Comment by altairprime
6 months ago
It makes sense when you consider that there is no minimum tax rate on businesses.
Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes. Section 174 was implemented without a minimum tax on corporate profits before voluntary deductions such as research. Therefore, it’s exploitable and all companies ought to hire and fire staff to ensure their profits show as 0%.
This tax code defect is now closed by accident, but could have been done much more intelligently than it was. Oh well.
(EDIT: My first sentence is potentially confusing when I reread it later. To restate: section 174 was defective as implemented due to the uncapped 100% deduction, but the concept of a significant research exemption is still excellent. Just need to close the effective 0% corporate tax rate loophole.)
The company already pays payroll taxes on those salaries, and the employees pay income taxes. And the people hurt by this aren't the shareholders or top executives, it's the rank and file workers getting laid off, losing benefits, and being asked to work more for the same pay.
What this change effectively did was make software developers significantly more expensive, without increasing the amount those developers get paid.
The company does not pay payroll taxes. Individuals pay those taxes.
It doesn't actually matter that much who actually writes the check to the government (although in the US, both parties pay taxes).
Either way, the total cost of employment is higher for the employer than the after-tax income of the employee.
3 replies →
It’s split but the company pays more. Both pay SS and Medicare. Company also pays unemployment.
Software developers are already too expensive in US, so this applies some downward pressure on those salaries. Frankly the economy will be much better off when tech salaries equalize across geos, thus avoiding the deep whole US manufacturing is in (for example, manufacturing wages in Vietname are one tenth of US manufacturing wages, and thus it is better to open new plants there).
If you want equalized poverty, feel free to move to the EU. Say goodbye to owning a nice house, or building any kind of wealth - that's reserved for the old money class.
In the US, software is one of the few remaining ways to achieve the American dream. I came to this country to work hard and earn money.
5 replies →
Yeah, make everybody equally poor. That'll solve things.
2 replies →
[flagged]
Don’t forget the other stakeholder - the general public.
Yes it sucks for developers, but does it make any difference for any other employee? Why does Joe’s plumbing have to pay those taxes, but Jane’s AdTech company doesn’t?
Sure, there are benefits to investing in R&D in general, and tech has fueled a lot of growth, so incentivizing it has likely paid off for the whole economy. But will that forever be true? Maybe?
If Joe's plumbing hires an assistant plumber, they get to fully deduct the assistant's salary.
Why do I, the hardworking tax payer, have to subsidize Joe Plumber, who already has a big house with a pool?
3 replies →
Joe's plumbing doesn't have to pay those taxes. Operational costs, including paying employees for normal operations, is deductable.
But with the change, the cost of R&D employees is now only partially deductible (right now, you can eventually deduct the full amount over the course of several years), and software development has to be considered R&D.
> Given the choice, Amazon would rather spend 100% of its profits on itself
And why is this bad, exactly? Money will be spent and will go back into the economy. Amazon will have to use the funds to build new offices, datacenters, do research, whatever.
And even if execs give themselves $10^11 USD in bonuses, they will be taxed as personal income, at even higher rates than corporate income.
It is complex - is it better for the money to go back into the economy by paying high salaries to a specific group of highly-educated people? Or is it better for the money to go back into the economy through taxes, then disbursing the benefits to lower-income benefit programs?
I’m not sure what the answer is. The former is likely to drive some innovation, which I’m sure varies by company. Where the latter could also unlock innovation by giving the bottom-quartile of earners a chance to improve their situation.
Those salaries are also taxed, and at the highest tax brackets. The government may end up getting more revenue that way.
The answer is simple: it's the biggest growth generator in USA.
Growth has its own problems of course (I don't want to estimate the health impact of Coca Cola), but it's a prerequisite of a country not falling behind others.
It can do both, by eliminating corporate taxes.
2 replies →
> It is complex - is it better for the money to go back into the economy by paying high salaries to a specific group of highly-educated people?
Yes. Also, the salary will not go _only_ to highly-educated people. For example, if Amazon decides to build a new distribution center, it will employ blue-collar workers to build it, not software engineers.
> Or is it better for the money to go back into the economy through taxes, then disbursing the benefits to lower-income benefit programs?
No.
> I’m not sure what the answer is.
The answer is pretty clear: invest money into the private sector, rather than divert it into the Federal budget. Private actors are more efficient at allocating funds than the government.
I'm not against social spending, it's a necessary evil for any real state. Pure libertarianism leads to dystopian outcomes. But it should be understood that it's a very real artificial inefficiency that is imposed on the economy.
There are also situations where additional social spending is necessary, but they are VERY easy to detect: when your interest rate is near zero.
11 replies →
Mostly, Amazon will do stock buybacks, so that its investor can invest into other top stocks.
Funds for the stock buybacks are not R&D, they'll be taxed.
> Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes.
"on itself"???
You mean it would rather spend its profits on hiring more developers than sit on it? That sounds great, doesn't it?
That isn't a loophole. It is working exactly as was intended. Reinvesting is good.
The deal is that you can delay taxes by reinvesting (and either make the government more money at the end or lose it all if you were a fool, but you gain nothing by losing it all) but you cannot skip them when it comes to taking the profit out. The entire point of it was to promote investment into businesses which has kind of been a crucial factor in international competitiveness since the Industrial Revolution. Remember the fall of US Steel? That happened because they didn't reinvest.
after 5 years then every year is deducting a whole year's worth of R&D - as long as that investment is not too lumpy from year to year you are back where you started
Which is fine for steady companies, but perpetually drags down any rapidly growing company
exactly. so this policy which was ostensibly about closing a loophole used by big tech is actually a benefit to big tech because it keeps disruptive new competitors from arising. regulatory capture strikes again.
In this theory you should tax revenue and not profit. Welcome to VAT.