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Bezos long ago figured out that the best tax strategy in modern America for a public company is to operate without profit. The company operates with a relativel
by cft 11y ago
Bezos long ago figured out that the best tax strategy in modern America for a public company is to operate without profit. The company operates with a relatively (to the revenue) small loss, maintaining positive cash flow by issuing and selling additional stock. Selling new stock is (remarkably) tax free. The dilution is negligible since the stock is valued by the revenue (not profit so much). Everybody benefits: executives are now compensated mainly by the RSUs and options, and the corporate profit is only a tax drag that does not really affect this compensation.
- sudhirj 11y agoIsn't this pretty much the best strategy anywhere in the world? Is there any country that taxes by revenue? Apple has this weird problem of being so profitable that they have no clue what to do with all that money. And then everyone picks on them for their loophole-based tax mitigation strategies.
- jnky 11y agoMaybe taxes on profits were created so that companies invest their profit instead of hoarding it or giving it to shareholders, creating jobs and infrastructure in the process. As far as I'm concerned, Amazon is using its profits (or lack thereof) exactly as intended.
- calpaterson 11y agoIf you returned it to shareholders they would be reinvesting it too (just somewhere else). You can return capital to investors tax efficiently using share buybacks. Haven't looked at Amazon's annual report in detail so can't tell if they are reinvesting profit in areas that will have high return or not.
- tajen 11y agoI don't think someone has designed taxes around incentives. In most countries wages are more heavily taxed than products, which balances the spending towards buying more things rather than employing more people. It seems very stretched, but some ecologists suggest to tax petrol more heavily and tax wages less, so it would be easier to employ more people for a task than throw more petrol at it (I use petrol in terms of fast tranports).
- zeckalpha 11y agoWhat about tariffs? They're designed to incentivize buying products made at home. What about "sin" taxes? They're designed to incentivize good behavior? (Some) taxes are definitely designed around incentives.
- mollmerx 11y agoIn addition, sins are often easy to tax because consumption is rather inelastic, due to there being few alternatives. Thus, taxes on sins can produce higher revenues than taxes on more price sensitive goods or activities would.
- calpaterson 11y agoMany companies have that problem. They return the capital to investors to invest somewhere else. That is how equity is supposed to work: you give someone money for something and then eventually give you back more than you gave them originally.
- eloff 11y agoThere are countries with much lower corporate tax rates. E.g. Ireland is 15%, Panama is 0% (on foreign income). I'd say the optimal strategy is what Facebook and Google do with the double Irish Dutch sandwich http://conversableeconomist.blogspot.com/2014/07/double-irish-dutch-sandwich.html http://conversableeconomist.blogspot.com/2014/07/double-iris...
- Spooky23 11y agoThe US has a system engineered around the political process. High corporate tax rates, with lots of carve-outs. There are all sorts of strategies for optimization. Many involve lobbying Congress for special carve-outs.
- mdasen 11y agoIf the point of a business is compensating its employees, that might be a strategy. However, that isn't the point of the business. The point of the business is to generate money for the shareholders. Over the short/medium term, shareholders might be content with growth and revenue. Over the long term, without profits the business has nothing for shareholders. It really isn't a tax strategy any more than being unemployed with no income is a tax strategy. Amazon's strategy seems to be keeping margins low enough that it's hard for others to compete with them, in the hopes of great long-term profits. While the stock may be valued on its revenue, that valuation is premised on the idea that Amazon will be making a lot of profits from that high revenue in the future. Investors aren't buying Amazon stock believing that it's avoiding profit as a tax strategy to funnel money to employees. They're buying Amazon stock believing that it's the future of retail and that being the future of retail will come with enormous profits.
- deleted 11y ago[deleted]
- ISL 11y agoThe point of a business is whatever its shareholders want it to be.
- ethbro 11y agoI don't claim to be especially economically savvy, but isn't the fundamental premise that there's a bounded conversion between revenue and profit? Iow, that one can trade a decrease in revenue for an increase in profit by certain business decisions. If so, then it's natural that stock price increases when revenue increases, albeit at a discount to actual profit depending on what your expected revenue:profit conversion ratio is. The interesting part is the next step. Someone buys a stock expecting to benefit from the exchange (sell at a higher price that one purchased it for). Thus, if the stock price is correlated with revenue, and Amazon can increase revenue even without increasing profit, stockholders will still be happy.* Stockholders are looking for increased value for their stock, not any particular metric thereof. *This is assuming Amazon finances the revenue increases through free cash flow (as mentioned elsewhere) rather than diluting stock
- 11y ago
- Aqueous 11y agoIssuing stock is not the principle way they maintain positive cash flow. The float between the time their customers pay them and the time they have promised to pay their vendors creates enormous, ever-increasing operating cash flow: https://hbr.org/2014/10/at-amazon-its-all-about-cash-flow/ https://hbr.org/2014/10/at-amazon-its-all-about-cash-flow/ They are essentially borrowing from their own customers (or maybe more accurately, vendors), at zero interest, to continually build the business.
- ethbro 11y agoIncidentally, this is pretty much how Warren Buffett made his first billions with Berkshire to the best of my understanding. He realized that insurance generated enormous carry, and if you were able to better utilize that (say, by buying other companies and improving them) then you had a pretty winning strategy.
- ISL 11y agoMost insurance companies operate this way, which long predates Buffett. In fact, it's possible for premiums to sum to less than the costs of insuring precisely because of the float. Buffett has done well by choosing companies and people that are good at avoiding losing money. If Amazon had a viable competitor, the profits of float investments would be the ammunition in the resulting price war. Amazon's margin is someone's opportunity.
- yokohama11 11y agoNot even just possible, but the default of operation in the industry. Most don't turn an underwriting profit with any consistency and make all their money on their investments from that float.
- ethbro 11y agoI was under the impression that most insurance companies aren't part of a larger business entity that directly invests their float in other companies. I'd assume there would be advantages on that closer relationship vs a stand-alone insurance company simply investing in a publicly traded offering.