The problem with stock buy-backs has been described well by another source, so I will borrow here:
Researchers have linked the prevalence of executive stock option plans to management’s fondness for engaging in stock buy-backs. The math here is fundamentally straightforward, if not entirely simple. Executive stock options give managers the ability to make money from an increase in share prices, but not to profit from dividends. Say a company with a 1000 shares outstanding and a per-share price of $10 ($10,000 total value) issues 100 executive stock options with a strike price of $10, i.e. the right to buy 100 new shares for $10 each. The company earns $2,200, or $2.20 per existing share, so that (all else equal) it now has a value of the original $10,000 plus $2,200 for the cash-in-pocket, or $12,200. From the market’s point of view, the price per share should now be computed by assuming that the executive stock options are exercised. That would bring in another $1,000 for the share exercise, for a total company value of $13,200, and would leave 1,100 shares outstanding. $13,200 divided into 1,100 shares is $12, and so the share price should rise to $12. If the company pays out those earnings as a $2.20 dividend, the share price will drop back to $10. In that case, management’s options would be worth nothing, management would get no benefit from the dividend, and the existing shareholders would get $2.20 per share. Now suppose that, instead, the company uses $1,200 to buy back 100 shares at $12 a share, and the executives then exercise their options. The company will then have 1,000 shares outstanding, $1,000 of remaining cash earnings, and $1,000 from the option exercise. It will thus have a value of the $12,000 distributed over 1,000 shares, or $12 a share. The executives will therefore have received value of $2 per share on their 100 options, or $200. The prior shareholders will likewise receive $2 per share, rather than $2.20 in the dividend scenario. If the executives chose to exercise their options without paying a dividend or doing a buy-back, they would receive the same $2 a share.
Through stock buy-backs, then, corporate management can shift funds from the pockets of the shareholders into their own, while saying that this is simply compensation for management’s great work in making the company grow in value. In our example, though, and commonly in real life, that “growth in value” just arose from refusing to pay shareholders their cash profits. Stock buy-backs give management the same profit on their options that they would receive if they paid out no money at all, but since they involve cash going to a portion of the shareholders they offer the image of money “being paid out to the investors.” In reality, they involve management picking the investors’ pockets.
Okay, so it is a trick, it has aggravated a phenomenon (sky-high CEO pay) that most Americans despise, it makes it more difficult to judge real corporate success, and it de-links management focus from operational factors that would really add shareholder and societal value in favor of unproductive, but simpler, financial games. Could it nonetheless be that lowering dividend pay-outs stimulates growth and boosts the economy? While many people choose to think so, the real answer is “no.” Robert D. Arnott and Clifford S. Asness did an interesting study
 in which they checked to see if lower dividend yields and higher within-corporation investment were correlated with higher subsequent growth. They found exactly the reverse. There is a strong positive correlation between dividend pay-out ratios (i.e. the percent of earnings paid out as dividends) and subsequent earnings growth. It is particularly interesting to note that the authors tested whether this appears to be due to management engaging in empire-building through making unproductive investments. Their data was consistent with that hypothesis. In times of low pay-out, more investment was occurring, but that investment was relatively unproductive in producing future earnings or GDP growth.
 See, e.g., Christine Jolls, Stock Repurchases and Incentive Compensation, National Bureau of Economic Research Working Paper 6467 (1998), http://www.nber.org/papers/w6467 (finding that the average executive in her sample of firms with repurchase activity enjoyed a $345,000 increase in stock option value as a result of the repurchase activity).
 Reality is more complicated. The market will probably not value the $2,200 of retained cash as worth $2,200, because the market usually does not quite trust management to invest that money efficiently, based on the market’s experience with corporate managers in general. But this illustration is directionally correct.
Stock buy-backs, in short, are theft from the shareholders for the primary benefit of overpaid CEOs. They are bad for business and bad for America. They should be discouraged.
How to do so? Tax them. Impose a 10% (or higher) tax on the gross amount of all stock buy-backs by publicly-traded companies. That would be easy for U.S.-parented groups. Ideally, though, we would do the same for all buy-backs of stock listed on a U.S. exchange, regardless of where the parent is located. Because the tax would not be aimed at the taxable income of the corporation or of the shareholder, but rather is aimed simply at a particular corporate practice that is harmful to society, it can be structured as an excise tax, which would keep it from being complicated by the provisions of our income tax treaties. Corporations and their shareholders could avoid it entirely simply by refraining from the bad practice and distributing their profits to all shareholders via dividends, like companies used to do before a badly designed U.S. tax policy made stock options dominate management thinking.
Once upon a time, would-be reformers took aim at CEO pay (which was then quite low by today’s obscene standards) by limiting deductions for pay above a certain dollar amount. Lobbyists did their thing, and an exception was put in for “performance based” pay, money that the executives could only earn by achieving certain targets. Because stock options only gain value through an increase in share prices, it was decided that stock options were inherently “performance based.” Executives quickly figured out that they didn’t actually need to perform, they just needed to do stock buy-backs. These days (I know you will be shocked to hear this) executives spend a large amount of time and effort figuring out how to maximize stock buy-backs while meeting the quarterly expectations of the Wall Street stock analysts. They do not spend so much time figuring out how to create wonderful new products and services or improving efficiency or making the lives of their workers better or reducing pollution. What badly designed tax policy did, good tax policy can help to undo.