Corporations would have to pay a 2% tax whenever they buy shares of their own stock under one of two new tax proposals that Democrats hope can unify their party.
The stock buyback tax, unveiled Friday by Sens. Sherrod Brown (D-Ohio) and Ron Wyden (D-Ore.), targets a form of executive self-enrichment that exploded after Congress slashed corporate taxes in 2017.
The new proposals come as moderate Democrats push back against other tax increases President Joe Biden said Congress should use to pay for the “Build Back Better” bill that would greatly expand the federal government’s social safety net.
Party leaders hope to pass the $3.5 trillion bill in the coming months, but have such slim majorities in the House and Senate that they have to find creative ways of accommodating the moderates without losing too much new tax revenue.
Sen. Jon Tester (D-Mont.), for instance, is one of several Democrats who have major problems with Biden’s vision for higher taxes on investment income, including a repeal of the “step up in basis” that eliminates capital gains taxes on appreciated assets before they’re inherited.
“The stepped-up basis proposals Senator Tester has seen to date would have a devastating impact on Montana’s family farms, ranches, and small businesses, and he is going to keep fighting to defend those folks from shortsighted policies that put their continued operation in jeopardy,” a Tester spokesman told HuffPost this week.
Biden’s proposal would apply only to the small percentage of households with million-dollar incomes, and would let family farms indefinitely defer the tax. Wyden, chairman of the Senate Finance Committee, has proposed an even larger $5 million income exclusion, plus a $25 million farm exemption.
But the American Farm Bureau Federation and other organizations lobbying against the tax continue to insist, against all evidence, that the proposal would crush family farms ― and several moderate Democrats in the House and Senate seem to be taking their line.
Taxing capital gains at death could raise more than $200 billion as part of the Biden plan, according to a Penn-Wharton Budget Model analysis, with the burden of the tax falling mostly on the top 1% of taxpayers. If Democrats drop the idea, they would also lose out on a large amount of the more than $100 billion they could raise from a higher capital gains tax rate, since investors would simply hold more assets until death, when the step up in basis wipes out the tax liability. That means Democrats would either need to find the money somewhere else or drop $300 billion from their proposals for expanded Medicare coverage, free community college or monthly checks to parents.
In the quest for more palatable revenue sources, Wyden proposed another new bill Friday that would raise $172 billion through new rules on partnerships, which are business entities that aren’t taxed directly but pass profits through to their individual owners. The Wyden proposal would raise revenue not through higher tax rates, his office said, but by setting stricter laws for how partnerships can shift the allocation of gains and losses among the partners.
“This proposal simply reduces complexity by closing loopholes that allow those at the top to pick and choose when, and whether, to pay tax,” Wyden said in a release. “Raising more than $172 billion for priorities like child care and paid leave by closing off these loopholes is a no-brainer.”
Partnership income accounts for a big chunk of the $600 billion in tax revenue the IRS fails to collect each year, the Treasury Department has said.
Democrats said the stock buyback tax could raise as much as $100 billion. Buybacks inflate the value of company shares by in part by reducing their supply, and they’re often a big component of executive compensation, meaning company executives essentially pay themselves when a company buys back its own stock. Buybacks weren’t even fully legal until 1982, but surged after Republicans slashed the corporate tax rate in 2017.
“Instead of spending billions buying back stocks and handing out CEO bonuses, it’s past time Wall Street paid its fair share and reinvested more of that capital into the workers and communities who make those profits possible,” Brown said.
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