“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.
Issues & Insights is a new site formed by the seasoned journalists behind the legendary IBD Editorials page. We’re just getting started, and we’ll be adding new features as time permits. We’re doing this on a voluntary basis, because we believe the nation needs the kind of cogent, rational, data-driven, fact-based commentary that we can provide.
Be sure to tell all your friends! And if you’d like to make a contribution to support our effort, feel free to click the Tip Jar over on the right.