Democrats Eye Taxing Stock Buybacks and Partnerships to Pay for Agenda

“The constant theme running through our tax code is, paying taxes is mandatory for working people, but optional for wealthy investors and mega corporations. That’s especially true when it comes to pass-through businesses and partnerships, the preferred tax avoidance tools for those at the top,” Mr. Wyden said.

To change all that, Democrats want to severely constrain partnerships from trying to game the system. Under the new rules, if two partners who were members of a single corporate group sold a shared asset, the profit would have to be divided equally, not parceled out disproportionately to maximize tax advantages. Similarly, partnership debt, which allows partners to take deductions and claim cash distributions, could not be shuffled from partner to partner to reduce their tax liabilities.

Those changes, without any increase in tax rates, would raise $172 billion over 10 years, according to the Joint Committee on Taxation, Congress’s official scorekeeper on tax matters.

Though it would raise less revenue, about $100 billion, the tax on buybacks could be the more far-reaching measure. Over the past decade, Apple has been by far the king of the stock buyback, spending $423 billion to retire its stock. Microsoft, in a distant second place, spent nearly $129 billion.

Some Democrats have favored making buybacks illegal, or setting the tax so high that buybacks would make no economic sense. But Democratic tax aides said on Thursday that they were trying to balance the desire to curtail stock buybacks with the need to raise revenue for the social policy bill. At the very least, a 2 percent tax on buybacks could encourage companies to use excess cash to pay higher dividends, which shareholders already pay taxes on.

In contrast, stock prices, inflated by buybacks, produce wealth gains that are taxed only if the stocks are sold. The richest men in America, like Jeff Bezos, Warren Buffett and Elon Musk, have instead used their vast paper fortunes as collateral to secure loans, which are not taxed and can be used to finance their wealthy lifestyles.

Aides on the Finance Committee said some repurchased shares would be exempt from taxation if they were deposited somewhere, like in a pension fund, and not retired. The Treasury Department would be given the explicit authority to make sure companies were not gaming the exemptions to avoid taxation.