The Biden administration has attempted to discourage corporate stock buybacks, with a 1% tax on the practice included in the Inflation Reduction Act. But there are several prominent lawmakers – Biden included – who don't think this goes far enough. In his recent State of the Union address, Biden suggested quadrupling the tax to 4% of the buyback amount.

There are a few reasons for this and other proposals to curb buybacks. Some feel corporations simply don't pay enough taxes and this would be a way to boost IRS revenue. And many feel companies should use their profits to reinvest in the growth of their business, to raise employee pay, and for other purposes besides simply boosting shareholder returns.

To put it mildly, legendary investor Warren Buffett disagrees. In his recent letter to Berkshire Hathaway (BRK.A -0.10%) (BRK.B -0.09%) shareholders, Buffett defended corporate buybacks when done for the right reasons and had some harsh criticisms for those who call stock buybacks harmful. Here's what Buffett -- a lifelong Democrat -- had to say.

When buybacks are done for the right reasons, everybody wins

In his letter, Buffett defended stock buybacks when they are done for reasons that make sense, specifically, when the stock is trading at an attractive price. As Buffett said, "Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose."

Think of it this way. If I were willing to sell you $20 bills for $19, wouldn't it be in your financial best interest to buy as many of them as possible?

Now, stock buybacks aren't that straightforward. If I asked 10 Wall Street analysts how much the intrinsic value of a Berkshire Hathaway share is, I'd probably get 10 different answers. And Berkshire itself only buys back its shares when Buffett and Vice Chairman Charlie Munger both agree the stock is attractively priced, and many other companies are similarly opportunistic when it comes to stock buybacks.

"Gains from value-accretive repurchases, it should be emphasized, benefit all owners -- in every respect," Buffett went on to say. He argues that all stakeholders win when buybacks are done at attractive prices, including the shareholders who willingly sell their stock, shareholders who then own a greater stake in the business, and management, who has fulfilled their duty to increase shareholder value.

It's the broad brush that Buffett doesn't like

To be sure, the current 1% tax on buybacks hasn't had much of an effect on how corporations allocate capital. Apple bought back nearly $20 billion in stock in the most recent quarter, while fellow Berkshire favorite Chevron recently authorized a $75 billion buyback program to be spread over a five-year period. And Berkshire itself spent about $3 billion in the fourth quarter of 2022 on buybacks.

Quadrupling the buyback tax could certainly encourage companies to pump the brakes, and there are some buybacks that are harmful. Some companies buy back stock regardless of valuation simply to help boost earnings growth, or to offset excessive stock-based compensation. But Buffett has a problem with those who think all buybacks are problematic, regardless of the motivation.

As Buffett said in his letter, "When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)."

Is Buffett right?

Buffett likely wouldn't have much of a problem with a crackdown on buybacks done for the wrong reasons. He might even be in favor of a policy requiring companies to show how their buybacks are in the best interest of all stakeholders. And while Buffett didn't specifically call out the buyback tax or new proposals, he clearly isn't in favor. There's a solid argument to be made that an across-the-board tax on buybacks discourages businesses from performing their fiduciary duty to shareholders when management feels buybacks are truly the best use of excess capital.