Democrats Can't Have It Both Ways With Amazon's Taxes
When reports come out about Amazon paying little to no taxes, it always creates some popular angst. At first glance, it appears corrupt or wrong to see such a large company paying less in taxes than average taxpayers. But Amazon reduces its tax liability by taking advantage of deductions that are good policy — in fact, Amazon’s strategy of aggressively taking advantage of these deductions are proof that the deductions are having their desired effect in encouraging positive corporate behavior.
Joe Biden reignited the debate with a tweet directed at Amazon that stated that “no company pulling in billions of dollars of profits should pay a lower tax rate than firefighters and teachers.” Amazon quickly fired back,tweeting: “We’ve paid $2.6B in corporate taxes since 2016. We pay every penny we owe. Congress designed tax laws to encourage companies to reinvest in the American economy. We have. $200B in investments since 2011 & 300K US jobs. Assume VP Biden’s complaint is w/ the tax code, not Amazon.”
Amazon is right to point out that it has paid what it owes every year, and it has no obligation to pay more than what Uncle Sam is demanding (would you?) But here’s the thing: Biden’s complaint probably isn’t really with the tax code either, or at least not with the provisions that allowed Amazon to zero out its tax liability in 2018. Amazon didn’t take advantage of obscure loopholes and unfair handouts, it utilized deductions that are well-known, politically popular, and bipartisan.
The most important deduction to Amazon is the Research and Development (R&D) tax credit. The R&D credit exists because private companies tend to undervalue the benefit of R&D to society as a whole — one Obama Administration study estimated the private returns of R&D to be just half the benefits to society as a whole. So to encourage private businesses to invest more in R&D than they otherwise would, the tax code provides benefits to companies for their R&D investments.
And Amazon invests a lot in R&D. In 2017, Amazon was the biggest R&D investor in the United States of any company, investing nearly $23 billion. In other words, it’s doing exactly what the tax code is engineered to try to encourage companies to do. It’s highly unlikely that Biden would be upset that Amazon is investing in R&D.
So what other provisions did Amazon take advantage of? Perhaps Biden is upset with changes from the Tax Cuts and Jobs Act (TCJA). But the most advantageous provision of the TCJA to Amazon was allowing businesses to fully expense capital investments. Where previously businesses making investments had to navigate a complicated depreciation schedule that could require them to recoup the value of investments over as much as 39 years, the TCJA allowed them to instantly deduct the value of an investment the year they made it.
Again, it’s unlikely that this is the target of Biden’s ire. Expensing wasn’t some novel concept thought up just for TCJA; the Obama Administration supported expensing as a way to encourage investment. And just like with the R&D credit, full expensing is a tax deduction that businesses can only take advantage of when they are making an economically productive investment.
The remaining two major deductions that Amazon used to negate its tax liability — so-called “net operating loss carryforwards” and a deduction for stock-based compensation — are also common and support for them is hardly exclusive to Republicans. NOL carryforwards allow businesses to spread out their tax obligations over time, and the deduction for stock-based compensation was introduced by President Clinton and Congressional Democrats.
In reality, Amazon is doing everything Democrats claim to want businesses to do. As a company, it has made a conscious effort to make productive investments in research and capital improvements, and it hasn’t engaged in stock buybacks to the extent some other businesses have. Ironically, using stock buybacks, which Democrats routinely criticize, would actually have led to Amazon paying a higher rate, thus potentially avoiding the former Vice President’s scrutiny.
Democrats can’t have it both ways. If they want to companies to be responsive to provisions in the tax code intended to direct corporate profits towards the benefit of society as a whole, then they have to be prepared for corporations to do so, and therefore pay a lower tax rate. Amazon’s tax bill is not a sign that the system is broken; it’s proof that the system is working as designed.