This isn't accurate. These companies do make billions and billions in profit. And they do pay taxes. They shelter a lot of hose profits in licensing deals off shore though. so the effect is the same.
And yes, the stated goal of a for profit corporation is to increase value for the share holders, so there's that too.
But these aren't accounting problems. They are issues with regulations and shitty personal values/moral codes.
Regulations are based on how we can account for profits, net revenue, capital gains. These companies don't record profit (an accounting term). They record net revenue to avoid income tax. See the chart in the essay.
This is utter nonsense. Companies can also opt to pay zero income tax if they reduce their taxable incomes to zero by donating all of their profits to charities. The only difference is that the charity Amazon supports is called "consumers".
Big fan of yours and do think Amazon does a ton for customers, but that's not quite accurate. I'm also a huge fan of Amazon so this comment isn't meant to be negative, but more admiring.
It's not that Amazon is giving its money to customers. Bezos is very cleverly taking advantage of a loophole in how taxes/accounting works. Over long periods of time, cash flow and income will generally converge. But in the short term, they don't have to. Bezos runs the business around cash flow while minimizing income. Corporate taxes are based on income. The reason for that is because the tax code wants to make sure a business actually has the cash to pay taxes, before owing them. Straightforward enough.
As Bezos bluntly states publicly, he focuses on free cash flow. That number is going through the roof, and while portions of it go into lower prices, a lot more of it goes into investments in new products/infrastructure that will further grow cash flow while effectively deferring net income. That balance is extremely difficult to manage, and Bezos is probably the best the world has ever seen. All that said, it's not quite right to say that they're donating profits to consumers.
>...Bezos runs the business around cash flow while minimizing income.
This is not really the full picture. For example:
>...Project Goldcrest, which is still in place, uses a series of complex intercompany contracts to transfer intangible assets—vital software, trademarks and other intellectual property (IP)—to one of Amazon’s Luxembourg companies, Amazon Europe Holding Technologies. A separate subsidiary, Amazon EU Sarl, then pays AEHT huge sums every year in royalty fees, reducing the amount of taxable income within the company.
"Utter nonsense" is a bit harsh. I think the (poorly articulated) issue behind this article is that some companies (and some rich people) have arranged their affairs to reduce the tax they pay. This increases the burden on other taxpayers, and those people feel this is unfair.
I see society as a resource that my company exploits to generate revenue - most companies would fail miserably if we didn't have education, the rule of law, roads and national security to provide a stable market for our goods and services. So we celebrate paying our taxes, because we're helping the thing that makes us money. So why doesn't Amazon and it's ilk?
OK, Amazon is huge enough that your argument that society in general benefits as much from their zero-profit policy as it does from the taxes is tenable. But Amazon deciding how it will best benefit society is exactly like a billionaire arguing that only she should say where her tax goes. That just doesn't work - relying on philanthropy alone would give us awesome animal sanctuaries, with raw sewerage and mentally ill people running down the street outside.
Amazon deciding how it will best benefit society is exactly like a billionaire arguing that only she should say where her tax goes.
Ah, but that's not how it works. It's not a $1 for $1 tradeoff -- you can avoid paying 35 cents of tax by contributing $1 to a charity (or, in the case of Amazon, subsidizing consumers by $1).
> So we celebrate paying our taxes, because we're helping the thing that makes us money. So why doesn't Amazon and it's ilk?
Because they have competitors who don't and it isn't reasonable to compete with them on uneven terms.
The problem isn't corporations paying no taxes by following the law, the problem is that the law allows them to pay no taxes.
The shell game is very simple in principle. Microsoft Offshore owns the copyright to Office. When Microsoft US sells a copy of Office, they collect money from the customer and then pay Microsoft Offshore almost that much for the right to sell it, so Microsoft US makes no profit.
The solution is equally simple. Replace corporate income tax with VAT. Then when Microsoft US sells a copy of Office, they pay VAT on the full purchase price and can deduct any US VAT already paid. Since Microsoft Offshore doesn't pay US VAT there is nothing to deduct and they have to pay their taxes.
Though Amazon in particular is actually a different case -- they don't pay taxes because they spend all their revenue expanding their business. They're not diverting profits offshore, they legitimately don't have any. This is completely unproblematic and meritorious, because as long as it continues they're creating jobs and growing the economy, and the instant they stop and actually turn a profit they owe taxes.
This is not bullshit as other comments are saying.
"Profit" in this sense is a means of personal cash flow. Once the shareholders (including the founders) have their personal cash flow needs taken care of, the focus shifts to long-term value creation.
Profit is derived from subtracting expenses from your revenue. Wage for businesses is a expense, and so is accusation cost of assets. I would assume Net Profit is taking into account all liabilities/assets/expenses/revenue for all departments.
There are two primary documents that make up a businesses financial statements. The P&L and the Balance Sheet.
The P&L is the profit and loss. It is where the terms "top line" and "bottom line" come from. The top line is total revenue. The bottom line is net profit.
The balance sheet shows the assets and liabilities.
Basically, the P&L is how a company performed for a period of time (month, quarter, year, etc) and the balance sheet is what the company is worth at a specific point in time.
Jaxn, just curious what books would you recommend to read to get into accounting? Because of hacknews i've been introduced into double entry book keeping using ledger (that I found really really useful). Kind of want to expand on the knowledge base (Not with ledger).
Unfortunately I have no idea. I just hard to learn it from doing my own books. It is something that was very opaque until all of the sudden it clicked. Kinda like learning object oriented programming for the first time.
>> If they pass the stock on to their heirs, those gains are never taxed at all.
Is this true? If one inherits stock, does the "purchase price" of that stock get reset to the price at the time of inheritance? Is that how it works or something different?
Yes, the basis (the tax concept meaning "what you are credited with having paid") on most items is "stepped up" to the fair market value upon inheritance.
This step up is subject to estate tax (if the estate is over a certain size), but not capital gains tax.
It's simplifying things a bit but basically the first $5.5/$11 million in total assets are Federal tax free. They are valued and taxed based on current market value and therefore the basis is stepped up to current market value at that time.
After the lifetime exclusion of $5.5/$11 (single vs married) million then any further inheritance is taxed around 40%.
But, if the inheritance had at one point been income for the deceased, it would have been taxed at the time they earned it and (again) at the time it transferred to their heirs (after the cap).
The opponents of the inheritance tax state that they were taxed when they earned it, so it shouldn't be taxed again at the transfer to their heirs. With stock, it is only taxed at the transfer.
You could argue that the person holding the stock never received benefit since it was illiquid, but it can still be leveraged.
Which is the other piece to this. The stock holder is able to leverage the asset to create cash that has an interest rate significantly lower than the tax rate. As long as the loaned capital also results in a return, the stock holder is able to "grow their pile" essentially tax free.
An inheritance tax is a catastrophe for family businesses because you aren't inheriting money, you're inheriting the business. It isn't a liquid asset. Families end up forced to sell the farm to pay the inheritance tax on it.
The natural thing to do would be to not have inheritance tax but leave the tax basis where it is. But then suppose grandpa bought shares of GM before the war and never sold them. Now they're worth a million dollars, but if you sold them the government would immediately take ~40% of the money. Which means you're stuck with a choice between keeping $1 of GM shares or selling them at $.60 on the dollar so you can buy Tesla shares or a Tesla or anything else whatsoever. Tax policy is forcing people into making otherwise economically irrational decisions, which is bad for the economy.
So to prevent that from happening, when you inherit grandpa's shares you get a new tax basis. But then people start complaining about rich people not paying taxes and bring back the inheritance tax. And then rich families with family businesses quietly get an inheritance tax holiday passed every generation or so that lets them keep the family business in the family, or otherwise do tax planning to prevent it from having any effect.
The solution to this mess is to realize that rich people never actually pay taxes until they spend the money anyway and we're better off with a VAT that doesn't have any of this trouble, combined with a UBI to make it progressive.
The threshold for inheritance taxes in the US is so high that very few family businesses are impacted.
A small fraction of family-owned businesses are worth more than $5 million. That family-farm comment sounds more like an out-dated PR talking point than a legitimate concern in 2017.
This is what farms, or many family businesses in general, look like.
A light truck or small tractor is five figures. A larger truck or tractor can be a quarter of a million. A combine harvester is half a million. Livestock would add six figures. The land itself will typically be worth seven figures. Add these together, more than one of some, plus sprayers and irrigation systems and various other pieces of farm equipment each in the five to six figure range, farmhouse, feed and crop storage and other structures, you can easily exceed five million dollars. Many businesses are very capital-intensive.
And a farm is just an example. A family construction business is going to own the same sort of expensive industrial equipment. A family that owns and operates residential apartments could exceed that amount with one building in many cities.
The only reason very few family businesses are impacted is that the ones who failed to engage in tax planning to avoid it were dismantled by the tax a generation or more ago and the remaining families do the tax planning. But what's the point of specifically screwing over the families without the civic disloyalty to rearrange their affairs that way?
I started a family-owned retail business with my father and have been growing it for 13 years. I get it.
The farm example is trotted out all the time because it is an emotional example. But it isn't really a meaningful one.
The 2016 estimates from the USDA states that 98.3% of family farms would not need to file a estate-tax return at all. Of the 1.7% that do need to file a return, the vast majority of those would owe no taxes.
Only 0.4% of family farms will owe any estate tax for 2016.
It only affects a very small percentage of family farms. And yet it is the go-to example of how the estate tax isn't fair.
> Only 0.4% of family farms will owe any estate tax for 2016.
The estate tax comes due when someone dies. Most people don't die in a given year.
And those numbers are artificially low on top of that because many of the affected families only don't owe estate tax because they did estate tax planning.
Headline is completely inaccurate. This piece says nothing about "accounting". All it seems to say is that Bezos is rich due to capital gains and then claims (with absolutely no evidence) that Bezos' motivation is reducing his taxes and, therefore, he is doing something (piece does not say what) to transform taxable profit to untaxable capital gains.
Piece also seems to equate being a big business with having a big market cap, which makes no sense as plenty of big corps with big revenues have small market caps.
This is all about accounting tricks. The evidence is that they don't record any NET INCOME - are you blind or you just don't get it? Check out the chart. Don't mean to be rude but your claim about accounting makes no sense.
You're right, but these are the incentives created by the system. It would be really hard to change this.
What you call net income isn't. It's a fictional valuation metric for current possessions. It's like when you own a house, and the house goes up in value. Should that value increase be counted as income ? Because it would force a lot of people to sell and certainly wouldn't be a good thing for middle America.
Another great way to not have profits is if you have a SaaS service is to give it away to non-profits (or start your own non-profit to give it away) and get the benfit from the tax deduction. It costs you about nothing for a few database entries.
32 comments
[ 2.8 ms ] story [ 95.0 ms ] threadAnd yes, the stated goal of a for profit corporation is to increase value for the share holders, so there's that too.
But these aren't accounting problems. They are issues with regulations and shitty personal values/moral codes.
Have you looked into Amazon's dividend distributions since inception?
What stated goal? Reference? Increase shareholder value is not legal requirement. see http://www.nakedcapitalism.com/2017/02/why-the-maximize-shar...
It's not that Amazon is giving its money to customers. Bezos is very cleverly taking advantage of a loophole in how taxes/accounting works. Over long periods of time, cash flow and income will generally converge. But in the short term, they don't have to. Bezos runs the business around cash flow while minimizing income. Corporate taxes are based on income. The reason for that is because the tax code wants to make sure a business actually has the cash to pay taxes, before owing them. Straightforward enough.
As Bezos bluntly states publicly, he focuses on free cash flow. That number is going through the roof, and while portions of it go into lower prices, a lot more of it goes into investments in new products/infrastructure that will further grow cash flow while effectively deferring net income. That balance is extremely difficult to manage, and Bezos is probably the best the world has ever seen. All that said, it's not quite right to say that they're donating profits to consumers.
This is not really the full picture. For example:
>...Project Goldcrest, which is still in place, uses a series of complex intercompany contracts to transfer intangible assets—vital software, trademarks and other intellectual property (IP)—to one of Amazon’s Luxembourg companies, Amazon Europe Holding Technologies. A separate subsidiary, Amazon EU Sarl, then pays AEHT huge sums every year in royalty fees, reducing the amount of taxable income within the company.
http://www.newsweek.com/2016/07/22/amazon-jeff-bezos-taxes-4...
I see society as a resource that my company exploits to generate revenue - most companies would fail miserably if we didn't have education, the rule of law, roads and national security to provide a stable market for our goods and services. So we celebrate paying our taxes, because we're helping the thing that makes us money. So why doesn't Amazon and it's ilk?
OK, Amazon is huge enough that your argument that society in general benefits as much from their zero-profit policy as it does from the taxes is tenable. But Amazon deciding how it will best benefit society is exactly like a billionaire arguing that only she should say where her tax goes. That just doesn't work - relying on philanthropy alone would give us awesome animal sanctuaries, with raw sewerage and mentally ill people running down the street outside.
Ah, but that's not how it works. It's not a $1 for $1 tradeoff -- you can avoid paying 35 cents of tax by contributing $1 to a charity (or, in the case of Amazon, subsidizing consumers by $1).
Because they have competitors who don't and it isn't reasonable to compete with them on uneven terms.
The problem isn't corporations paying no taxes by following the law, the problem is that the law allows them to pay no taxes.
The shell game is very simple in principle. Microsoft Offshore owns the copyright to Office. When Microsoft US sells a copy of Office, they collect money from the customer and then pay Microsoft Offshore almost that much for the right to sell it, so Microsoft US makes no profit.
The solution is equally simple. Replace corporate income tax with VAT. Then when Microsoft US sells a copy of Office, they pay VAT on the full purchase price and can deduct any US VAT already paid. Since Microsoft Offshore doesn't pay US VAT there is nothing to deduct and they have to pay their taxes.
Though Amazon in particular is actually a different case -- they don't pay taxes because they spend all their revenue expanding their business. They're not diverting profits offshore, they legitimately don't have any. This is completely unproblematic and meritorious, because as long as it continues they're creating jobs and growing the economy, and the instant they stop and actually turn a profit they owe taxes.
"Profit" in this sense is a means of personal cash flow. Once the shareholders (including the founders) have their personal cash flow needs taken care of, the focus shifts to long-term value creation.
Part of that is reducing tax expense.
The P&L is the profit and loss. It is where the terms "top line" and "bottom line" come from. The top line is total revenue. The bottom line is net profit.
The balance sheet shows the assets and liabilities.
Basically, the P&L is how a company performed for a period of time (month, quarter, year, etc) and the balance sheet is what the company is worth at a specific point in time.
Is this true? If one inherits stock, does the "purchase price" of that stock get reset to the price at the time of inheritance? Is that how it works or something different?
This step up is subject to estate tax (if the estate is over a certain size), but not capital gains tax.
https://www.irs.gov/help-resources/tools-faqs/faqs-for-indiv...
After the lifetime exclusion of $5.5/$11 (single vs married) million then any further inheritance is taxed around 40%.
The opponents of the inheritance tax state that they were taxed when they earned it, so it shouldn't be taxed again at the transfer to their heirs. With stock, it is only taxed at the transfer.
You could argue that the person holding the stock never received benefit since it was illiquid, but it can still be leveraged.
Which is the other piece to this. The stock holder is able to leverage the asset to create cash that has an interest rate significantly lower than the tax rate. As long as the loaned capital also results in a return, the stock holder is able to "grow their pile" essentially tax free.
An inheritance tax is a catastrophe for family businesses because you aren't inheriting money, you're inheriting the business. It isn't a liquid asset. Families end up forced to sell the farm to pay the inheritance tax on it.
The natural thing to do would be to not have inheritance tax but leave the tax basis where it is. But then suppose grandpa bought shares of GM before the war and never sold them. Now they're worth a million dollars, but if you sold them the government would immediately take ~40% of the money. Which means you're stuck with a choice between keeping $1 of GM shares or selling them at $.60 on the dollar so you can buy Tesla shares or a Tesla or anything else whatsoever. Tax policy is forcing people into making otherwise economically irrational decisions, which is bad for the economy.
So to prevent that from happening, when you inherit grandpa's shares you get a new tax basis. But then people start complaining about rich people not paying taxes and bring back the inheritance tax. And then rich families with family businesses quietly get an inheritance tax holiday passed every generation or so that lets them keep the family business in the family, or otherwise do tax planning to prevent it from having any effect.
The solution to this mess is to realize that rich people never actually pay taxes until they spend the money anyway and we're better off with a VAT that doesn't have any of this trouble, combined with a UBI to make it progressive.
A small fraction of family-owned businesses are worth more than $5 million. That family-farm comment sounds more like an out-dated PR talking point than a legitimate concern in 2017.
A light truck or small tractor is five figures. A larger truck or tractor can be a quarter of a million. A combine harvester is half a million. Livestock would add six figures. The land itself will typically be worth seven figures. Add these together, more than one of some, plus sprayers and irrigation systems and various other pieces of farm equipment each in the five to six figure range, farmhouse, feed and crop storage and other structures, you can easily exceed five million dollars. Many businesses are very capital-intensive.
And a farm is just an example. A family construction business is going to own the same sort of expensive industrial equipment. A family that owns and operates residential apartments could exceed that amount with one building in many cities.
The only reason very few family businesses are impacted is that the ones who failed to engage in tax planning to avoid it were dismantled by the tax a generation or more ago and the remaining families do the tax planning. But what's the point of specifically screwing over the families without the civic disloyalty to rearrange their affairs that way?
The farm example is trotted out all the time because it is an emotional example. But it isn't really a meaningful one.
The 2016 estimates from the USDA states that 98.3% of family farms would not need to file a estate-tax return at all. Of the 1.7% that do need to file a return, the vast majority of those would owe no taxes.
Only 0.4% of family farms will owe any estate tax for 2016.
It only affects a very small percentage of family farms. And yet it is the go-to example of how the estate tax isn't fair.
The estate tax comes due when someone dies. Most people don't die in a given year.
And those numbers are artificially low on top of that because many of the affected families only don't owe estate tax because they did estate tax planning.
Piece also seems to equate being a big business with having a big market cap, which makes no sense as plenty of big corps with big revenues have small market caps.
What you call net income isn't. It's a fictional valuation metric for current possessions. It's like when you own a house, and the house goes up in value. Should that value increase be counted as income ? Because it would force a lot of people to sell and certainly wouldn't be a good thing for middle America.