A canard that gets abused often in discussions about the tax code is the notion that it somehow unfairly advantage corporations at the expense of workers. Many cite lower effective tax rates for corporations as proof that businesses are skating on their public finance obligations. This ignores some fundamental differences between personal income taxes and corporate taxes, as well as the fact that companies pay levies at the state and local level and shoulder heavy payroll liabilities for large workforces.
It bears repeating that what makes corporations’ effective tax rate lower than its statutory income tax rate isn’t due to widespread abuse or tax gamesmanship, but rather it’s due to companies investing in their workers and their facilities here in the U.S. These tax features are intended to correct for other inadequacies that reduce investment, limit capital and prevent the efficient allocation of profits.
Measures intended to induce capital investment and hold companies harmless in years of loss can all reduce taxable income, below the income reported on financial statements. Companies in all industries get these benefits, but one feature that is particularly prevalent amongst tech firms is the granting of shares of stock as part of an employee’s compensation.
For employees of companies that are some of the most valuable in the world, this can be a very attractive perk. Many of these companies famously pay below-market salaries and instead provide generous stock grants, tying the employee’s total salary to the company’s overall performance. Employees and the company, therefore, have the same incentives: improved performance.
Stock-based compensation actually has its genesis in the 1990s, when Congressional Democrats and President Bill Clinton were looking for ways to rein in executive pay. They did so by prohibiting salaries in excess of $1 million from being deducted from a company’s federal tax liability, exempting compensation in the form of stock.
Companies account for the cost of the shares when they’re granted, but stock-based compensation is elastic: in years of strong corporate performance, the value of the stock rises. So too then does the value of the deduction businesses can take for that compensation that was already provided. In the case of Amazon, their share price has increased 400 percent in five year, the value of their stock-based compensation has too.
This has the effect of reducing a company’s taxable income by larger amounts in years in which it is more profitable. This isn’t an accounting trick, it’s simply ensuring that companies and their employees aren’t taxed too much.
Investing in workers and domestic locations benefits the economy and it benefits shareholders. When a corporation does well, the effects of those higher profits are distributed to its rank and file workers, through better stock performance and higher wages. The effect is wealth accumulation for workers, the means of which were thought to only apply to executives less than 30 years ago. Today’s political narrative often seeks to pit workers against corporations. The advent of stock-based compensation illustrates one way that benefits for workers and companies are closely aligned.