
Increasingly, businesses don’t generate profits – they generate capital gains - deafcalculus
http://evonomics.com/amazon-accounting-corporate-profits-rich-peoples-income-invisible-bezos/
======
mrmcd
Unrealized capital gains aren't income because I can't pay my rent and buy
groceries with Amazon stock. Even if I could once I did it would be realized
same as if I sold it for cash, and I'd owe tax.

You could argue that capital gains rates are too low, but that's a different
argument than saying stock owners are getting "invisible income".

~~~
rileymat2
I was under the impression that loans can be secured by stock. Then you don't
pay the gains but get the money to spend on rent or whatever.

~~~
jgalt212
You are correct sir. I own $10,00 in stock. per reg T, I can borrow $5,000
against it. Now the stock goes on an Apple/Amazon like tear and it's worth
$1,000,000. Now I can borrow up to $500,000 against it--that's a lot of rent
groceries.

The above assumes you control the shares and they are pledgeable as
collateral. It is not easy, but doable, to borrow against RSU's. i.e. you
probably need a high net worth/private banker relationship.

~~~
charlesdm
I was under the impression that per reg T, you can borrow 100% of the equity
value of your stock. So if you own $10,000 worth of stock, you can borrow
$10,000 against it (but you will get margin called if there's a decline, so
don't do that).

You're right however, if you want to acquire more shares using margin, then
your equity needs to be at least 50% of the stock value, i.e. with $10k you
can purchase (up to) $20k worth of stock.

~~~
sokoloff
Shorthand: You can borrow 50%.

You can't put $10K into the account, buy $10K in shares, and borrow $10K in
cash (leaving 0 net equity in the account).

Your scenario where you can borrow 100% of the value applies only if you apply
that 100% to further shares (meaning you buy 2x as many shares and have a
margin balance of 100% of your original equity but 50% of the shares' value).

That means you can buy $20K worth of stock using $10K of cash.

~~~
charlesdm
Interesting. I don't usually use margin since I live in a country without
capital gains tax, but if I transfer $10k worth of shares and I want to use it
as a line of credit, then I can at most take out $5k (in cash) before getting
margin called?

~~~
sokoloff
Yes and no (mostly yes). The 50% level is the "initial margin" limit (hence
the "yes" part) for initiating a loan.

There is a separate, lower limit called the "maintenance margin" limit, which
is the equity percentage that you need to hold to avoid a margin call on a
held position.

So, if you deposit $10K in shares, they appreciate to $12K, you borrow $6K and
then the share price falls back to the original amount, you have $10K in
shares, $4K in net equity (40%), but are probably not going to receive a
margin call.

Or, if they are worth $10K, you borrow the limit of $5K and the share price
falls by 1%, you won't get a margin call there either (on most securities).

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mikekij
This article gets two big things wrong:

1) Amazon's lack of profits appears to be due to reinvestment back into the
business, not because the margins are non-existent. If the margins weren't
there, there would be no money to invest in R&D.

2) The author never comments on the issue of double taxing corporate profits.
Is it really the spirit of the tax code that $1 in profits earned by a
business should really yield $0.48 to the federal government? The best way to
address the author's concern is to put the effective corporate tax rate (35%
corp income + 20% dividend) more in line with capital gains rates.

~~~
Analemma_
Amazon's retail business is very low-margin. Most of the profit they do make
now is coming from AWS. Their valuation right now comes from investor
expectations that they will eventually run every other retailer out of
business and then change monopoly rent with much fatter margins, rather than
on the margins they have now.

~~~
neekburm
Interesting proposition. Anything I can read on this further?

------
dboreham
A principle well known to economists is that if you tax some activity, you are
going to see less of that activity. This applies to business profits. Heck
when I started my first business our newly engaged accountant told us
"whatever you do don't make a profit" (meaning pay any money mad to
employees/managers). Hardly a new or specific to Amazon concept.

~~~
tome
> "money mad to employees"

"mad"? What does that mean?

~~~
dublinben
It was likely a typo for "money made."

~~~
tome
Oh right, the accountant advised that all leftover money be paid to employees
or managers.

~~~
dboreham
Yes.

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toyg
I'm all for raising taxation, but I've always felt Amazon is often the wrong
target to pick on. They are a rare example of an old-school business in the
digital age - they pinch every penny and then reinvest all revenues in the
business itself or send them out as personal compensation. They don't stash
billions in Bermuda accounts, they don't give them to Wall Street players with
the right connections, they don't leverage their might to spike property
prices, and so on. Amazon is what every big business could be if people at the
top were a bit more concerned with actual efficiency and growth, and less with
pure greed.

But: in their actual business practices, Amazon often squeeze the little guy -
both their workers and their small-retail competitors - so they are easy to
hate. They clearly display all the problems with cyberspace (who should be
taxed where, when bits go up and down some fiber? Where is my data "in the
cloud"? Etc etc), so they are at the nexus of a number of critiques, and
rightly so. I personally don't think, though, that their overall
investment/growth strategy should be attacked, because it's actually _very
good_ from a social perspective.

~~~
refurb
What makes you think Amazon is doing everything in it's power to avoid paying
taxes just like every other multi-national?

[http://www.newsweek.com/2016/07/22/amazon-jeff-bezos-
taxes-4...](http://www.newsweek.com/2016/07/22/amazon-jeff-bezos-
taxes-479814.html)

~~~
toyg
The point is not tax minimization (which every company does), it's what you do
with the money thereafter. Amazon historically didn't hoard cash like, say,
Apple, preferring to put most of the money back in the business, which is what
I was talking about; however, looking at recent data, it seems like they've
started significant accumulation of cash in 2014, and they're now sitting on
$20bn+. I wonder what triggered this change.

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mgamache
Avoiding double taxation? Evil!

How about removing the corporate income tax?
[https://www.nytimes.com/2014/01/06/opinion/abolish-the-
corpo...](https://www.nytimes.com/2014/01/06/opinion/abolish-the-corporate-
income-tax.html)

~~~
ryandrake
I've never understood the whole "double taxation" complaint. Money is taxed
whenever it changes hands. Why is it that only the taxing of dividends is
considered "double taxation" [1]?

1: [http://www.thepatriotaxe.com/blog/wp-
content/uploads/dividen...](http://www.thepatriotaxe.com/blog/wp-
content/uploads/dividends.gif)

~~~
aracarie
Because companies can't deduct the dividend payment on their taxes. If $100 is
paid in dividends then both the individual and the company pay income taxes on
that same $100.

~~~
BearGoesChirp
If I use $100 to pay for groceries, I had to pay income tax, sales tax, then
the company has to pay any profits on it, and then when the employee gets paid
they have to pay income tax on their part.

Perhaps the issue is we tax money way too much as it flows through our
economy.

------
EADGBE
"Simple: don’t show any profits" is a concept that's been used forever to
avoid paying taxes from the local handyman all the way to Amazon.

It isn't evil, but just try and convince some people that.

Especially that handyman, who's trying to avoid those estimated payments in a
slow business part of the year.

~~~
tclancy
If you ignore scale, sure. A handyman pocketing $100 in cash here and there is
a good deal different from a company whose whims could affect the trajectory
of the economy.

~~~
conanbatt
It's not the act that is evil, is the person doing it, am i rite. We must take
the veil off Lady Justice.

Please. Corporate taxes make no sense as they are, companies don't pay taxes,
people pay taxes. And corporate taxes more often than not fall on the
consumer.

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taxicabjesus
Almost six years ago, before I took to taxi driving, I spent almost two months
as a "seasonal associate" at an Amazon warehouse in Phoenix. It was such a
relief to get laid off... In the warehouses, people are servants to the
machine, and are entirely replaceable.

"Humanity's Second-Best Hope" was based on my experiences at Amazon:
[http://www.taxiwars.org/p/humanitys-second-best-
hope.html](http://www.taxiwars.org/p/humanitys-second-best-hope.html)

~~~
EADGBE
Seasonal. Warehouse. Job.

This experience sounds like a typical warehouse job. I'll ignore the outdated
political symbolism.

------
lazyjones
Amazon's net profits increased to $1.17b in 2016 and are likely to stay
healthy. So the article is already a bit obsolete. It's not like it isn't onto
something, but the ingenious scheme used by evil megacorporations isn't just
not posting a profit, but moving that profit to some tax haven to avoid
taxation.

~~~
wonder_bread
This seemed to be the case but after the recent earnings report Bezos & Co.
hinted that they are likely to go back to losing money now.

[https://techcrunch.com/2017/07/27/it-looks-like-amazon-
would...](https://techcrunch.com/2017/07/27/it-looks-like-amazon-would-be-
losing-a-lot-of-money-if-not-for-aws/)

------
anovikov
Am i the only one so cynical that i don't see how is this a problem for
anyone?

------
toddh
Of course their unrealized gains are not included in income... that's not what
income is.

The online reason this works is because the tax code specifically preferences
investment & the gains thereon vs interest & wages/Self Employment income.

Wouldn't that be an interesting discussion to see as part of tax reform...not
holding my breath.

------
carsongross
We get more of what we tax less?

Weird.

