Powerful is the man who, with a short series of tweets, can single-handedly send the bluest of the blue-chip stocks into a headlong tumble. For better or for worse, the current occupant of the Oval Office is one such man, tapping into his power with the following missive that crossed the Twitter transom on the morning of March 29:
I have stated my concerns with Amazon long before the Election. Unlike others, they pay little or no taxes to state & local governments, use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.), and are putting many thousands of retailers out of business!
Over the next few trading days, with four subsequent tweets peppered in, Amazon’s stock dropped by more than $75 a share, losing a market value of nearly $40 billion. Card carrying-members of the Resistance and Never Trump brigade quickly portrayed the president’s scorn as the latest evidence of his “soft totalitarianism” and general disdain for the First Amendment and the free press. They noted that Amazon’s CEO and founder, Jeff Bezos, owns the Washington Post—a leading “perpetrator” of what Trump has called the “opposition party” and “fake news.”
Concerns of politically motivated impropriety are not without merit. Trump has repeatedly proven himself unworthy of the benefit of the doubt. As presidential candidate and commander in chief, he has demonstrated an eagerness to use his Twitter account as a bully pulpit in his petty brawls with lawmakers, media personalities, and anyone else who might draw his ire.
And yet, ulterior motives though there may be, knee-jerk dismissals of the president’s attack are short-sighted. The president’s bluster in this instance is rooted in reality.
Indeed, contra the libertarian ethos that Amazon and its leader purport to embody, the company has not emerged as one of history’s preeminent corporate juggernauts through thrift and elbow grease alone. Although the company’s harshest critics must concede that Amazon is the world’s most consistently competent corporation—replete with innovation and ingenuity—the company’s unprecedented growth would not be possible without two key ingredients: corporate welfare and tax avoidance.
Amazon has long benefitted from the procurement of taxpayer-funded subsidies, emerging in recent years as the leading recipient of corporate welfare. According to Good Jobs First, a Washington, D.C., organization dedicated to corporate and government accountability, Amazon has, since 2000, received more than $1.39 billion in state and local tax breaks and subsidies for construction of its vast network of warehouses and data centers.
These private-public “partnership” deals are perhaps best illustrated by the sweepstakes for Amazon’s second headquarters. Touted as the economic development opportunity of the century, the chosen destination will reap the benefits of 50,000 “high-paying” jobs and $5 billion in construction spending. The possibility of securing an economic development package of this magnitude elicited proposals from 238 North American cities and regions, fomenting what some have called a “bidding war” between mayors, governors, and county executives desperate for economic invigoration.
After a first round deadline of October 19, the pool of applicants was, in mid-January, whittled down to a list of 20. As expected, each finalist offered incentive packages worth more than a billion dollars, with Montgomery County, Maryland, ($8.5 billion) and Newark, New Jersey, ($7 billion) offering the most eye-popping bundles. Proposals utilized a wide array of state and local economic development programs: property tax discounts, infrastructure subsidies, and, in the case of Chicago’s proposal, an incentive known as a “personal income-tax diversion.” Worth up to $1.32 billion, Amazon employees would still pay their income taxes in full—but instead of Illinois receiving the money, the tax payments would be funneled directly into the pockets of Amazon itself.
While critics condemn the ostentatious bids of Maryland and New Jersey and decry the “creative” gimmicks of cities such as Chicago, they are equally worried about the details—or lack thereof—of the proposals from the other finalists. Despite demands for transparency from local community leaders and journalists, only a handful of cities have released the details of their bids in full, while six finalists—Indianapolis, Dallas, Northern Virginia, Los Angeles, Pittsburgh, and Raleigh, North Carolina—have refused to release any of the details from their first-round bids. Viewing themselves as players in a zero-sum game of high-stakes poker, they claim that there is little to gain, but a lot to lose, in making their proposals public.
Such secrecy has, in the second round of bidding, become the rule more than the exception. Although he owns a newspaper with the slogan “Democracy Dies in Darkness,” Bezos has required state and local officials involved in negotiations to sign non-disclosure agreements. With the opportunity to revisit and revise their bids (i.e., increase their dollar value), the transition from public spectacle to backroom dealing introduces yet another cause for concern. If the finalists don’t apprise citizens of their bids’ details, the citizens can’t weigh the costs and benefits and determine whether inviting the company into their midst will be a net positive or net negative.
Amazon’s pursuit of public tithes and offerings is matched by its relentless obsession with avoiding taxes. Employing a legion of accountants and lawyers, the company has become a master at navigating the tax code and exploiting every loophole. Illegality is not the issue here but rather a tax system that allows mammoth corporations to operate with huge tax advantages not available to mom-and-pop shops on Main Street.
Of course Amazon isn’t unique in its desire to avoid the taxman. It is, however, unrivaled in its ability to do so. Last fall’s debate concerning the merits of lowering the corporate tax rate from 35 percent to 20 percent was, for Amazon, a moot point. In the five years from 2012 to 2016, Amazon paid an effective federal income tax rate of only 11.4 percent.
The company fared even better in 2017. Despite posting a $5.6 billion profit, Amazon didn’t pay a single cent in federal taxes, according to a recent report from the Institute on Taxation and Economic Policy. What’s more, Amazon projects it will receive an additional $789 million in kickbacks from last year’s tax reform bill.
Even by the standards of mammoth corporations, this is impressive. By way of comparison, Walmart—no stranger to corporate welfare and tax avoidance—has paid $64 billion in corporate income tax since 2008. Amazon? Just $1.4 billion.
Amazon’s tax-avoidance success can be attributed to two things: avoiding the collection of sales taxes and stashing profits in overseas tax havens. The IRS estimates that Amazon has dodged more than $1.5 billion in taxes by funneling the patents of its intellectual property behind the walls of its European headquarters city, Luxembourg—a widely used corporate tax haven. Again, nothing illegal here, but there’s something wrong with a tax system that allows it.
From day one, Amazon’s business model involved legally avoiding any obligation to collect sales taxes, and then using the subsequent pricing advantage to gain market share. It did this by first locating its warehouses in very few states, most of which did not have a sales tax. It then shipped its goods to customers that resided in other states that did have sales tax. This game plan allowed Amazon to avoid what is known as “nexus” in sales-tax states, meaning that those states could not compel it to collect the tax—a two to 10 percent competitive advantage over its brick-and-mortar counterparts.
Amazon exploited this tax advantage for years until state legislatures—realizing how much revenue they were losing—gradually began passing legislation requiring Internet retailers to collect sales taxes for items purchased by their citizens. In 2012, having already benefited from this competitive advantage for more than a decade and a half, Bezos—under the pretense of a “level playing field”—began advocating for federal legislation that would require Internet retailers to collect sales tax. No such legislation has been passed.
And despite Bezos’s carefully calculated public relations posturing, Amazon’s advantage over brick-and-mortar retailers persists: not only does Amazon not collect city and county sales taxes (where applicable) but it also doesn’t, with few exceptions, collect sales tax on items sold by third-party distributors on Amazon Marketplace—sales that account for more than half of Amazon’s sales.
It is difficult to overstate how instrumental tax breaks and tax avoidance have been in Amazon’s unprecedented growth. As Bezos made clear in his first letter to shareholders in 1997, Amazon’s business plan is predicated on amassing long-term market share in lieu of short-term profits. As a result, the company operates on razor-thin margins in some retail categories, while actually taking losses in others.
Amazon has not squandered these competitive advantages. Half of online retail purchases are made through Amazon, and more than half of American households are enrolled in the Amazon Prime program—a subscription service that engenders platform loyalty and leads to increases in consumer spending.
In fact, Amazon’s ascent and tactics have led an increasing number of public policy experts to call for a renewed enforcement of America’s antitrust laws. The concern is that Amazon has used its market power to crush smaller competitors with a swath of anti-competitive practices, including predatory pricing and market power advantages stemming from Amazon Marketplace—Amazon’s vast sales platform for third-party retailers.
Such practices may be a boon for consumers and Amazon stockholders, the reasoning goes, but they are only possible because Amazon uses economic power to squeeze its retail partners on pricing at various points in the production line, which harms the health of many other businesses. In fact, some suggest this bullying tendency calls to mind the actions of John D. Rockefeller in his dealings with railroad companies at the turn of the last century.
These monopolistic practices have squeezed local, state, and federal revenue streams in two ways. Not only do these governments forego the collection of needed tax revenue but Amazon’s rise has also knocked out many brick-and-mortar competitors that previously had provided streams of tax revenue. By wooing Amazon with taxpayer-funded subsidies and other giveaways, government leaders are, in a very real sense, funding the destruction of their own tax base. There is little evidence that such taxpayer-funded inducements have resulted in a net positive to the states and localities doling out the subsidies.
By forsaking the tenets of free market orthodoxy, forgoing the collection of much-needed tax revenue, and giving big businesses major competitive advantages, state and local governments have generated increasing controversy and political enmity from both ends of the political spectrum. And yet, though bipartisan accusations of crony capitalism and corporate welfare abound, such opposition does little to dissuade state and local governments from loosening the public purse strings in their efforts to woo big corporations such as Amazon.
Daniel Kishi is associate editor of The American Conservative.