One of the few companies where profits are under management control Credit, Amazon logo

It’s clearly a little difficult to be absolutely certain about this but there’s good reason to think that Jeff Bezos will be more than a little annoyed that Amazon has just made a profit. For the basic business plan these past couple of decades seems to have been to avoid doing that. Further, the basic plan seems to have been to do what every lefty on the planet insists businesses should do – and haven’t they been giving Bezos and Amazon stick for doing exactly that?

Amazon posted a record profit of $2.5bn in the second quarter of 2018, thanks to strong performance by the retail giant’s non-retail divisions – advertising and cloud-computing, the company announced Thursday,

Bezos quite clearly desires that an activity undertaken by Amazon be profitable. But what he then does is take that surplus cash flow, that excess of revenues over costs, and sends it off to be ploughed into the next activity that the company is going to start up. The profits from book selling have been going into that cloud infrastructure for example.

This being exactly what every lefty does shout that business should be doing. It must invest, reinvest, instead of passing money out to those evil capitalist rentiers we call shareholders. We can see this in all that whining from Elizabeth Warren and the like that companies are just paying profits out to shareholders as dividends.

So, Bezos does exactly this.

At which point the lefties are whining that the company doesn’t pay any taxes. Which seems obvious enough, profit taxes are levied upon profits, don’t make profits and you won’t get taxed. An excellent manner of not making profits being to reinvest everything within the same time period it is made. And it’s that which might cause the Bezos anger. For that’s what Amazon has been doing. If you make money this year and invest it next then you’ve a profit to declare and pay tax upon. If one line of business makes a profit this year and then you invest it into a loss making but growing business this then, sure, you’ve made that same profit but declared none and pay no tax.

If you’re really following this policy, as we think Bezos has been, then making a profit is an error in forecasting and that’s a bad thing.

So far so fun. But then we’ve a much larger point. Investing this year’s margins into this year’s expansion – again, as we’re told all companies should be doing – only works if all that activity is within the same company. As long as it’s a division of Amazon’s profits funding the expansion of another Amazon division then no tax is payable. But what happens if one business – say, Ford – makes a profit. And the investment desire is over at Facebook – or a start up in Silicon Valley at least – then we’ve a problem, haven’t we? Efficient allocation of capital within a company happens without a tax wedge being payable. Efficient allocation of capital across companies doesn’t. Because the tax system taxes the profits at the corporate level then taxes again the distribution (the US certainly does, the UK only the once).

Our tax system deliberately and specifically favours within company investment and not across companies nor sectors. Which is a mad way to run an economy to be honest. For we positively desire that capital move across sectors and between companies. Yet we deliberately make that more difficult with our tax system. But then, you know, lefties and their insistences about business….

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1 COMMENT

  1. So, if you are a business, you are damned if you do and damned if you don’t. Yes, that sounds like how it works.

    There are lots of reasons why intra-company transactions are favored over transactions between companies. For example, individuals in the same company ostensibly work toward a common goal and can be fired if they don’t support the plan. The big problem with the tax bias in allocating capital is that the tax rate was far above the rate at which disincentive effects overwhelm revenue-raising. If Trump’s tax law didn’t eliminate this problem, it at least massively reduced it.

    Unfortunately, in “Tax Cut: Part 2,” the House is talking about boosting investment — but not by reducing tax rates on it: reducing the Obama-care tax levied on large investors (on every dollar, not just the large part; because the investment was not Obama’s problem, the investor was), eliminating the arbitrary distinction between short-term “speculation” and long-term “investing,” or eliminating rules like the wash-sale rule designed to penalize people acting deliberately.

    Instead, they are talking about yet another tax-favored, government-monitored personal savings account, involving arcane rules for withdrawals and transfers that will require employing a Financial Professional. Swamp still not drained.

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