Holiday Season Giving to Jeff Bezos

Jeff Bezos, CEO of Amazon. (Photo: Dan Farber)The public should recognize that Amazon CEO Jeff Bezos’ success has come with a huge helping hand from the taxpayers. (Photo: Dan Farber)

Jeff Bezos, the CEO and founder of Amazon, is routinely touted in the media as an entrepreneurial genius. That assessment may well be correct. After all, Amazon has made huge breakthroughs not only in internet marketing, but also in promoting the spread of e-books, and more recently as a new source of television shows.

But however brilliant Bezos may be, the public should recognize that his success has come with a huge helping hand from the taxpayers. He has received in the neighborhood of $4 billion in subsidies from taxpayers over the last two decades to help his business grow.

If you missed that line item in the budget, it’s probably because the media have mostly chosen not to give it much attention. The basic point is a simple one: The brick and mortar retailers with whom Amazon competes are required to collect state and local sales taxes on the products they sell. For most of its existence, Amazon was exempted from this requirement in most of the states it did business.

This amounts to a massive subsidy to Amazon at the expense of both big chains and tiny family operated business. For example, in a state like New York, where combined state and local sales taxes average over 8 percent, Amazon could charge a price that was 1 percent below its brick and mortar competition, and still have an additional profit of 7 percent on everything it sold. That is a huge deal in an industry where profits are often just 2-3 percent of revenue.

Alternatively, Amazon could pass the most of the savings onto consumers in order to build market share. This appears to be the route that Amazon has pursued, as it has been a marginally profitable company through most of its existence, even as it built itself into one of the world’s largest retailers.

We calculated how much Amazon’s has saved over its existence by not having to collect sales taxes in most states for most of the 20 years since it was founded. While an increasing number of states do now require Amazon to collect the sales tax, we calculated the cumulative savings to the company as more than $20 billion in 2015 dollars. With Jeff Bezos owning a 20 percent stake in the company, his personal share would be roughly $4 billion.

This is real money by almost any standard. There are many people who get very upset about families getting Temporary Assistance to Needy Families (TANF) benefits. Mr. Bezos’ special treatment on sales tax would be equivalent to 10 million monthly TANF checks. Food stamps also get many people angry. Bezos’ $4 billion is equivalent to more than 31 million months of the average food stamp benefit.

And just to be clear, the sales tax exemption enjoyed by Amazon is not some nitpicky point. The vast majority of economists across the political spectrum would agree that Amazon should have to collect the same sales tax as its brick and mortar competitors. There is zero logic in saying that customers have to pay a 5 percent tax on their purchases of books, clothes, or anything else, unless they buy them from a retailer like Amazon who does not have a store in the state.

This practice was effectively having the stores that hired people in the community subsidize Amazon and other internet sellers who did not. That’s a good way to put stores out of business and support the growth of internet retailers. It’s also a way to make relatively lower income people subsidize the purchases of higher income people, since low income people are less likely to buy over the web. Many lower income households do not have easy access to the internet and/or credit cards. For these reasons, they are less likely to be able to take advantage of no sales tax shopping than higher income people.

In many ways, Jeff Bezos could be a poster boy for the modern US economy. Unlike some of his fellow billionaires who made their money on Wall Street scams, Bezos can point to developing a service that is of considerable value to tens of millions of households. People appreciate the convenience of being able to quickly purchase a large variety of items on Amazon.

At the same time, he also benefited enormously from a set of rules that make no economic sense and are clearly unfair to traditional retailers. To get rich in today’s economy, it helps to have a good business plan, but it helps even more to have political connections that give a real competitive edge. Jeff Bezos clearly has both.