By Kevin D. Williamson
Tuesday, April 30, 2019
The 2020 Democratic contenders are launching a jihad
about corporate taxation, and the New
York Times is their imam. “Profitable Giants Like Amazon Pay $0 in
Corporate Taxes,” the Times headline
says above an article that is essentially recruiting literature for the
Democratic Socialists of America, “Some Voters Are Sick of It.”
The article quotes Senator Bernie Sanders, the Vermont
socialist seeking the Democratic presidential nomination, saying: “Amazon,
Netflix and dozens of major corporations, as a result of Trump’s tax bill, pay
nothing in federal taxes. I think that’s a disgrace.”
The problem is that neither the headline nor the claim
from Senator Sanders is true.
Amazon has paid billions of dollars in corporate income
tax in recent years, though in some years it has paid no tax on profits because
— don’t let the accounting terminology scare you off here — it lost money.
Amazon has a very large footprint in the culture and in online commerce, but it
is not a wildly profitable company; in fact, the usual complaint about Amazon is
that it is forgoing profits in the here and now as part of a long-term
world-domination scheme.
Companies do not usually pay any tax on profits when they
do not have any profits.
But sometimes companies have no tax liability in years
when they do show profits. That was the case with Amazon in 2018. There are
three main reasons for that worth understanding:
First, the U.S. tax code realizes that businesses have
both profitable and unprofitable years, and so it allows businesses to average
out their income by carrying losses forward. For example, if Company X lost $25
million this year but makes $100 million next year, it can deduct some or all
of that $25 million in losses from that $100 million in income. If the company
lost more money in earlier years than it makes this year, then those losses may
be enough to offset its income entirely. Some businesses, such as energy, are
highly cyclical; others, such as real estate, can take a long time to become
profitable. Evening out income between profitable and unprofitable years is one
way that the tax code helps to mitigate the effects of the flux. That doesn’t
automatically make it a good policy, but it is not obviously a poor policy,
either, or a nefarious one. New businesses and expansions requiring large
capital investments drive a lot of economic growth and employment, and our tax
code encourages them.
Second, our tax code encourages other things, too,
including spending on research and development. Companies such as Amazon spend
tremendous amounts of money on R&D, and there are tax benefits for doing so.
This is not a “loophole” — this is an intentionally designed feature of our tax
policy. Government is always eager to encourage R&D spending,
manufacturing, investments in physical capacity and equipment, etc., and it has
long been the policy of Democrats and Republicans alike to use the tax code to
encourage that. Again, not an inarguably good policy, but not an obviously
wicked one, either.
Third, stock-based compensation can reduce tax
liabilities. (If you want to get into the accounting nerdery of this, start here.)
The simplified version: Companies sometimes pay executives (and lowly newspaper
editors!) in stock options. A stock option is a contract entitling the holder
of the option to purchase a certain number of shares of stock at a certain
price; the idea is to align the incentives of the shareholders and their
employees by giving both parties a personal interest in the share price, and
hence (in theory) the overall health and performance of the business. If a
company gives its employees the option of buying 1 million shares at $10, then
those employees will make $1 million if they exercise the options when the
stock is at $11. The company can then deduct that $1 million from its income as
employee compensation. This looks like trickery to some people, because that $1
million didn’t come from ordinary business income but from an increase in the
value of company shares, but there is a pretty compelling case that the
shareholders are bearing the $1 million expense and therefore entitled to treat
it as an expense. Once more, this may not be the right policy, but it’s not obviously the wrong one.
The Democrats and the Times
(to the extent that there is a difference when it comes to national political
reporting) don’t give a fig about this. The Times
makes almost no effort to go into how Amazon’s taxes are calculated. Instead,
we get this:
Colin Robertson wonders why he pays
federal taxes on the $18,000 a year he makes cleaning carpets, while the tech
giant Amazon got a tax rebate.
His concerns about a tilted
economic playing field recently led Mr. Robertson to join the Akron chapter of
the Democratic Socialists of America. At a gathering this month, as members
discussed Karl Marx and corporate greed over chocolate chip cookies, it wasn’t
long before talk turned to income inequality and how the government helps the
wealthy avoid taxes.
“He wonders why.” If only there were some institution out
there dedicated to explaining this sort of thing to the general reading public!
It could adopt for its motto: “All the news that’s fit to print.” Once again,
Williamson’s Law comes into play: “Everything is simple, if you don’t know a
f*****g thing about it.”
Simple — and morally satisfying, too!
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