“A recurring theme in our tax code is that paying taxes is required for working people but optional for wealthy investors and megacorporations. That is especially true when it comes to pass-through entities and partnerships, which are the preferred tax-avoidance vehicles for the wealthy,” Mr. Wyden said.
To change this, Democrats want to severely limit partnerships’ ability to game the system. If two partners in a single corporate group sold a shared asset, the profit would have to be divided equally, rather than disproportionately to maximise tax benefits, under the new rules. Similarly, partnership debt, which allows partners to deduct and claim cash distributions, could not be transferred from partner to partner in order to reduce tax liabilities.
According to the Joint Committee on Taxation, Congress’ official scorekeeper on tax matters, these changes, without any increase in tax rates, would raise $172 billion over ten years.
The tax on buybacks may be the more far-reaching measure, despite raising less revenue (about $100 billion). Apple has been by far the king of stock buybacks over the last decade, spending $423 billion to retire its stock. Microsoft came in second place, spending nearly $129 billion.
Some Democrats have advocated making buybacks illegal or raising the tax so high that buybacks are no longer economically viable. Democratic tax aides, however, said on Thursday that they were attempting to strike a balance between the desire to limit stock buybacks and the need to raise revenue for the social policy bill. A 2% tax on buybacks could at the very least encourage companies to use excess cash to pay higher dividends, which shareholders already pay taxes on.
Stock prices, on the other hand, are inflated by buybacks, resulting in wealth gains that are taxed only if the stocks are sold. Instead, the wealthiest men in America, such as Jeff Bezos and Elon Musk, have used their vast paper fortunes as collateral to secure loans that are not taxed and can be used to fund their lavish lifestyles.
According to Finance Committee aides, some repurchased shares would be tax-free if they were deposited somewhere, such as a pension fund, rather than retired. The Treasury Department would be given explicit authority to ensure that companies were not abusing tax exemptions to avoid paying taxes.