The provisions that help the company are good policy.
The revelation that Amazon did not end up owing any income taxes this year despite billions of dollars in profits precipitated a flurry of sensationalist news reports. Predictably, many Americans were upset, as this feeds into a prevailing narrative about the wealthy and large corporations not paying their “fair share.” Amazon’s tax liability is so low, however, because of bipartisan policy that is entirely defensible.
As much as politicians like to deride tax deductions and credits for businesses as “corporate handouts,” many exist in the tax code for good reasons. There are four major deductions that explain how Amazon effectively zeroed out its tax liability — the research-and-development tax credit, the deduction for stock-based compensation, full expensing of investments, and operating-loss carryforwards.
The research-and-development (R&D) tax credit has long been an area of bipartisan agreement. The basic premise is simple: Innovation is beneficial for society as a whole, not just the business in question. The Obama administration estimated that the benefits to society as a whole were double the benefits to a business. In the absence of the R&D tax credit, R&D might be undervalued by self-interested businesses — and the R&D credit encourages businesses to value them more.
A similar deduction that Amazon utilizes is bonus depreciation for investments. Whereas previously our tax system required businesses to deduct the cost of their investments through the tax code over a long period of time, the Tax Cuts and Jobs Act changed the rules so that businesses could immediately deduct most investment spending for the next five years. This encourages businesses to spend money on productive investments, boosting economic and wage growth.
While full expensing is less an area of bipartisan agreement than the R&D credit, the simple fact is that by claiming investment deductions, Amazon is doing what many on the left claim to want a business to do with profits: investing in employees and projects rather than in schemes to enrich wealthy shareholders. While it is inaccurate to claim that stock buybacks crowd out investment, Amazon’s status as a company that does not do share buybacks and invests a great deal in its business operations should appeal to progressives.
The remaining two deductions Amazon uses are also fairly vanilla. Net-operating-loss carryforwards allow businesses to smooth out their tax bills over good years and bad, ensuring they aren’t hung out to dry in bad times and hammered by huge tax bills in successful ones. And the deduction for stock-based compensation was added to the tax code by the Clinton administration and congressional Democrats as a way to tie executive compensation to business performance.
That’s not to say that these deductions, or the tax code as a whole, are perfect. The recent tax-reform bill made great strides to improve the corporate tax system in particular, but there is work still to be done. However, the provisions used by many companies to reduce their liability reflect goals shared by the vast majority of tax-policy experts — to encourage research, innovation, and investment; to promote growth; and to ensure that taxes are structured so as to harm business activity as little as possible. The fact that Amazon took advantage of so many of these credits and deductions shows only that businesses are responsive to them, and that the credits and deductions are having the desired effect.
Amazon is no paragon of virtue in pursuit of pure tax policy, but its zero corporate tax liability comes largely from its use of provisions that enjoy widespread bipartisan support. Complaints to the contrary are either ill-informed or willfully deceptive.