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Issues & Insights

Guess Who’s Really To Blame For Amazon’s Zero Federal Tax Bill

“Amazon and Netflix are among many companies paying zero federal taxes under Trump’s tax law”

This is just one of several similar headlines in the wake of a report that major, profitable, corporations paid little or no federal income taxes last year.

And as that headline suggests, President Trump’s corporate tax reform bill is getting the lion’s share of blame.

The New York Times, for example, claimed that “the list of those paying zero roughly doubled last year as a result of provisions in President Trump’s 2017 tax bill that expanded corporate tax breaks and reduced the tax rate on corporate income.”

CBS News said, “Big companies have long relied on strategies to reduce their tax bills. But the new tax law is making it even easier.”

Case closed, right?

Leave aside the fact that these companies pay plenty of taxes, and the jobs they create and the businesses they support also generate a pile of government revenues.

The real reason these companies didn’t pay federal taxes last year has almost nothing to do with Trump’s tax cuts. 

Clinton Is the Culprit

It is instead largely the result of a provision in a tax bill passed by the Democratically controlled House and Senate and signed by Bill Clinton back in 1993. The provision was meant to rein in “excessive” executive pay back in 1993. 

The tax bill Clinton signed — which got zero Republican votes — set a $1 million cap on compensation for CEOs and other top executives that could be deducted as a business expense. Anything over that had to be paid with after-tax dollars. 

However, the bill contained a loophole that let companies deduct the cost of any amount of compensation deemed “performance pay.” As a result, while a company could only deduct $1 million in ordinary wages to its top execs, it could deduct an unlimited amount paid through performance bonuses like stock options. 

Better still, under the law, a company could deduct the difference between the option price granted to the executive, and the stock price when they exercised their options. The higher the actual stock price, the bigger the tax break.

As a result, Clinton’s attempt to rein in executive pay wildly backfired as corporations started to massively shift compensation over to performance-based stock options. Worse, taxpayers ended up footing the bill.

Clinton’s Lucrative Tax Dodge

Several years ago, the Joint Committee on Taxation estimated that this loophole let corporations avoid a total of $50 billion in taxes over 10 years. 

A 2016 study found that more than 300 Fortune 500 companies managed to cut their federal and state taxes by a total of $64.6 billion from 2011 to 2015.

And, because the stock market has been on a tear since Trump took office, the amount companies could deduct climbed as well.

In fact, the report from Institute on Taxation and Economic Policy that got the mainstream media’s chins wagging this week found that: 

“Amazon reduced its income taxes by more than $1 billion in 2018 using a tax break for stock options. Netflix reduced its income taxes by $191 million using this tax break. Salesforce.com reported $137 million of stock option tax benefits. Activision Blizzard reported $58 million of stock option tax breaks, with Honeywell close behind at $52 million. Deere, Rockwell Collins and Performance Food Group each reduced their income taxes by $20 million using stock options in 2018.”

This Clinton rule let companies sharply reduce their tax burden, and it distorted business decisions as well. 

In a 2017 report, the Ways and Means Committee said that the shift in compensation caused only by the stock option loophole “has led to perverse consequences as some executives focus on … quarterly results (off of which their compensation is determined), rather than on the long-term success of the company.”

GOP Repeals This Tax Loophole

Here’s the other piece of the story the press aren’t telling you: Republicans closed this loophole in their 2017 tax cut bill. The tax bill that, by the way, got zero Democratic votes.

In fact, the GOP tax bill not only removed the tax exemption for “performance” compensation, it expanded the pool of top executives covered by the $1 million deductibility cap. 

That’s right. The very bill that the New York Times and the rest of the mainstream press claim to be a huge corporate tax giveaway actually got rid of a costly and distortionary tax loophole, and applied the $1 million deductibility cap to more top executives.

Fast Company, one of the few outlets to acknowledge it, said that this “little-noticed provision” in the GOP tax bill “could make corporate America more responsible.”

But if the tax bill closed the loophole, why were Amazon and other companies able to use it to help zero out their taxes last year? 

That’s because the bill contained a transition period that let companies keep the loophole for executive contracts in effect as of November 2, 2017 that haven’t been “modified in any material respect.”

As these grandfathered plans disappear over time, so will this tax dodge. 

Of course, Republicans could have repealed the arbitrary Clinton cap on the deductibility of executive compensation entirely, rather than expand it. Heck, they arguably should have eliminated the corporate income tax entirely. (As this Milken Institute Review article explains: “Although corporations bear the legal obligation to fork over the tax, they cannot bear the economic burden because they are not real people… More to the point here, the economic burden of the tax must ultimately fall on corporate stakeholders — principally shareholders and workers.”)

But at the very least, Trump and the GOP lawmakers deserve credit for eliminating a gross tax distortion that Democrats long ago created, and then refused to fix on their own.

Just don’t hold your breath waiting for the mainstream press to offer any congratulations.


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John Merline

Veteran journalist John Merline was Deputy Editor of Commentary and Opinion at Investor's Business Daily. Before IBD, he launched and edited the Opinion section of AOL News, and was a member of the editorial board of USA Today, where he continues to be a regular contributor. He’s been published in the Washington Post, National Review, Detroit News, Cleveland Plain Dealer, Forbes, and numerous other publications. He is regular commentator on the One America News Network and on local talk radio. He got his start in journalism under the tutelage of M. Stanton Evans.

7 comments

  • That is because there is no honest media in America today. 95% of the American media is simply an extension of the demonRat party. They are all crazy, socialist/communist, left-wing radicals. Telling the truth is not part of their program. To the left, “The ends justifies the means”; further, “Being left means NEVER having to say that you are sorry, or that you are wrong”. Well, those two quotes should sum up the lies the media is spouting about Amazon and Netflix. The NYT, WAPO, ABC, CBS, NBC, LAT, CNN, and MSNBC are all a DISGRACE to our great nation.

    • I hate to say this, I really do, but Fox is only a very slight shade better.

      Like this article, it blames Trump at the start, which is as far as most anti-Trump liberals CAN read, before it mentions Clinton.

      Lay out the worst truth first and editorialize it in the article. Don’t lay out the falsehood that they already believe first and then attempt to lay out the truth. Liberals are not capable of comprehending it.

  • The main fact everyone glosses over is that corporations don’t pay taxes. Their customers do.

    • I hate to say this, I really do, but Fox is only a very slight shade better.

      Like this article, it blames Trump at the start, which is as far as most anti-Trump liberals CAN read, before it mentions Clinton.

      Lay out the worst truth first and editorialize it in the article. Don’t lay out the falsehood that they already believe first and then attempt to lay out the truth. Liberals are not capable of comprehending it.

  • News falsh. No business actually pays taxes. They just pass the tax burden to their customers, who really pay the taxes. This is a bigger secret than the loopholes ceated by our lawmakers and laws in this article. I agree. Get rid of business taxes altogether and tell the populace the REAL amount of taxes they pay.
    Federal, state and local income taxes, Excise taxes, Property taxes, Sales tax, License fees, Alltogether DOZENS of TAXES, Could well be as much as 50 to 70 % with many of the poorest paying a larger % of their income in taxes than the more well to do.
    We don’t need taxes based on income (easily hidden). We need a tax on outgo (harder to hide your spending).

  • Amazon does not pay corporate taxes because their investors pay taxes on the profits, instead. Claiming that Amazon pays no taxes is true, but not particularly accurate. As their profits are paid to the shareholders in dividends, there is no corporate profit to tax.

    Now I am not certain that Harvard pays any taxes on it’s $12,000,000,000 endowment but even though it rakes in profits but it is not technically a corporation.

    • Amazon does not and never has paid dividends. It does not matter anyway because you would still be wrong if they did. That’s because corporations cannot deduct dividends for income tax purposes.

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