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Donald Trump’s “big, beautiful bill” has become an opportunity for special interest groups of all types to make a bid for whatever goodies they think they deserve. Running to more than 1,000 pages, it has become the perfect opportunity to request beneficial changes that, fair or not, will be pretty much drowned out in all the noise.
An example is the debate over pass-through companies, and one type in particular. The American tax code has created a whole class of companies that avoid corporate-level tax. In exchange for that privilege, they must pass on most of their earnings to shareholders in the form of dividends. They include real estate investment trusts, which own property, and master limited partnerships, which operate oil and gas pipelines.
Then there are business development companies, or BDCs. These are vehicles that raise investor money to make loans to middle-market companies. And they have become an important part of the ongoing private credit boom. There are now more than 150 BDCs, some listed and some private, in America with assets approaching half a trillion dollars.
Backers of BDCs are now trying to right a perceived wrong. Back in 2017, Trump lowered the corporate tax rate from 35 per cent to 21 per cent. While good news for corporate taxpayers, this reduced the relative appeal of pass-through entities, by making their own exemption from corporate taxation less valuable.
Reits and MLPs were given a consolation prize as part of that 2017 tax reform. Individuals in those types of vehicle can get 20 per cent of their dividends paid exempted from taxable income. BDCs, though, were not included. They are now lobbying to rectify that apparent oversight, as part of a raft of Trump tax reforms working their way through Congress.
The question shouldn’t be whether BDCs get these perks, but whether the US economy needs pass-through entities at all. In theory, the structure subsidises certain activities that on the face of it, are worthy: investing in real estate, transporting energy across the country and providing financing for companies too small to easily access bond markets.
But it’s not clear these activities wouldn’t happen anyway. The overall growth of private credit suggests that investors are happy to pile in without minuscule tax breaks. Share prices of BDCs rise and fall, ultimately, based on whether or not they make profitable loans.
Seen narrowly, the BDCs have a decent case. If Reits and MLPs are getting special treatment, then perhaps they should too. But such tweaks have to be paid for — for example, through sharp cuts to food and healthcare programmes that benefit poor Americans. Executives and lobbyists’ hunt for every dollar of potential tax advantage is perfectly rational for them. It’s not clear everyone else should be equally enthusiastic.
sujeet.indap@ft.com
