How The Tax Bill Will Impact Silicon Valley: Great For Big Tech, Good For Startups
The $1.5 trillion tax bill passed by the House and Senate has been called a gift to corporate America, with a sharp reduction in the corporate tax rate from 35% to 21%, the retention of significant loopholes and deductions, and the ability of pass-through businesses to deduct 20% of the first $315,000 of earnings.
But it’s especially generous for the giants of Silicon Valley.
Already, tech companies paid an average tax rate of 24% over the past decade, below the 29% average tax rate for companies in the S&P 500. That’s less in taxes than every other industry—which includes finance, healthcare, and energy—in the country, according to an analysis by Zion Research Group. For example, Hewlett Packard Enterprise only pays an effective tax rate of 12.6%, reports the Silicon Valley Business Journal. And now it promises to get even better.
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Some of the bill’s provisions will deliver a windfall to tech giants, allowing them to bring their huge piles of overseas cash back to the United States at a greatly reduced tax rate of 15.5%. The big five tech firms–-Apple, Alphabet, Amazon, Facebook, and Microsoft–-currently have a combined $457 billion held in foreign subsidiaries, reported Fast Company‘s Mark Sullivan last month.
To push for that reduced rate, they spent a lot of money on lobbyists, increasing their spending in the third quarter of 2017 by 24.3% (compared to the same quarter in 2016). Microsoft alone had 81 lobbyists from 16 different firms (and Amazon had 64 lobbyists) working for them to influence Congress specifically on tax issues in the first three quarters of 2017, according to Public Citizen.
The bill includes a 10.5% tax on future foreign profits, which benefits the tech giants but that doesn’t help smaller startups, who will pay the usual 21% corporate tax rate since most of them make their money in the United States. That discrepancy “creates an uneven playing field, where big monopolies will pay lower taxes than new entrants, which could reduce innovation,” the University of California Berkeley’s Gabriel Zucman told the New York Times.
But the final bill gladdens the hearts of most startup investors and entrepreneurs, since it doesn’t include an initial proposal to tax stock options and restricted stock units when they vest instead of when they are exercised, as is the case currently, reports GeekWire.
“We have always viewed tax reform as an important opportunity to realign the tax code to better support entrepreneurship and spur new company formation … We are thankful the Finance Committee removed language that would have disrupted the equity-based compensation system that is so critical to recruiting and retaining a talented startup workforce,” said National Venture Capital Association CEO Bobby Franklin in a statement.
Another key factor behind the support of the industry is that the bill retains the carried interest tax break, despite President Trump’s multiple vows during the campaign to get rid of it. That pleases venture capitalists, since it taxes the share of a fund’s profit that goes to partners at a lower rate (23.8%) than ordinary income (as high as 39.6%).
Overall, the tech industry has strongly supported the bill. TechNet, which represents about 75 companies, released a statement earlier this week:
The final tax reform bill is strong in the key areas that encourage innovation and entrepreneurship and create jobs in America. Lowering the corporate tax rate, transitioning to a territorial tax system, allowing companies to reinvest their overseas profits here at home, and safeguarding the R&D tax credit are important drivers of economic growth. By combining them in tax reform legislation, they will help trigger a new wave of innovation and investment in our nation.
Major multinationals rejoiced today in the holiday spirit—Boeing stated that it would spend $300 million in charitable donations and “workplace investments” and AT&T committed to paying $1,000 bonuses to each of its 200,000 employees.
It’s a marked difference from Europe, where tax regulators are raking the tech giants over the coals. Just last Friday, Amazon was ordered by Italian authorities to pay $118 million to end a tax-evasion investigation. And Apple has been duking it out with Ireland, which ordered the company in 2016 to pay $15 billion in back taxes.
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