
How Accounting Makes Corporate Profits – And Rich People’s Income – Invisible - econwoman
http://evonomics.com/accounting-smoke-mirrors-makes-corporate-profits-rich-peoples-income-invisible/
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massysett
Headline is completely inaccurate. This piece says nothing about "accounting".
All it seems to say is that Bezos is rich due to capital gains and then claims
(with absolutely no evidence) that Bezos' motivation is reducing his taxes
and, therefore, he is doing something (piece does not say what) to transform
taxable profit to untaxable capital gains.

Piece also seems to equate being a big business with having a big market cap,
which makes no sense as plenty of big corps with big revenues have small
market caps.

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jaxn
This is not bullshit as other comments are saying.

"Profit" in this sense is a means of personal cash flow. Once the shareholders
(including the founders) have their personal cash flow needs taken care of,
the focus shifts to long-term value creation.

Part of that is reducing tax expense.

~~~
hackits
Profit is derived from subtracting expenses from your revenue. Wage for
businesses is a expense, and so is accusation cost of assets. I would assume
Net Profit is taking into account all liabilities/assets/expenses/revenue for
all departments.

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jaxn
Assets are amortized and not a part of the net profit calculation.

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hackits
Thanks jaxn, I don't do accounting thats why I said `assume`.

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jaxn
There are two primary documents that make up a businesses financial
statements. The P&L and the Balance Sheet.

The P&L is the profit and loss. It is where the terms "top line" and "bottom
line" come from. The top line is total revenue. The bottom line is net profit.

The balance sheet shows the assets and liabilities.

Basically, the P&L is how a company performed for a period of time (month,
quarter, year, etc) and the balance sheet is what the company is worth at a
specific point in time.

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hackits
Jaxn, just curious what books would you recommend to read to get into
accounting? Because of hacknews i've been introduced into double entry book
keeping using ledger (that I found really really useful). Kind of want to
expand on the knowledge base (Not with ledger).

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jaxn
Unfortunately I have no idea. I just hard to learn it from doing my own books.
It is something that was very opaque until all of the sudden it clicked. Kinda
like learning object oriented programming for the first time.

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wheelerwj
This isn't accurate. These companies do make billions and billions in profit.
And they do pay taxes. They shelter a lot of hose profits in licensing deals
off shore though. so the effect is the same.

And yes, the stated goal of a for profit corporation is to increase value for
the share holders, so there's that too.

But these aren't accounting problems. They are issues with regulations and
shitty personal values/moral codes.

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econwoman
Regulations are based on how we can account for profits, net revenue, capital
gains. These companies don't record profit (an accounting term). They record
net revenue to avoid income tax. See the chart in the essay.

What stated goal? Reference? Increase shareholder value is not legal
requirement. see [http://www.nakedcapitalism.com/2017/02/why-the-maximize-
shar...](http://www.nakedcapitalism.com/2017/02/why-the-maximize-shareholder-
value-theory-is-bogus.html)

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phkahler
>> If they pass the stock on to their heirs, those gains are never taxed at
all.

Is this true? If one inherits stock, does the "purchase price" of that stock
get reset to the price at the time of inheritance? Is that how it works or
something different?

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zaroth
It's simplifying things a bit but basically the first $5.5/$11 million in
total assets are Federal tax free. They are valued and taxed based on current
market value and therefore the basis is stepped up to current market value at
that time.

After the lifetime exclusion of $5.5/$11 (single vs married) million then any
further inheritance is taxed around 40%.

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jaxn
But, if the inheritance had at one point been income for the deceased, it
would have been taxed at the time they earned it and (again) at the time it
transferred to their heirs (after the cap).

The opponents of the inheritance tax state that they were taxed when they
earned it, so it shouldn't be taxed again at the transfer to their heirs. With
stock, it is only taxed at the transfer.

You could argue that the person holding the stock never received benefit since
it was illiquid, but it can still be leveraged.

Which is the other piece to this. The stock holder is able to leverage the
asset to create cash that has an interest rate significantly lower than the
tax rate. As long as the loaned capital also results in a return, the stock
holder is able to "grow their pile" essentially tax free.

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AnthonyMouse
Inheritance is a mess.

An inheritance tax is a catastrophe for family businesses because you aren't
inheriting money, you're inheriting the business. It isn't a liquid asset.
Families end up forced to sell the farm to pay the inheritance tax on it.

The natural thing to do would be to not have inheritance tax but leave the tax
basis where it is. But then suppose grandpa bought shares of GM before the war
and never sold them. Now they're worth a million dollars, but if you sold them
the government would immediately take ~40% of the money. Which means you're
stuck with a choice between keeping $1 of GM shares or selling them at $.60 on
the dollar so you can buy Tesla shares or a Tesla or anything else whatsoever.
Tax policy is forcing people into making otherwise economically irrational
decisions, which is bad for the economy.

So to prevent that from happening, when you inherit grandpa's shares you get a
new tax basis. But then people start complaining about rich people not paying
taxes and bring back the inheritance tax. And then rich families with family
businesses quietly get an inheritance tax holiday passed every generation or
so that lets them keep the family business in the family, or otherwise do tax
planning to prevent it from having any effect.

The solution to this mess is to realize that rich people never actually pay
taxes until they spend the money anyway and we're better off with a VAT that
doesn't have any of this trouble, combined with a UBI to make it progressive.

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jaxn
The threshold for inheritance taxes in the US is so high that very few family
businesses are impacted.

A small fraction of family-owned businesses are worth more than $5 million.
That family-farm comment sounds more like an out-dated PR talking point than a
legitimate concern in 2017.

~~~
AnthonyMouse
This is what farms, or many family businesses in general, look like.

A light truck or small tractor is five figures. A larger truck or tractor can
be a quarter of a million. A combine harvester is half a million. Livestock
would add six figures. The land itself will typically be worth seven figures.
Add these together, more than one of some, plus sprayers and irrigation
systems and various other pieces of farm equipment each in the five to six
figure range, farmhouse, feed and crop storage and other structures, you can
easily exceed five million dollars. Many businesses are very capital-
intensive.

And a farm is just an example. A family construction business is going to own
the same sort of expensive industrial equipment. A family that owns and
operates residential apartments could exceed that amount with _one building_
in many cities.

The only reason very few family businesses are impacted is that the ones who
failed to engage in tax planning to avoid it were dismantled by the tax a
generation or more ago and the remaining families do the tax planning. But
what's the point of specifically screwing over the families without the civic
disloyalty to rearrange their affairs that way?

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jaxn
I started a family-owned retail business with my father and have been growing
it for 13 years. I get it.

The farm example is trotted out all the time because it is an emotional
example. But it isn't really a meaningful one.

The 2016 estimates from the USDA states that 98.3% of family farms would not
need to file a estate-tax return at all. Of the 1.7% that do need to file a
return, the vast majority of those would owe no taxes.

Only 0.4% of family farms will owe any estate tax for 2016.

It only affects a very small percentage of family farms. And yet it is the go-
to example of how the estate tax isn't fair.

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AnthonyMouse
> Only 0.4% of family farms will owe any estate tax for 2016.

The estate tax comes due when someone dies. Most people don't die in a given
year.

And those numbers are artificially low on top of that because many of the
affected families only don't owe estate tax because they did estate tax
planning.

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gscott
Another great way to not have profits is if you have a SaaS service is to give
it away to non-profits (or start your own non-profit to give it away) and get
the benfit from the tax deduction. It costs you about nothing for a few
database entries.

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zrm
Then isn't the "nothing" it cost you the extent of what you can take as a tax
deduction?

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blazespin
Better title: "How a clever business strategy helped Amazon succeed."

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cperciva
This is utter nonsense. Companies can also opt to pay zero income tax if they
reduce their taxable incomes to zero by donating all of their profits to
charities. The only difference is that the charity Amazon supports is called
"consumers".

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foxylad
"Utter nonsense" is a bit harsh. I think the (poorly articulated) issue behind
this article is that some companies (and some rich people) have arranged their
affairs to reduce the tax they pay. This increases the burden on other
taxpayers, and those people feel this is unfair.

I see society as a resource that my company exploits to generate revenue -
most companies would fail miserably if we didn't have education, the rule of
law, roads and national security to provide a stable market for our goods and
services. So we celebrate paying our taxes, because we're helping the thing
that makes us money. So why doesn't Amazon and it's ilk?

OK, Amazon is huge enough that your argument that society in general benefits
as much from their zero-profit policy as it does from the taxes is tenable.
But Amazon deciding how it will best benefit society is exactly like a
billionaire arguing that only she should say where her tax goes. That just
doesn't work - relying on philanthropy alone would give us awesome animal
sanctuaries, with raw sewerage and mentally ill people running down the street
outside.

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AnthonyMouse
> So we celebrate paying our taxes, because we're helping the thing that makes
> us money. So why doesn't Amazon and it's ilk?

Because they have competitors who don't and it isn't reasonable to compete
with them on uneven terms.

The problem isn't corporations paying no taxes by following the law, the
problem is that the law allows them to pay no taxes.

The shell game is very simple in principle. Microsoft Offshore owns the
copyright to Office. When Microsoft US sells a copy of Office, they collect
money from the customer and then pay Microsoft Offshore almost that much for
the right to sell it, so Microsoft US makes no profit.

The solution is equally simple. Replace corporate income tax with VAT. Then
when Microsoft US sells a copy of Office, they pay VAT on the full purchase
price and can deduct any US VAT already paid. Since Microsoft Offshore doesn't
pay US VAT there is nothing to deduct and they have to pay their taxes.

Though Amazon in particular is actually a different case -- they don't pay
taxes because they spend all their revenue expanding their business. They're
not diverting profits offshore, they legitimately don't have any. This is
completely unproblematic and meritorious, because as long as it continues
they're creating jobs and growing the economy, and the instant they stop and
actually turn a profit they owe taxes.

