At heart, capitalism is a simple system. Anyone can start a business. If you make a profit, you pay a portion of those profits in tax to support the society that made your success possible.
In the real world, things aren’t so simple. In February, the Washington, D.C.-based Institute on Taxation and Economic Policy (ITEP) reported that Seattle-based Amazon, the retail/tech behemoth, paid no federal income taxes in 2018 even though its profits soared.
“Amazon will pay $0 in federal income taxes for the second year in a row,” growled ThisWeek.com. More shouty was this headline from tech news site The Register: “Amazon triples profit to $11.2bn, pays ZERO DOLLARS in corp tax – instead we pay it $129m.”
Naturally, the accounting fraternity took a different take: “Tax law didn’t help Amazon pay zero in 2018 – it was just savvy,” boasted AccountingToday.com.
How could America’s eighth-biggest company, with US$233 billion in revenue and $11 billion in profit, escape taxation? (In fact, it filed for a $129 million tax rebate.) ITEP says the company has been deliberately engineered to avoid tax, thanks to a bevy of tax credits and a tax break that encourages executive stock options. (Note that when Amazon went shopping for its “second headquarters,” it asked potential hosts for all the tax incentives they could spare.)
Economics writer Matthew Yglesias, cofounder of Vox.com, noted that Amazon likely maximized tax credits for R&D spending – a standard incentive in knowledge economies – and took advantage of a temporary 100% tax deduction for investment in equipment. But he says Amazon’s most significant gain came from a tax loophole that allows firms to deduct the cost of stock-based compensation.
As Yglesias notes, the more your share price rises, the bigger deduction you can claim for giving out shares – and Amazon’s stock nearly tripled in the past two years. It’s win-win-win, says Yglesias: “Because Amazon’s profits surged, the price of the company’s shares went up a lot, and the value of these deductions surged as well.”
ITEP advocates closing loopholes that allow so many corporations to pay low or zero taxes. It especially criticized the 2017 Tax Cuts and Jobs Act, which reduced corporate tax rates from 35% to 21%: “The tax law failed to broaden the tax base or close a slew of tax loopholes that allow profitable companies to routinely avoid paying federal and state income taxes on almost half of their profits.”
But sometimes, what goes around comes around. Last fall, a group of Amazon employees who had just received stock grants filed petitions asking their employer to release a comprehensive plan addressing climate change. According to the New York Times, it’s “the first time that tech employees have led their own shareholder proposal.” The proposal will be voted on at Amazon’s annual meeting this spring.