How Amazon’s Accounting Makes Rich People’s Income Invisible

Increasingly, businesses don’t generate profits. They generate capital gains. It’s fiendishly clever.

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By Steve Roth

Image you’re Jeff Bezos, circa 1998. You’re building a company (Amazon) that stands to make you and your compatriots vastly rich.

But looking forward, you see a problem: if your company makes profits, it will have to pay taxes on them. (At least nominally, in theory, 35%!) Then you and your investors will have to pay taxes on them again when they’re distributed to you as dividends. (Though yes, at a far lower 20% rate than what high earners pay on earned income.) Add those two up over many years, and you’re talking tens, hundreds of billions of dollars in taxes.

You’re a very smart guy. How are you going to avoid that?

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Simple: don’t show any profits (or, hence, distribute them as dividends). Consistently set prices so you constantly break even. This has at least three effects:

1. You undercut all your competitors’ prices, driving them out of business. Nobody who’s trying to make a profit can possibly compete.

2. You control more and more market share.

3. You build a bigger and bigger business.

Number 3 is how you monetize this, personally. The value of the company (its share price/market cap) rises steadily. Obviously, a business with $136 billion in revenues (2016) is going to be worth more than one with $10 or $50 billion in revenues — even if it never shows a “profit.” You take your profits in capital gains.

Because stock-market investors are always going to be thinking: “They could always turn the dial from market share to profits. Just raise prices a skootch, and reap the harvest. In spades.”

But: they never do. It’s like a perpetual-motion machine, or holding yourself up by your own bootstraps. All that rising valuation is eternally based on the fact that they could raise prices and deliver profit (and yes: they could). In the meantime the business both generates and has massive value. It employs 270,ooo people, delivers zillions in employee compensation, pays zillions more to suppliers, receives hundreds of billions in revenues, and dominates whole segments of multiple industries. Are there really no “profits”? Nobody’s being irrational here.

Here are the results of your long-term plan:



Half a trillion dollars in revenues.

Essentially zero profits. Ever.

Dollars delivered onto investors’ balance sheets? Somewhere north of 300 billion.

And instead of being double-taxed on profits for all that time, investors’ income is taxed once, at the low 20% capital gains rate. And that, only when those gains are “realized” through sale of the stock. In the meantime it’s all tax-deferred — yet another huge effective-tax-rate win for shareholders. The longer they hold, the bigger the win. If they pass the stock on to their heirs, those gains are never taxed at all.

And just to mention in passing, none of that shareholder income ever appears as household income in the national accounts. It might as well not exist.

You gotta be impressed. That Jeff Bezos is a very smart guy.

2017 February 19

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  • Adrian Crescitelli

    Very telling infographic. There is a currently 40% inheritance tax over the 5.49 million per spouse, so that’s something. Of course a lot skips generations right to the grandkids. But there are a lot of other taxes paid and much economic activity created along the way. Warren Buffet has been vocal about this ridiculous gaping loophole.

  • Andy White

    We hire our brightest mathematical minds to juggle imaginary ones and zeroes to magically generate profits, which are then hidden from the tax man, the woman in the main street where the shops are being replaced by coffee shops which serve over priced beverages to the chattering classes which benefit from those avoided taxes whilst they talk about the “I want to live for free masses” who can’t find legitimate work that pays a living salary…..

    Welcome to the “free market” where the elite are free to cheat the system for their own benefit.

  • George McKee

    It’s a nice theory – too bad it’s wrong. Amazon is a retailer, and retail busineses notoriously generate enormous cash flows but very little profit. Further, Amazon, like every other public company, has no control over its stock price once the shares are released via an IPO. When an investor buys a share any other time, those shares nearly always come from some other investor who has decided to sell, and Amazon has no say in the matter. The only way that Amazon can directly increase its share price is by a stock buyback program, where they buy their own shares on the open market. Amazon’s buyback program in 2017 amounts to $6 billion – less than 1.5% of their market cap of $408 billion. Even counting this capital gain as profit, that’s nothing to write home about. James Brumley at Investorplace has details:

    According to the Efficient Market Hypothesis, which Evonomics writers disparage, investors are betting that sometime in the distant future, Amazon will achieve monopoly status, begin to rake in the really big bucks by artificially inflating prices, and have no choice but to release big dividends. A more Evonomics-friendly theory is that investors have mistaken top-line revenue for bottom-line profits, and are betting their future returns on an event that will never arrive. There’s a name for this kind of investment when the business managers know what’s going on – “Ponzi scheme”, and another name when management is as clueless as the investors – “bubble”. But it will be a fun ride while it lasts, and Jeff Bezos is crying all the way to the bank.

    Besides, we may get reusable rocket ships from Blue Origin as a side effect.

    • ryhisner

      What does the majority of the economics profession make of this whole Amazon situation? The stock price is supposed to reflect expected future profits, but here is a business that has consistently failed to make much profit. Is it all just a bubble, or will we soon see Amazon cranking up their prices, after they decide they’ve sufficiently monopolized the market?

  • Travis Collier

    The zero profit strategy/outcome is actually a good thing. That’s generally what businesses should be doing if we think that minimizing prices and investing in increasing productivity are good.

    Investors / owners extracting money via an ever increasing stock market valuation is perverse, but isn’t that money ultimately coming from new investors? Doesn’t seem to add anything particularly useful to the economy, but I’m not convinced of the downside either. Still, just being ‘not for profit’ seems like it would make a lot of sense in a surprising number and breadth of cases these days.

    • Derryl Hermanutz

      You’re right that the only way to realize the capital gains is if new investors buy the shares at the inflated prices. There is a limited buy-side market (demand) for the shares. If too many Amazon shareholders try to sell too many shares in too short a time, they will have to continuously drop their ask price in order to find enough new investors who will buy their shares.

      So share price inflation is really a virtual Ponzi scheme. Not even a real Ponzi scheme that works with actual money. A virtual scheme that works with the inflated ‘value’ of shares that are sellable for money.

      Nobody actually invested 100s of billions of money buying those shares. A few shares are sold at a higher price, which makes ALL the shares “worth” the new higher price. It “looks like” a company is “worth” 100s of billions. But when shareholders try to turn their “worth of shares” into “money”: the sellabe price of the shares deflates, and the company is no longer “worth” 100s of billions.

      Tech billionaires are virtual billionaires who own billions “worth of” shares in their own companies. If they tried to cash out their billions “worth of” shares for billions “of money”, they would crash their share price and would only realize a fraction of the inflated value in actual sales of shares for actual money.

      • E4439qv5

        How does the valuation of those assets count towards taxes then, if it is as you say? If it isn’t accurate to assume a corporate bigwig could net a full market price evaluation, how exactly do they go about reporting share estimations in USD?

        (Sorry if this comes across as a stupid question– I’m a kid who just turned 20 with an Associate’s Degree hot in hand.)

        • Derryl Hermanutz

          Unrealized capital gains are not income because they are not money. Just like when you buy a house for $30,000 in 1975, then in 2006 somebody tells you it’s “worth” $500,000. It’s still the same old house. You owned it while the price was inflating, but you didn’t earn any of that price inflation. If you sell the house for $500,000, then you have converted the capital gain into money income. It’s not taxable income if the house was your principal residence, so you legally keep all the money. If you bought 2000 shares of Amazon for $30,000, then the price inflated to $500,000, you still own the same old shares. But if you sell the shares for $500,000 you converted the capital gain into capital income, and you pay capital gains income tax on the money.

          You don’t report asset price gains on your income tax, but you report it on your corporate balance sheet. Then you report an equal increase in shareholder equity, on the liability side of the balance sheet, because the corporation “owes” all of its net worth to its human owners — the shareholders. The shareholders don’t report the gain on their personal income tax, unless they sell the shares and realize their capital gain. Unrealized capital gains are not income, so you don’t report them on your corporate or personal income tax.

          • E4439qv5

            Much of the technical practice of this brain-bending idea is still going over my head, but I see enough of the abstract processes at work to follow your line of logic.

            At any rate, thanks for not throwing me a softball. 🙂

      • Travis Collier

        Excellent point.
        Of course, actually selling isn’t the way most rich people profit from the gains. It isn’t about how much $ you have, it is about how much and how favorably you can borrow. If you have a stock portfolio ‘worth’ some ridiculous amount of money, you have extreme privilege (love that is actually the technical term) when it comes to borrowing… Sometimes even at effectively negative rates. Then you use that debt to finance something which gives a higher rate of return and make $$$.
        Normally, this is plays out behind the scenes, but occasionally manifests in the form of something us proles actually understand, like a billionaire getting a multi-million dollar mortgage at a negative real rate (below inflation).

  • Adrynian

    Robert Kiyosaki of “Rich Dad, Poor Dad” fame outlines how to take advantage of this scheme to live the high life without ever paying income tax: borrow from the bank to fund expenditures, while being careful to ensure that your debt rises more slowly than your assets (I.e. the capital gains from Amazon that are used to balance your financial statement). You don’t pay income tax on borrowed money, and if you’re wealthy enough you can play this game for the rest of your life and never pay tax until you die.

  • Josh Samos

    One major irony in this situation is that Amazon’s income isn’t taxed, unless it’s profit, while individual’s income is all taxable. The ordinary taxpayer has a much greater tax burden. To level the playing field, individual income should only be taxed on profit. it to put it another way, regular taxpayers should be able to deduct any expenses that maintain their lives, such as food clothing medical care housing education and even vacations that serve to keep them fit for work. In other words, only what we have left over as profit should be taxable. Since a great many people are just breaking even, they should pay no taxes at all, as businesses do.