Princeton economist warns Biden’s tax on stock buybacks will hurt your 401(k)

As the Biden administration proposes higher taxes and levies for corporate stock buybacks, one Wall Street expert and Princeton University economics professor is warning the policy move could hurt low and middle-income families the most.

"What people don't realize is that, sure, poor people don't own a lot of stock directly, they own very little. But most of us all own stock indirectly through our 401(k)," Burton Malkiel told FOX Business’ Larry Kudlow on Monday. "These are the people who are going to be hurt. It's all the mutual funds that we all own, that own a lot of stock."

Malkiel’s comments come as President Joe Biden revived his calls for higher taxes on billionaires and proposed quadrupling the levy on corporate stock buybacks during his State of the Union address.

"I’m a capitalist. But just pay your fair share," Biden said in the speech. "And I think a lot of you at home agree with me that our present tax system is simply unfair."

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The White House has provided few details about the latest iteration of the proposal, but said that it would set a minimum tax for the wealthiest Americans. The proposal also considers quadrupling a 1% levy on corporate stock buybacks. Democrats passed the tax last year as part of the Inflation Reduction Act in hopes of curbing businesses' tendency to repurchase their own shares from investors.

In 2019, stock buybacks hit a record $1 trillion, according to the SEC. In the third quarter of 2022, buybacks among companies listed on the S&P totaled about $210 billion, down about 10% from the same period one year ago, according to S&P analyst Howard Silverblatt.

In the second quarter, companies spent about $220 billion, compared with roughly $281 billion in the first.

If the 1% tax had been in place during the third quarter, companies would have owed roughly $1.93 billion to Uncle Sam, according to The Wall Street Journal.

While the Biden administration might be trying to target the wealthiest 1% of Americans with these tax proposals, Malkiel warned that’s "just wrong," and more penalties for stock buybacks is anti-capitalist.

"In fact, it almost all goes back into the system, and it goes back into the system in a particularly efficient way because companies buy back their stock when they don't have good investment opportunities," the economist explained. "And by giving the money back in buybacks, that money flows back into the stock market in newer companies, in entrepreneurial companies. And it's exactly the kind of thing that you want from a capitalist system."

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Malkiel, who also authored "A Random Walk Down Wall Street" nearly 50 years ago, expressed he still firmly believes investors are "better off" looking at the long-term by buying and holding a broad-based index – even in this volatile market.

"Frankly, even better than the S&P 500, I would do a total stock market fund. I want you to also have the small entrepreneurial companies that are doing a lot of the growth in the country. I want you to be in the new companies that are doing all of the innovations. This is exactly what you ought to be doing," the economist advised. "So [the] broader, the better. Buy an index fund. You want to go and buy some individual stocks around the edges? God bless you, go do it. But you can do it far more safely if the core of your portfolio is indexed."

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FOX Business’ Megan Henney contributed to this report.