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Senate Democrats Mull Taxes on Stock Buybacks, Excess CEO Pay

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What You Need to Know

  • Senate Democrats are discussing a wider range of tax proposals than President Joe Biden has proposed.
  • Another idea: Tax billionaires on unrealized capital gains.
  • The Senate Finance Committee is also said to be considering a crackdown on some trusts that wealthy families use to avoid estate taxes.

Senate Democrats are discussing a wider range of tax proposals than President Joe Biden has proposed, including levies on stock buybacks, carbon emissions and executive compensation, as part of a package of measures to help fund a ramping up in social spending.

One idea is applying an excise tax on stock buybacks or treating them as taxable dividends to shareholders, according to two people familiar with Senate Finance Committee discussions. Corporate deductions for executive compensation could also be limited, and companies could face an excise tax if their chief executive officer’s pay exceeds that of an average company worker by a certain ratio, the people said.

Billionaires, meanwhile, could potentially face new “mark to market” rules requiring them to pay taxes on unrealized capital gains, potentially raising hundreds of billions of dollars from about 600 of the richest Americans. And new limits are being considered for the size of tax-advantaged retirement accounts, targeting an increase in the number of accounts shielding millions in wealth.

The expanded menu of tax options would give Democrats more flexibility as they undertake thorny negotiations among themselves over how to pay for $3.5 trillion of proposed long-term investments in child care, education and other social programs. Biden and Democratic lawmakers have repeatedly said that they won’t raise taxes on those making less than $400,000 a year.

Assorted other proposals are in the mix and have previously been proposed by Biden or by Senate Democrats, including raising the 21% corporate rate, increasing taxes on overseas company income and raising the top individual income tax rate to 39.6% as well as the capital gains rate for high-income investors.

It’s not clear which parts could get enacted, however, given the views of Sen. Joe Manchin of West Virginia — a pivotal Democrat who this week blasted the $3.5 trillion size of the legislation and called for a pause in its consideration given concerns about inflation and debt.

The House Ways and Means Committee, meantime, is assembling its own version of tax measures. The two chambers would need to reconcile any differences for legislation to make it into law.

Treating corporate buybacks and dividends similarly for tax purposes would raise $70 billion to $80 billion a year, “making it a potentially attractive add-on to future budget bills that strive for revenue neutrality or deficit reduction,” law professors Daniel Hemel and Gregg Polsky wrote in a paper earlier this year.

Other measures being considered by Senate Finance Committee Democrats would increase exemptions to Biden’s proposal to impose capital gains taxes on appreciated assets held by wealthy individuals until death.

The new proposal would allow for a $5 million exemption per person, or $10 million per couple — an increase from the $1 million-per-person and $2 million-per-couple exclusions proposed by the administration in May, according to the people familiar with the discussions.

Family Farms

The Senate Finance proposal would modify a protection for family farms by allowing couples to exclude the first $25 million from their property from taxes, in addition to the general $10 million exemption. The Biden proposal allowed family-owned and -operated small businesses to indefinitely defer paying the capital gains tax until the interest in the business is sold or the business ceases to be run by the family.

Democrats have also been discussing a boost to Internal Revenue Service enforcement to raise as much as $200 billion, taxing carried interest for fund managers at regular tax rates, and cracking down on trusts used by the wealthy to avoid gift and estate taxes.

Also on the table: a proposal to effectively cut taxes on small-business owners with less than $400,000 in net income, while phasing out a 20% deduction in pass-through income enacted in the 2017 tax law above that threshold.

Environmental proposals on the table include:

  • A potential tax on the carbon content of fossil fuels starting at $15 per ton
  • A carbon tax on major industrial emitters like steel, cement and chemicals
  • A per-barrel tax on crude oil

Each option would be paired with rebates for low-income taxpayers and a border-adjustment tax aimed at ensuring foreign companies don’t get an advantage.

Fossil-fuel companies could lose assorted tax breaks. The set of proposals under consideration includes a 20-cents a pound fee on the sale of so-called virgin plastics, which aren’t derived from recycled feedstocks.

Wealthy Estates

The Senate Finance Committee, chaired by Ron Wyden, is also considering proposals to end popular techniques the ultra-wealthy use to avoid estate taxes, including grantor-retained annuity trusts and intentionally defective grantor trusts, according to the people.

In addition, the committee may seek to compel the Treasury to revive regulations that would limit the use of discounts for reducing the value of assets held in closely held family businesses for estate and gift tax purposes. A set of rules was proposed in 2016 by the Obama administration but later withdrawn under the Trump administration — a move heralded at the time by trade groups and Republican lawmakers who opposed the regulations for being overly broad.

Democrats are also looking at a proposal to crack down on the use of sophisticated derivatives to avoid or reduce taxes on underlying investments, as well as create a new IRS tax reporting requirement on accounts with as little as $600 of inflows and outflows a year in an effort to collect more taxes already owed.

– With assistance from Allyson Versprille.

Image: Shutterstock

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