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Your Guide to What Trump’s Second Season Means Washington, Business and World
Donald Trump’s “big, beautiful bill” provides an opportunity for all types of special interest groups to bid on what they think they deserve. Running over 1,000 pages has been a great opportunity to demand some useful changes that are fairly owned with all the noise, whether fair or not.
An example is a discussion of pass-through companies and one type in particular. American tax laws have created an entire company of the class that avoids corporate-level tax. In exchange for that privilege, they must convey most of their revenue to shareholders in the form of dividends. These include real estate investment trusts that own the property and Master Limited Partnerships that operate oil and gas pipelines.
Then there is a business development company or a BDC. These are vehicles that raise investors’ funds and lend to middle market companies. And they became a key part of the ongoing private credit boom. Currently there are over 150 BDCs, some listed and some private.
BDC supporters are now trying to correct perceived mistakes. In 2017, Trump reduced the corporate tax rate from 35% to 21%. Good news for corporate taxpayers, this has reduced the relative appeal of pass-through entities by making their own exemption from corporate taxes less valuable.
REIT and MLP were given the Comfort Award as part of the 2017 tax reform. Individuals in these types of vehicles are exempt from taxable income from 20% of their dividends. However, BDC is not included. They are lobbying to correct that obvious oversight as part of Trump’s tax reform, which is currently working through Congress.
The question is not whether BDCs will get these perks, but whether the US economy needs pass-through entities. In theory, this structure subsidizes certain activities that in the face of it deserve to invest in real estate, transport energy across the country, and fund businesses that are too few to be easily accessible to the bond market.
However, it is not clear that these activities do not occur anyway. The overall growth in personal credit suggests that investors are willing to load without a modest tax credit. Ultimately, BDC stock prices rise based on whether or not they create a profitable loan.
When viewed narrowly, there are decent cases of BDC. If REITs and MLPs are undergoing special treatment, they should probably too. But such tweaks must be paid, for example, through rapid cuts in food and healthcare programs that benefit poor Americans. Hunting the potential tax advantages of executives and lobbyists by dollar is totally reasonable for them. It is not clear that everyone else should be equally enthusiastic.
sujeet.indap@ft.com
