The Finance Committee also leans toward changing the rules that large business partnerships have used to avoid taxes and evade Internal Revenue Service audits. Congress formulated the rules when partnerships were dominated by small businesses, such as doctor’s offices. But increasingly, partnerships are large corporations or subsidiaries of large corporations, arrayed in complex and overlapping configurations to allow owners to remit profits, losses, and deductions to evade taxes.
About 70 percent of partnership income now goes to the top 1 percent of income earners, and tax minimization methods have become so complex that ordinary IRS agents are not allowed to conduct certain audits without the help of an IRS attorney.
“The consistent theme that runs through our tax code is, paying taxes is mandatory for workers, but optional for wealthy investors and mega-companies. This is especially true when it comes to businesses and cross partnerships, the preferred tax avoidance tools for those at the top,” said Mr. Wyden. .
To change all that, Democrats want to restrict partnerships from manipulating the system. Under the new rules, if two partners who were members of one corporate group sell a joint asset, profits will have to be divided equally, not disproportionately distributed to maximize tax benefits. Likewise, partnership debt, which allows partners to take deductions and claim cash dividends, cannot be switched from one partner to another to reduce their tax liability.
These changes, without any increase in tax rates, would raise $172 billion over 10 years, according to the Joint Committee on Taxes, Congress’ official registrar on tax matters.
Although it would generate less revenue, around $100 billion, a tax on buybacks could be the most comprehensive measure. Over the past decade, Apple has been the king of share buybacks, spending $423 billion to retire its stock. Microsoft, in second place, spent nearly $129 billion.
Some Democrats preferred raising the tax to the point that buybacks would make no economic sense. But Democratic tax aides said Thursday they are trying to balance the desire to reduce share buybacks with the need to raise revenue. At the very least, a 2 percent tax on buybacks could encourage companies to use excess cash to pay higher dividends, which shareholders pay tax on.