Just Taxes Blog by ITEP

Pandemic Profits: Netflix’s Record Profit Haul, Past Tax Avoidance Raise Questions about Tax Law’s Weaknesses

Pandemic Profits: Netflix’s Record Profit Haul, Past Tax Avoidance Raise Questions about Tax Law’s Weaknesses

April 29, 2020

Matthew Gardner
Matthew Gardner
Senior Fellow

Corporate tax avoidance has left the nation with fewer resources to meet its critical priorities. In 2017, congressional Republicans were blasé about piling onto the nation’s 10-year budget deficit with the $1.5 trillion Tax Cuts and Jobs Act, and they have since shown little interest in the growing evidence that the true cost of the top-heavy tax cuts will be even larger than originally forecast.

But the current economic crisis and the deep investments it will take to get the nation through this time means that policymakers can no longer turn a blind eye to corporate tax avoidance. Businesses across the country are shuttered and struggling, so it isn’t a popular time to talk about profits and fair taxation. But due to a quick and drastic shift in how consumers buy goods and services, some companies (chief tax avoiders among them) are slated to reap significantly higher profits, even during this economic slowdown.

Their tax-avoidance habits and the laws that enable such behavior deserve scrutiny.

Netflix avoided federal taxes on $2.5 billion of income in 2018 through 2019 and appears poised to do the same again in 2020, even as the company rakes in record profits due to a huge increase in its subscriber base. The company reported $799 million of pretax earnings for the first three months of 2020, doubling its earnings from the same quarter in 2019. At a time when many companies are facing existential threats due to the COVID-19 pandemic and associated economic shutdown, it is vital to ensure that our corporate tax laws apply fairly to companies that are still turning a profit in these turbulent times.

The nation’s lack of public investments—investment in health care and safety-net programs, for example—has resulted in far more suffering than necessary. The public will demand better from its government in the future, and that will require increased revenue in the long term. Part of the answer is that corporations like Netflix should pay a reasonable amount of taxes to support the investments that make their profits possible.

Quarterly earnings reports are generally light on information related to tax payments, and Netflix’s first-quarter report is no exception. Although we can’t know whether the streaming giant will owe any federal income taxes on its profits at the end of this year, based on the last two years, there’s every reason to expect that Netflix’s tax rate will be a lot closer to zero than the statutory 21 percent.

In the first two years of the new, sharply lower 21 percent tax rate signed into law by President Donald Trump, Netflix has recorded just over $2.5 billion in U.S. pretax income—a number that has ramped up sharply. After earning $845 million in 2018, the company’s U.S. income doubled to $1.7 billion in 2019. Its combined federal income taxes on this two-year, $2.5 billion haul? Zero.

As ITEP has noted repeatedly, Netflix’s avoidance of federal income taxes on $2.5 billion appears legal, and it can be fairly said that this result reflects the apparent intentions of Congress and President Trump. After all, when policymakers restructured the federal corporate income tax two years ago, they sharply reduced the corporate tax rate from 35 percent to 21 percent and, rather than eliminating tax breaks to make up the revenue loss, generally left these tax breaks in place or expanded them. It was entirely predictable that large and profitable corporations would see sharp reductions in their federal income tax rates, as Netflix and others have.

We’re still a long way from the end of this year—and this crisis. But now, with Netflix’s quarterly earnings out and an earnings report from Amazon on the horizon, is an excellent time for leaders in Washington to ask two questions. What tax rate would they like to see Amazon, Netflix, and other companies that continue to enjoy profits during this crisis pay—and if these companies don’t pay their fair share to help finance the workings of government in this time of peril, who will?