Democrats Eye Taxing Stock Buybacks and Partnerships

Democrats Eye Taxing Stock Buybacks and Partnerships

The finance committee is also leaning toward changing the rules that large business partnerships have used to avoid taxation and avoid Internal Revenue Service audits. Congress drafted the rules when small businesses such as doctors’ offices were dominated by partnerships. But increasingly, partnerships are larger companies or subsidiaries of major corporations, in complex, overlapping configurations to allow their owners to transfer profits, losses and deductions to avoid taxes.

Some 70 percent of partnership income now goes to the top 1 percent earners, and tax minimization methods have become so complex that ordinary IRS agents are not allowed to audit certain things without the help of top-flight IRS attorneys.

“The constant theme running through our tax code is, paying taxes is mandatory for working people, but optional for wealthy investors and mega corporations. This is especially true when it comes to pass-through businesses and partnerships. Which is the preferred tax avoidance tool for those on top,” said Mr. Widen.

To change all that, Democrats want to disrupt the partnership by gaming the system. Under the new rules, if two partners who were members of a single corporate group, sell a shared asset, the profits would have to be divided equally, not disproportionately, to maximize tax benefits. Similarly, partnership debt, which allows partners to take deductions and claim cash distributions, cannot be changed from partner to partner to reduce their tax liabilities.

According to the Joint Committee on Taxation, Congress’ official scorekeeper on tax matters, $172 billion will be raised over 10 years, without any increase in tax rates.

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Although it would raise less revenue, about $100 billion, the tax on buybacks could be a more far-reaching measure. Over the past decade, Apple has been the king of stock buybacks, which cost $423 billion to retire its stock. Second-ranked Microsoft spent about $129 billion.

Some Democrats favor setting the tax so high that the buyback would make no economic sense. But Democratic tax aides said Thursday they were trying to balance a desire to reduce stock buybacks with a need to increase revenue. At the very least, a 2 percent tax on buybacks could encourage companies to use the excess cash to pay higher dividends, on which shareholders pay taxes.

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