which rewards existing shareholders.

Supporters hope the tax will make buybacks less attractive and instead nudge companies toward investing their excess cash in their business and their workforce. That, in turn, could provide a boost to the wider economy.

“There is good evidence that stock buybacks have been used in ways that are contrary to the health of firms and the health of the economy and workers,” said David Kamin, a deputy director of the National Economic Council in the White House.

Many top Democrats, including Sen. Sherrod Brown, D-Ohio, and academics also see buybacks as a form of harmful corporate behavior that they hope a tax would thwart. They contend that chief executives favor big buyback programs in large part because the programs help bolster their compensation, which comes mainly in the form of company stock. This, they say, helps create a corporate culture in which top executive pay keeps growing, widening the gap between the C-suite and rank-and-file employees.

Critics of the proposed tax view it very differently. Buybacks, they say, route money — via investors — from mature companies that don’t need as much cash to younger firms that are hungry for capital. A tax on buybacks could distort that flow of money by forcing companies to rethink their policies, said Alex Edmans, a professor of finance at London Business School.

“Like any tax, even if it’s pretty small, it will just weigh on companies’ decisions,” Edmans said.

Since buybacks are so entrenched on Wall Street, it may take more than a 1% tax to reduce them by much. But one thing is clear: A lot of money is at stake.

In the past decade, companies in the S&P 500 stock index have repurchased more than $5 trillion of their own shares, according to a New York Times analysis of data from S&P Capital IQ. Apple alone spent $423 billion on buybacks in the past decade, the largest total for an S&P 500 company, according to a Times analysis of the company’s financial statements. That sum dwarfs the $233 billion Apple, which rakes in enormous amounts of cash from the sales of

iPhones and other products, spent on capital expenditures and research and development over the same period. The company declined to comment.

So far this year, companies have announced — although not completed — more than $1 trillion in share buybacks, according to a recent research note from Goldman Sachs. The investment bank said the effect of a 1% tax on buybacks would be “marginal.”

Most companies seek to reward their shareholders in two ways: through share buybacks and dividends. The buyback tax, if approved, is expected to push companies to pay more in dividends. But Edmans said that could limit a company’s flexibility. If a company primarily uses buybacks to pay shareholders back, it can control the timing — hoarding capital when the business outlook is uncertain or grim and repurchasing shares when profits are rolling in. But since dividend payments for each quarter are set in advance, any sudden change could make shareholders nervous, Edmans said.