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2018-04-15 07:00 by Karl Denninger
in Federal Government , 167 references Ignore this thread
On This Tax Day....
[Comments enabled]

... make sure you lift a glass to Beelzebezos and Donald J Rump.

Amazon (AMZN.O) received a $137 million federal rebate on $5.4 billion in U.S. profits, resulting an effective tax rate of negative 2.5 percent, by using a tax break that allows companies to write off the value of executive stock options, according to ITEP.

That's right -- last year Amazon was paid by the US Treasury (that's you!) to operate.  They had a negative 2.5% tax rate; the government literally gave them $137 million dollars; they paid nothing in federal income tax.

And this was before Trump's tax cuts took effect.

This year?  They'll steal even more thanks to Trump and his "tax cut", sold to the people because, as he claimed, our taxes on corporations are too high.

Make sure you say thanks as all the stores and other retailers who actually do pay taxes are put out of business by a firm that the US Federal Government literally pays to screw retailers large and small.

PS: Yes, I know, you don't actually to file and pay until the 17th..... 

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Bodhi
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Not to mention the shipping subsidies they receive from the USPS. smiley
Mangymutt
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Obama paid a Chinese solar panel company to undercut the U.S. competition.

Wind turbines are a net loss for the rate payer and are very inefficient.

Amazon also would not exist if not for government theft.

How many more tax "loopholes" are being given to companies that would not/could not exist if not for the direct government theft?

The saddest part of this hole thing is something that has been point out several times on Market-Ticker and that is we (America) runs at a negative tax rate and that of course means the future generations and not only being forced to pay for our follies, they also get to pay the interest on this crap.

I wish we could lay all the blame at the feet of just one person, but the fact is the congress is in on it, governors of each state are in on it, so are state and local legislators as well as counties and cities.

And the general population eats it up. Why?

Because many of them are also in on it with earned income credits or some form of government hand out.


Mgpacher
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I have to admit that I don't even understand that.
Tickerguy
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@Mgpacher -- the way it works is that companies are allowed to write off the value of employee stock options as if they were cash.

Leaving aside whether they're vested and can be exercised (both of which is usually not the case at the time of issue) there's the fact that under no circumstance does this result in the ACTUAL expenditure of CASH from the firm. Options are issued against either authorized or treasury shares; in either case no actual expense not only has occurred it never will occur either.

The economic effect of issuing options as part of a compensation package is to transfer control of the firm in economic terms from existing shareholders (the public in the case of a public company) to the executives. However it in NO CASE results in the firm actually spending money, as is the case when the firm does other things that can be written off (such as investing in PPE, development, paying salaries, etc.)

It gets even more-ridiculous if the company buys back stock on the open market. That's an expense too (and thus can be written off) and if it does so for the purpose of using those shares to put into the treasury to issue to executives.....

So a firm that pays part or even all of its executive compensation in the form of options effectively gets paid by everyone in America to operate. By doing this the firm steals the foregone tax revenue on the written-off option value from everyone in the country and forcibly transfers that value to said executives.

Beelzebezos (and the others who are compensated with option packages there) literally shove a gun up the nose of everyone in the country and extract BILLIONS from you via this mechanism.

What should you do when you catch someone in the act of armed robbery again?

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Winding it down.

Bodhi
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Quote:
the way it works is that companies are allowed to write off the value of employee stock options as if they were cash.


So companies can just issue stock options out of thin air much like banks issue loans out of thin air. Sounds like legalized counterfeiting.
Tickerguy
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@Bodhi -- Well, not really, because the value of the firm is divided by the number of shares out. It's not legalized counterfeiting for that reason.

Nor is the transfer from the shareholders to the executives "forced", in that the shareholders have the ability to vote the board out, and the board has to pass the resolutions to allow this structure.

The tax theft only works for a public company by and large, however, and is relatively ineffective for those without "large" sponsorship in the corporate and market media. Small firms can try this sort of game but if closely-held it doesn't work either because the minority shareholders will sue, might win, and the legal costs defending (win or lose) will be ridiculous for a small company compared against operating cash flow, so you'd be out of your mind to try it as a small C corp.

It doesn't work AT ALL for a Sub-S or LLC because those are pass-throughs and thus there's no tax structure to exploit in this fashion.

This is one of the "**** you" deals that large corporations with substantial sponsorship in the corporate media -- and a large share count -- can abuse to essentially destroy smaller competitors, as there's no ****ing way that I could have pulled something like this at MCSNet and gotten away with it, even through we were a C Corp. I could (and did) bonus out funds based on performance which reduced the tax load on the firm but it just shifted who paid (some of) the tax and, provided the bonus was reasonable, it's a legal (employment) expense but since I had to pay taxes on the bonus as ordinary income in that same year it just changed which bank account the tax check was drawn on. Issuing stock into the treasury against which I could write options (and take those as pay) would have been an extraordinarily-dilutive thing to the other holders and they would have come after me immediately, the firm would have had to pay the legal bills to defend against that, we might have lost (which would have been ruinous if it happened) and that, never mind it being unethical, was plenty of motivation to not attempt it.

Employee stock options are not a taxable event until exercised. In other words while in theory the person they're issued to will eventually pay taxes on them that's by no means assured, and unless FORCED to be exercised that deferment can be nearly indefinite. I was issued options with a firm I worked for that went public; it later blew up and I had toilet paper as a result, but there was no tax implication to me since they were never exercised (and ultimately the firm was de-listed.)

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Winding it down.

Goforbroke
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Quote:
the shareholders have the ability to vote the board out

Like any shareholder is actually knowledgeable enough about the company that they actually vote (much less attend shareholder meetings), or if they just go along with the proxy vote.

The same goes for elected school board and jurisdiction/municipality officials ... how many residents are actually knowledgeable enough about their district's/jurisdiction's operations to vote out those who have been working against them?

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Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our Light, and not our Darkness, that most frightens us. -- Marianne Williamson
Jal
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All of that gives socialism a bad name.
Tickerguy
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It's kleptocracy and was put in the tax code by lobbyists for those very same corporations.

Every one of them and all the lawmakers involved should be eaten by feral hogs after having their genitals and anus slathered in peanut butter so the hogs direct their attention first to the correct part of the body.

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Winding it down.

Bodhi
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Quote:
you'd be out of your mind to try it as a small C corp.


The thought had crossed my mind of whether or not smaller corps could employ this strategy. Thanks for the explanation.
Mgpacher
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So, the company issued stock options in excess of the $5.4 billion in profits and thus actually showed a loss for the tax year. I still don't see how a company gets a tax refund for having a loss. Is this like some kind of earned income tax credit for businesses? Who wrote this thieving tax code?
Tickerguy
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The lobbyists, of course.

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Winding it down.
Weezie
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Hubby works for a certain large gaming corporation. He doesn't get options, but all out stock grants. When they're vested, some shares are immediately sold to cover taxes (treated as ordinary income), while the rest go into his brokerage account. His 'basis' on these shares is the opening price of the stock that day and later when we sell them or whatever, I do the taxes accordingly.

So basically, his company wrote off his grants as a full expense although their 'cost' of his grant was essentially zero (Treasury shares)?

Interesting.

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Goforbroke
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And if I as an individual have short term capital gains in Amazon, I could be taxed at a marginal rate of 39.6%

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Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our Light, and not our Darkness, that most frightens us. -- Marianne Williamson
Tickerguy
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Quote:
So basically, his company wrote off his grants as a full expense although their 'cost' of his grant was essentially zero (Treasury shares)?

Yep.

The "money" was effectively stolen from the shareholders; it cost the company nothing, but they get to write it off -- not the shareholders from which the money (value) was actually taken.

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Wa9jml
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I used to do my shareholderly duty, and go through the proxy statement carefully, and vote against the bankster thieves on the board, against the ridiculous compensation of the senior executives, and against their even more ridiculous golden parachutes and retirement packages. It never made any difference. Now I just shred the proxies.

Back in the greed-filled 1980s, I was working at a small high-tech company in western Marxachusetts. I was working 12-14 hour days 6 days a week, but only 8-10 on Sundays. I wanted to have a stake in the company, so I innocently asked the personnel director if I could have a stock option. She replied that they only gave those to essential personnel. So, when I said that in that case, all of us non-essential personnel should stop working so damn hard, I got a chewing out. I went back out there for a visit a year after I left in disgust, and was told by one of the senior vice presidents, that they had no idea how much work I was doing. They had to replace me with 3 people, and a vice president. If the company had not been so badly managed, they would have known how much work I was doing. Needless to say, the founders lost control of the firm, and it was swallowed up by a competitor.

Since most executives that have stock options just feed them back into the firm's share buybacks, the whole scam should be taxed heavily. But, of course that would never be the case. Most people simply do not understand corporate finance and tax law, so they keep getting screwed over.
Tickerguy
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Yep.

The basic principle involved is fairly foundational to accrual accounting, in that theoretically the treasury shares of a public company have the value of whatever the stock price is on a given day. Accrual accounting is predicated on the idea that even though you haven't reduced something to cash (yet) when the economic act occurs the value transfer, creation or destruction occurs too.

The problem is that these shares or options only have that "value" if they're sold into the open market in fact, because otherwise they're worthless paper. They don't circulate, nobody can trade them, and their value tomorrow is a complete unknown. Unlike a building, cash or inventory they're intangible.

It's a scam put into the tax code and then you wind up with various refundable credits that, if you can do enough of this **** the taxpayers actually PAY YOU to operate the company and take the money out for yourself. It only works for large public companies in certain circumstances, but if you want to know where America went wrong... well, a big part of it is right there.

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Winding it down.
Little_eddie
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and all this is part of why

I've been working on it very hard for the last few years, in 2017 our property, state & fed taxes worked out to 11% of income. Other taxes & fees bumped it up to 12% maybe 13% at tops.

No sales taxes.

My best year yet,

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Think of how stupid the average person is, and realize half of them are stupider than that. - George Carlin

Mickey
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Chic
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I do beleive that this is also part of the NON GAAP reporting fraud. FB and GOOG used to have huge differences between GAAP and NON GAAP and most of it was stock options "expensed" for taxes but not for reported eps.

at one point several years ago 50% of GOOG reported income was due to the non gaap difference.

it is too difficult to follow corporate accouting now, thanks to mark to fantasy for banks, etc. Govt acctg has similar problems: full and fair disclosure is an issue-can't pump up stock prices without some accting gimmicks , plus a little hlep from Fed and Treasury.

All those on stock options plan get a huge break from inflation , and a healthy tax cut--all that hard work lobbying paid off.

Feh.
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