Senate Democrats say a 2 percent tax on the money companies use to buy back stocks and tightened rules around taxing partnerships would raise $270 billion for their $3.5 trillion social policy bill.
Washington — Senate Democrats are coalescing around imposing a new tax on corporations that buy back their stocks to boost share prices and tightening rules around business partnerships that have allowed rich companies to shield profits from taxation.
The plans, likely to be included in the Senate’s far-reaching budget bill to offset some of its $3.5 trillion in social policy spending, show how far Democrats are willing to go in using tax policy to reshape business behavior. Democrats say the tax changes would bring in about $270 billion over 10 years, while pushing companies to invest more in their workers and their businesses.
Their emergence is also a sign that Democratic leaders are still looking for fresh ways to pay for the spending as other proposals run into rank-and-file opposition. Senator Jon Tester, Democrat of Montana, expressed opposition on Friday to a plan to tax inherited assets based on the gain in value from when those assets were initially purchased, rather than what they are worth at the time of death.
That proposal “would have a negative 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,” said Roy Loewenstein, a spokesman for Mr. Tester.
Taxing buybacks may be more unifying. Cash-rich firms like Apple, JPMorgan Chase and Exxon spend billions of dollars each year to buy back, then retire, shares in their own companies, a practice that can help drive up the company’s stock price. That has been lucrative not only for shareholders but for corporate executives whose compensation is often tightly tied to their firm’s stock performance.
The heavy use of buybacks has come under withering criticism, especially since former President Donald J. Trump’s huge corporate tax cut was enacted in 2017.
Proponents of that legislation promised that companies would use the tax law’s windfall to boost worker wages and grow their businesses. Instead, it touched off an explosion of stock buybacks that critics say has made top executives and industry insiders even more wealthy. In 2019, the largest American companies spent a record $728 billion on stock buybacks, a 55 percent increase from 2018, according to Senate Finance Committee data.
Senators Sherrod Brown, Democrat of Ohio, and Ron Wyden, Democrat of Oregon and the Finance Committee chairman, are proposing to tax the amount companies spend on such buybacks at 2 percent — enough, they say, to bring in revenue while making companies price in the financial risk and distortions that large-scale buybacks can pose to the economy.
“Instead of spending billions buying back stocks and handing out C.E.O. bonuses, it’s past time Wall Street paid its fair share,” Mr. Brown said.
The Finance Committee is also leaning toward changing the rules that large business partnerships have used to avoid taxation and evade Internal Revenue Service audits. Congress drafted the rules when partnerships were dominated by small businesses, like doctors’ offices. But increasingly, partnerships are large companies or subsidiaries of major corporations, arrayed in complex, overlapping configurations to allow their owners to shift profits, losses and deductions to evade taxes.
Some 70 percent of partnership income now goes to the top 1 percent of earners, and the tax minimization methods have become so complex that ordinary I.R.S. agents are not allowed to conduct certain audits without the assistance of top-flight I.R.S. lawyers.
“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 constrain partnerships from gaming 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 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 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. At the very least, a 2 percent tax on buybacks could encourage companies to use excess cash to pay higher dividends, which shareholders 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 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.
The proposed tax on stock buybacks would further inflame debate over a practice that has been going on for years in the stock market. Companies in the S&P 500 stock index have spent $5.3 trillion on buybacks over the past decade, according to a New York Times analysis. A 2 percent tax on that sum would raise $105 billion over 10 years, close to the Democrats’ revenue estimate.
The battle over buybacks raged in the months after the Trump administration cut the corporate tax rate to 21 percent from 35 percent and enacted other changes that made more cash available for companies to repurchase stock.
Then, as now, critics said buybacks consumed cash that companies could instead invest in ways that bolstered their long-term growth and productivity. Top investors, including Laurence D. Fink, chief executive of BlackRock, the world’s largest asset manager, have at times been worried about the diversion of so much money into buybacks.
In theory, redirecting buyback cash into corporate investments could have a significant impact by fueling new jobs and economic growth. Companies in the S&P 500 spent $6.2 trillion on new plant and equipment in the 10 years through 2020, according the Times’s analysis, a similar amount to what they spent on buybacks over the same period.
Defenders of buybacks say there is little evidence to suggest that companies would invest more if they spent less buying their own shares. Instead, they might just sit on huge amounts of cash.
“The empirical evidence supports the idea that companies have capacity to invest everything they need in long-term investment and research and development,” said Craig M. Lewis, a finance professor at Vanderbilt University and a former chief economist at the Securities and Exchange Commission. “Buybacks do not constrain those activities.”
Since chief executives’ compensation is made up mostly of stock, they are likely to resist any call to trim buyback programs. Any paring back could weigh on the performance of their companies’ stock, reducing their wealth in the process. But critics of buybacks say some of the money spent on buybacks could be used to give employees raises and, over time, reduce the gap between senior executive pay and that of their rank-and-file workers. In 2020, chief executives received 274 times the pay of the median employee at their companies, compared with 245 times in the previous year.
“Stock buybacks are one of the drivers of our imbalanced economy, in which corporate profits and shareholder payments skyrocket while wages for typical workers stay flat,” said Lenore Palladino, an assistant professor of economics and public policy at University of Massachusetts Amherst.
Stock ownership is highly concentrated in a small number of people.
“That just means that the wealth created by stock buybacks is going to a very small slice of the American public,” Ms. Palladino said.
But Ed Yardeni, president of the stock market research firm Yardeni Research, noted that many employees — not just senior executives — received stock-based pay. Buybacks financially benefit those workers, too, and can motivate them overall.
“It is a good way to create some loyalty to the company,” he said. “I’d like to see more of that than less.”