Tuesday, June 12, 2012

Facebook's IPO & Tax-Dodging Show How Rigged the US Economic System Is

Marky Mark here never promised to "Do No Evil" like Google did,
and his below-board yet legal antics show just how rigged the
U.S. economic system have become.

Unlike many people, I don't begrudge the success enjoyed by Facebook and its founder, Mark Zuckerberg - though practically nothing he came up with was a new idea, he did it well enough and at the right time to capture much of the social networking market, and he hasn't screwed it up enough or faced a good enough competitor to cause Facebook to lose its throne atop the social networking heap - for now, anyway.

You may have heard that Facebook went public a few weeks ago - and it hasn't exactly been a smooth ride. Valued at $38/share when it debued on the NASDAQ (valuing the company at $104 billion), it's currently trading at $27.40/share (valuing the company at about $75 billion). Personally, I still think Facebook is way over-valued - unless you make wildly optimistic assumptions about Facebook's future growth, there's no way the company is worth that much. If I were an early Facebook investor, I'd be looking to cash out as soon as I legally could.

But, that's beside the point of today's post, which is that Facebook has and is engaged in economic practices that show just how rigged the U.S. economic system has become - a system rigged to shovel ever more money and power to the already rich and powerful at the expense of everyone else.

First, we have a story from ThinkProgress about how Zuckerberg and Facebook might try to dodge taxes on their billions of wealth / earnings for years to come, if not forever:
While Zuckerberg will pay a hefty tax bill right off the bat if he follows through on his plan to sell $5 billion in Facebook stock options, as the New York Times noted, he may then never pay a dime of taxes on the rest of his Facebook wealth. “Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax,” the Times reported.
And, as Citizens for Tax Justice has noted, Facebook may use the issuance of stock options to avoid corporate income taxes, instead receiving hundreds of millions of taxpayer dollars in refunds:
The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.
When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.
“When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden,” said Sen. Carl Levin (D-MI). “It isn’t right, and we can’t afford it.” This tax preference for corporations costs the U.S. about $2 billion in revenue per year.
In addition, Zuckerberg’s using a totally legal accounting gimmick to transfer money to his unborn children, thus avoiding the gift tax. He also — by virtue of accepting a $1 dollar salary and purely living off his wealth — could be eligible for the Earned Income Tax Credit, which is intended to benefit low-income Americans.
Second, the IPO was rigged from the get-go to advantage Facebook and insiders - which was either a good thing or a bad thing, depending on who you ask. Indeed, Wall Street firms complained because they didn't pocket their normal ridiculous IPO profits - instead, Facebook and other insiders managed to capture the lion's share. But that's not the point - the point is that there was no hope for "the little guy" in this arrangement, even if he wanted to buy Facebook stock - he was just going to get hosed, one way or another - it just so happened that this time, Facebook hosed him instead of Wall Street. But, when it comes to IPOs, you can guarantee that you're going to get hosed by someone, if you're not an insider.

I can't say that I blame Zuckerberg or Facebook much - hell, I'd probably be working the system with all I had too, if I were in their position. What I do blame is the system (and Congress, and the special-interest lobbyists who write the rigged laws that Congress passes) - and I am terribly disappointed that we, the American people, have collectively allowed the system to become so rigged and skewed in favor of the already rich and powerful. And I like to think that, even if I were as fabulously rich as Zuckerberg, I'd be willing to support un-rigging the system for me, if all the other rich and powerful people agreed to the same thing. So perhaps I do begrudge Marky Mark Z. a bit for that, since he hasn't shown much interest in un-rigging the system.


  1. the world of finance is like poker--- if you can't tell who the sucker at the table is, the sucker is you.

    1. A good think to keep in mind in most situations involving non-random chance and uncertainty - but especially in poker and finance!

      -The Angry Bureaucrat

  2. If some bank loans Zuckerberg spending-money against the value of his shares, as the ThinkProgress article suggests, I'm not the only sucker. And then, if the FB stock price keeps dropping, and Zuckerberg gets the mother of all margin calls, I bet a third will join us.

    1. Joe: I seriously doubt these loans would be structured like that - I seriously doubt Marky Mark Z. would face a margin call. Instead, think of it like a home equity loan - he borrows money and pledges the stock as collateral. In the unlikely event that he can't make the payments / goes bankrupt, whoever loaned him the money takes the stocks - and they're the one who bears the risk that the value of the stock might decline below the value of the loan. At least, that's how I'd demand that the loan be structured, if I were Marky Mark Z.

      -The Angry Bureaucrat