Tuesday night President Biden proposed a fourfold increase to the recently passed 1% tax on stock buybacks. The existing excise tax went into effect barely a month ago and taxpayers are still facing uncertainty over how the existing tax will be implemented.

The original buyback excise tax was included in the Inflation Reduction Act of 2022, went into effect at the beginning of 2023, and is estimated to raise about $74 billion over ten years. The tax is still being implemented by the IRS and a recent Congressional Research Service report notes that “a number of repurchase issues still need clarification.” One of those clarifications came only after investors took nearly $750 million in unnecessary losses in an attempt to account for the new tax going into effect.

The tax applies to the total value of stock repurchases, lowering investor’s after‐​tax return on the affected investments, and likely inducing firms to rely more heavily on dividend payments. The President and many in Congress support the tax for reasons rooted in an economic misunderstanding of stock buybacks.

Since the 1980s, when the Securities and Exchange Commission eased some related rules, there have been periodic political panics over stock buybacks. The common concern is that when businesses repurchase shares, executives choose to pay out to investors instead of reinvesting in workers, capital improvement, or new research and development. This view misunderstands the economics of stock buybacks. They do not remove investment from the economy but instead help ensure investment flows to the firms best positioned to expand and hire.

It is easiest to see the flaw in this logic if we consider dividend payments, which are the other way businesses can return profits to shareholders. Dividends are like a recurring stock buyback; they simply share some of the firm’s profits with its investors. A stock buyback does not create or destroy any wealth, it is simply a voluntary exchange of cash for the value of the stock.

Stock buybacks and dividend payments are typically larger and more frequent when businesses are older, well established, and no longer growing rapidly. This happens because businesses generally buyback shares after their investment needs are met. Thus, stock buybacks return unused resources to individual investors so that they can be redeployed at higher growth firms where the marginal investment will produce more jobs and bigger economic gains. According to one estimate, about 95 percent of resources returned through stock buybacks are reinvested in other public companies. If policymakers were to entirely ban stock buybacks and dividend payments, it would trap these profits at large incumbent firms, ossifying markets and starving smaller firms of needed capital.

Beyond the economic misunderstanding of stock buybacks, the President’s tax proposals—including a new billionaire tax—also create budgetary confusion. Rather than clearly explaining to the American people that it will take higher taxes on all Americans to pay for the spending outlined in Tuesday’s speech, the President’s proposals add to the confusion, making it seem that the answer is as easy as adding a few new taxes on the wealthy and big corporations. The increase in the stock buyback tax will only fund a small portion of Tuesday’s proposals, let alone begin to close our trillion‐​dollar budget deficit.

The President’s proposal to increase an untested tax that has already proved economically costly will harm individual investors and the businesses that rely on free flows of capital.