Saturday, June 29, 2019

Published June 29, 2019 by with 1 comment

Why Do We Let Amazon Pay No Federal Taxes?

I see people mention Amazon or Netflix or whoever paying no federal tax often as if it's a terrible thing for society. Is it though?

There are a few ways that this can happen. For example, they can carry forward losses from previous years or spend a lot on investing in the business. There's a specific way this happens that no one I've talked with seems aware of that is worth walking through here though. The situation is employee stock.

I'll focus on one specific example here...Restricted Stock Units (RSUs).

Employee bonuses in tech are often in the form of RSUs. These are shares in the company that are not available to the employee until after some period of time. When those become available to the employee (i.e., they 'vest'), they count as income, so the employee pays tax and the company has their employee income expenses (which are deductible) increase.

Let's walk through a detailed, hypothetical example.
  • In January 2016, a company gives an employee 100 shares of stock valued at $100 per share.
  • In January 2018, that stock vests and is worth $150 per share now.
  • In April 2019, the employee pays his 2018 taxes, finds that he's in the 32% income bracket, and pays 0.32 * $150 * 100, or $4800 in taxes.
  • The company's deducts $150*100, or $15,000 for 2018. At a 21% max tax rate, that's 0.21*$15000, or $3150 in lost taxes.
  • In total, $4800 of taxes are paid.
Imagine instead that the company just paid the employee an additional $15,000 in 2018.
  • Employee pays 0.32*$15,000, or $4800 in taxes.
  • Company deducts $15,000, so 0.21*$15,000 or $3150 in lost taxes.
  • In total, $4800 of taxes are paid.
The only differences here are that the amount depends on stock growth, and the income and deduction are in a year other than the one in which the RSUs were given.

Finally, imagine we change the laws to force the company to not deduct this payment and so the company keeps the money:
  • Employee had no additional income, so $0 added to his tax which is $4800 in lost taxes compared with the other two situations.
  • Company pays 0.21*$150*100, or $3150 in taxes.
  • In total, $3150 of taxes are paid.
Look at the total situation from those three. Current situation results in $4800 - $3150, or $1650 more in tax revenue than if the company had been the one taxed there. The general equation is (employee tax rate - corporate tax rate) * stock value. This situation is better.

We could tax both the employee and the company, but that makes no sense. Also, if we did, companies could just shift to paying directly as salary instead of stock bonuses to avoid the double-tax and we're back to where we were but have no ability for companies to give employees stock.

It is important to note here that this effect will be larger when the company is doing well. The equation here shows gain in tax revenue is directly proportional to both stock value and employer tax deductions. It's worth summarizing...companies are able to lower their taxes more with this method when their stock value goes up, and this results in more tax revenue for the US government.

In summary...a major way that fast-growing tech companies end up with low or zero federal tax burdens is through vesting RSUs that have grown in value over time. If the employee's tax bracket is higher than the company's (generally true for high-paying tech companies that do this), the overall federal tax revenue is higher than it would be if the company was responsible for the tax. This is literally a company lowering its taxes by paying its employees more which is generally thought to be a good thing.

There are shitty ways that companies avoid taxes. Paying their employees well is not one of them. 


1 comment:

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