Here’s an article that’s sure to start a debate:
Microsoft and Cisco paid NO federal income taxes
Opinions anyone?
Okay, let’s see.
Cisco and Microsoft paid out huge amounts to their employees in stock options. Stock options being tax-deductable, Cisco and MS gave out enough stock options to deduct the entirety of their taxes.
Why is this a big deal?
This isn’t greedy money-grubbing Cisco rolling around in the money they stole from the government; Cisco just decided to give the money to its employees (and, as the article notes, actually hurt its regular share-holders) instead of the government. Either way, Cisco is out the money.
Had Cisco given the money to a charity and claimed a tax deduction for that, would it be seen as greedy, wrong, or out-and-out evil?
Actually, at least in MS’ case, I was under the impression that the stock options are exercised by MS printing new stock certificates. Those new stocks are sold on the market, and the employee gets the proceeds. AFAIK, MS has share dilution, but no charge for the exercises.
Well, if the public is stupid enough to keep buying Microsoft stock…
So, while the employer paid less in taxes, the employees who got the stock paid more in income tax and did not complain. In the end the taxes were pais anyway.
It seems when a big corporation does something perfectly legal to minimize their tax liability that is somehow wrong but when Southernstyle does something perfectly legal to minimize their tax liability then that is the only right thing to do.
sailor - it did not sound to me like Southern was complaining. (I could be wrong, SouthernStyle please let me know).
BTW, Big Corps and Small Corps do a lot worse than this to avoid tax liability. This particular example actually is a bad one, since tax was (or will be paid) by the employees (who still receive a great benefit). In other examples, corps will move their plants/offices causing much strife in people’s lives (thank’s to our over-complicated tax system); deduct big fancy trips for officers and employees, give employees ‘benefits’ instead of income (saving taxes for both corp and employee), etc. The list is very long, and I’m sure any tax accountant can fill in more for us.
This options thing is really no big deal at all.
Oops, I did not mean to single him out. I just meant “an individual person” as opposed to a big corporation. Sorry if it came out wrong.
You know, none of this would even be an issue if we replaced the income tax with a national sales tax.
Or got rid of the corporate income tax.
(No, I am not kidding)
Tracer: it simply can’t be done. The rate would have be at least 20%, more like 28%, and then you would have to add on state sales tax, so in some areas there would be maybe a 35% sales tax. Compliance problems would be incredible. No major country has done this. Now, we could reduce the FIT by haveing a FST, but it would be terribly regressive. The only fair way would be to increase the standard deduction/etc so that the under 50K a year folks would have no income tax, and only a small amount until the AGI got over 100K- ie the FIT would go back to what it started to be- a tax on the “wealthy”, with the wage earners paying their taxes thru sales taxes. We could have about a 10% FST, then, about right. Of course, that would not get rid of FICA, etc.
tretiak: or get rid of all the corporate welfare so that big corps pay the almost 1/2 of the income tax burden they used to pay, and all us wage earners would get a cut of almost 40%. Gee, I like that better.
Lemme get this straight… twenty years ago (give or take), someone was a genius if they bought MS stock. Now, they’re stupid if they buy it?
Huh… what a silly thing a couple decades can be…
Of course this is a problem. The amount of tax being paid by the individuals will be less than what would have been paid in corporate taxes. This is pretty obvious: if it were not so the employees would not accept the stock options as a substitute for wages.
The way this tax avoidance scheme works is as follows: the company can get an immediate deduction for the options. The employee can defer the tax liability on any capital gain they make. Compared to other forms of income, capital gains are concessionally taxed.
This means industries which use this scheme and workers in these industries are paying lower taxes than other industries, for no obvious efficiency reason and no equity reason.
Now tracer’s comment that
Irrelevant. The allegation here is that the companies are avoiding most of the tax on capital income (ie tax that would otherwise be borne by the shareholders). Replacing income tax with an indirect consumption tax would “solve” this problem by entirely exempting that capital income from tax.
As for tretiak’s
This wouldn’t solve the problem either, but it does reveal an important point: what counts is the tax burden borne by the shareholders and workers. You could achieve similar results by having no corporate taxes and taxing capital income (in the form of dividends, interest payments and accrued capital gains) in the hands of owners. The root of the problem here is the inconsistency of treatment of different forms of income in the asymmetric way deductions for options and income from options are counted. The result is distorting and inequitable as well as costly in terms of revenue.
picmr
There is no beter way to ruin an economy like a 35% sales tax.
“The employee can defer the tax liability on any capital gain they make.”
As a tax practitioner, please tell me how you do this, my clients would be very interested in this.
Capital gains tax is lower than high level corporate income tax rates. The tax policy encourages the corporation to pay the money (through tax incentives) to the employees. Remember, every tax ‘break’ was established with a social purpose behind it. Perhaps one day Congress will decide that the purpose originally intended is not worth doing anymore and will repeal what is often referred to as a loophole. They aren’t loopholes, they are strategically planned exceptions to the tax code to encourage a particular activity.
The corporation has no control, beyond the usual three year holding period, over when the employees exercise their stock options. If the stock is doing really well, it is the employees who made it that way who can benefit by exercising their options. The tax policy makes alot of sense, it provides corporations with an incentive to reward employees for making a company work.
Does it cost the corporation anything? Absolutely.
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The current stockholders forgo dividends when these stock options are exercised.
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The stock available through options is already computed in ‘fully diluted’ status in financial reports and SAR reports. This stock could be sold directly to the open market if there were no ESOP … there is no tax consequence on equity investment.
Regarding a repeal of corporate income taxes and the placement of a federal sales tax. Our system of taxation is intentional in those it levies against. At face value, a federal sales tax would underburden the rich and overburden the poor. Perhaps a federal property tax would be a more feasable alternative. However, I think you will find that the Federal Government enjoys the current system because it offers them some influence over how the country spends or saves its money.
Suppose the value of your asset has increased - ie you have an accrued capital gain. Suppose the tax you will have to pay on this capital gain is $100. Defer realisation of this gain (not risk-free, but the risk can be managed with appropriate portfolio behaviour). If you sell it a year later you effectively have enjoyed an interest free loan equal to the amount of your tax liability. Hold an asset which systematically yields capital gains (such as shares in companies that routinely reatin earnings) for a while, and it’s pretty profitable. Simple way to understand this: would you rather pay a bill for $100m now or in 5 years? You make this work by realising your capital losses and bringing forward your deductions whilst deferring realisation of your capital gains. Result - even more concessional treatment of capital gains.
As for:
Oh please. Maybe some were introduced to encourage particular activities (although this is a bad way of doing it), but they have been exploited past the original intent by a sophisticated financial sector. Most have always been disguised and indefensible handouts to politically favoured groups.
picmr
Umm, yeah! Twenty years ago, a share of microsoft cost like five cents![sup]*[/sup] Oh wait, were they even public then? Whatever. Now that the price has gone up by 18 kajillion percent in the last 15 years, why would you buy it? It’s like going to the car dealer and listening as they say “This model was $15 yesterday, but today it’s $35987 - you better buy now!” Would you buy it? Wouldn’t buying it yesterday have been smarter? What a silly thing a day can be…
*[sub]Price adjusted for splits not actually researched by poster. Your mileage and intelligence may vary. Not responsible for accidents caused by attempted use of time travel to buy MSFT.[/sub]
These options, per the article in the OP, were already exercised which was the whole reason for the tax write off. If they weren’t exercised, there would be no effect on the tax return of the corporation and no post here at all. I was really hoping for a new secret!
"As for:
quote:
They aren’t loopholes, they are strategically planned
exceptions to the tax code to encourage a particular activity.
Oh please. Maybe some were introduced to encourage particular activities (although this is a bad way of doing it), but they have been exploited past the original intent by a sophisticated financial sector. Most have always been disguised and indefensible handouts to politically favoured groups."
I don’t disagree. The exceptions are always and will always be exploited. Many exceptions exist because of special interests and lobbying groups. You don’t have to be a sophisticated financial sector to find them and use them. But if they are over-abused, then I agree, they should be repealed.
I asked our VP about our tax rate a while back. It was just under 37% if I recall correctly. I am not really sure what “corporate welfare” is, but I would love to know.
>> I am not really sure what “corporate welfare” is, but I would love to know.
I’m sorry I can’t help you but I am sure picmr will be very happy to enlighten you 
Well, “corporate welfare” is a term usually employed by libertarians and I’m not one, but I think I can give you an idea of what sort of things they mean by it. The term is in my view a little loaded, since it seems to suggest that these sort of things apply only to corporations - which is not only untrue but irrelevant, since it is the owners and/or employees of companies who end up with the benefits - and that what people normally think of as welfare programmes are the same sort of thing, which is something with which many might disgree.
The idea is that a lot of government programmes are about taking from one group in society and giving to others, frequently in a wasteful manner and with little or no regard to any equity criterion. Obviously libertarians would generally oppose any redistribution, others might favour some pro-equality redistribution. It is also the case that government programmes to assist a particular industry may have some purpose. There are arguments for example that the research market would, if left to its own devices, provide inadequate amounts of research because firms cannot capture all the benefits associated with their research expenditures. In general whenever some costs or benefits fail to be accounted for in market particpants’ behaviour (“externalities”), there is a prima facie case for corrective taxes or subsidies.
Let’s suppose that for one reason or another, the government of the day wants to enrich the people involved with the wine industry. One way you could do this is to take a big bag of cash collected from ordinary taxpayers and give it to those people in the full glare of the TV cameras. Clearly this sort of thing tends to be unpopular, so if you were going to do it, you’d be more subtle. You could use spending or tax policies to do it.
Spending policies
The government could subsidise various things. It could pay to build an irrigation system in wine-growing areas. It could subsidise water use. It could provide free technical or marketing advice. After a while when the irrigation causes some salinity problems it could introduce an environmental programme to clean up the damage to the land.
Tax policies
The government could allow special deductions for wine-growers, or give excessive allowances for depreciation. In Australia you can get a deduction for depreciation of vines despite the fact that over many decades vines increase in value rather than depreciate. The goverment could reduce land taxes. It could allow firms to transform fully-taxed dividends into concessionally-taxed capital gains by excessive deductions for debt and manipulation of payout policy. It could tax wine less heavily than other alcoholic drinks.
Other policies
By introducing a tariff or other trade barrier, the government could raise the price of foreign wine and make the domestic industry more profitable. After a while it could get rid of the tariffs and establish an industry adjustment fund to help the industry cope with competitive pressures.
All of these policies involve a redistribution of wealth from ordinary tax payers - both as wage and salary earners and as owners of businesses in other industries - to this industry. What’s more worrying is that industries in the face of a government that selectively intervenes in this way have an incentive to focus less on ways to reduce costs and sell more products and more on ways to get bigger and more cunningly hidden handouts.
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Quick reply to JustAnotherGuy who said:
The exercise of the options is a real cost to the company, but the point is that their employees will be paying less tax on their overall remuneration since they can realise their capital gains later and they are taxed at a lower rate than other income. Effectively the labour input is subsidised. No doubt most of what they do in the tax area is to rapidly expense new investment and deduct debt payments whilst retaining lots of earnings to generate deferral/ timing advantages - these are after all high growth companies.
picmr