dana liebelson

Dana Liebelson

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Dana Liebelson is a reporter in Mother Jones' Washington bureau. Her work also appears in Marie Claire and The Week. In her free time, she plays electric violin and bass in a punk band.

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The Loophole That Allows Facebook to Avoid Paying Taxes on Billions of Earnings

| Fri Nov. 8, 2013 10:22 AM PST

Most Americans assume that Silicon Valley, a shining beacon of US economic growth, will give a lot of dough back to Uncle Sam over the next few years. But thanks to a controversial loophole in US tax code, 12 tech companies—including Facebook, Twitter and Linkedin—are poised to avoid paying income taxes on their next $11.4 billion in earnings, netting the companies a collective savings of $4 billion, according to a report put out this week by the Citizens for Tax Justice (CTJ). 

The way the law stands now, US companies get big tax deductions when they pay their employees in stock options. For example, if an executive is given the option to buy a million shares of a company at five cents a share and later cashes those options in when they're selling for $20 a share, the company can deduct the price difference in tax breaks, even though they never actually paid that higher salary. This is especially profitable to emerging industries, like tech, where companies give stock options to young executives when they're still coding out of their parents' basements. These tech employees have an incentive to stay with the company over the long-term, and then cash in once the company is profitable. That means that companies get to store these tax breaks until—ta-da!—they're not paying income taxes for years. Here's how much these 12 companies have saved: 

CTJ

Twitter is the latest company that stands to profit from this, since it just went public. But in this latest report, CTJ determined that Facebook still has the highest amount of stock deductions to cash in—about $6.2 billion worth, allowing it to avoid income taxes for almost five years. And it's not just tech companies. In April, CTJ found that 280 Fortune 500 companies have benefited from this break in the last three years alone. 

Tony Nitti from Forbes argues that even with this loophole, Uncle Sam isn't losing money, since as Facebook deducts $5 billion in taxes from Mark Zuckerberg's stock, Zuckerberg is taxed on $5 billion in income, and the individual rate is higher than the corporate rate. Facebook did not immediately respond to comment on the report, but a spokesperson told the Huffington Post earlier this year that "it's a mistake to look at only the corporate tax revenue while ignoring the billions of taxes paid from initial shareholders."​

But Matt Gardner, executive director of the Institute on Taxation and Economic Policy, tells Mother Jones that the IRS is still losing money, since Zuckerberg would be taxed on his income no matter where it came from, and under the loophole, the company is able to write off his income without corporate income taxes.  "If Facebook buys Zuckerberg a lottery ticket for a buck, and then he wins a million dollars, should the company be able the write off that million? That's absurd, but that gives you a sense of what's going on here," says Gardner.

Bipartisan lawmakers have recently started to denounce this loophole, and in February of 2013, Senator Carl Levin (D-MI) proposed a bill that would limit how high companies could go with their stock-option tax breaks.

"People recognize that these loopholes are not fair. They are wrong in every sense that a policy can be wrong—wrong fiscally, wrong economically, wrong ethically," said Levin in a statement. 

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The Battle of the NSA Surveillance Bills

| Fri Nov. 1, 2013 8:31 AM PDT

On Thursday, the Senate intelligence committee took a step forward toward officially authorizing some of the National Security Agency's more controversial surveillance practices, which have recently come to light thanks to leaks from former NSA contractor Edward Snowden. The panel passed out of committee a bill allowing broad phone surveillance to continue under the Foreign Intelligence Surveillance Act (FISA). Backed by the committee chair, Sen. Dianne Feinstein (D-Calif.), the FISA Improvements Act leaves untouched the NSA's internet surveillance dragnet, PRISM, and does little to improve oversight of the government's surveillance powers. Feinstein's bill will face off against legislation introduced earlier this week by Rep. James Sensenbrenner (R-Wis.) and Sen. Patrick Leahy (D-Vt.) that would significantly curb the government's ability to sweep up the private information of Americans.

Privacy experts say that the FISA Improvements Act, which passed 11-4, codifies current surveillance practices instead of fixing the law to protect the privacy and civil liberties of Americans: "This was an opportunity for Congress to really recalibrate the statute, and it's very disappointing that they've used this opportunity to cement domestic spying programs instead," says Michelle Richardson, legislative counsel for the ACLU.

The primary focus of the bill is Section 215 of FISA. This is the part of the law that provides the legal justification for the bulk collection of the telephone metadata of Americans, including phone numbers and the date and duration of calls (but not the content of those conversations). While the bill's language amends the statute to prevent the NSA from hoovering up phone metadata en masse, it provides gaping loopholes that could allow the agency to continue with its bulk collection practices as usual, such as if there's a "reasonable articulable suspicion" that an investigation is related to international terrorism. The legislation also makes it legal for the government to collect and search records that are three "hops" from a target who is suspected of terrorism—in other words, a suspect, all of that suspect's contacts, and all of their contacts. The bill makes only surface fixes and "absolutely allows for the kind of collection that is already happening right now," according to Amie Stepanovich, the director of the Electronic Privacy Information Center's (EPIC) Domestic Surveillance Project.

Also worrisome to privacy experts is the fact that the bill expands the NSA's powers, by allowing the agency to track cellphone's of non-Americans believed to be located abroad for 72 hours after they enter the United States. The bill additionally levies a penalty of up to 10 years in prison on anyone who accesses NSA information without authorization, like Snowden did.

"The call-records program is legal and subject to extensive congressional and judicial oversight, and I believe it contributes to our national security," Feinstein said in a statement. "But more can and should be done to increase transparency and build public support for privacy protections in place."

Feinstein's modest reforms include limiting the amount of time the government can store the information it collects to five years, with the approval of the attorney general required to search records that are older than three years. And it requires regular reporting to Congress on all FISA violations. The bill also requires the NSA to disclose to the public annually the number of times the agency searched its telephone metadata database.  

Feinstein's surveillance bill will now go head to head with Sensenbrenner and Leahy's legislation. They introduced companion bills in the House and Senate that would end the bulk collection of phone metadata and put strict limits on the section of FISA that has been used to justify PRISM (so that if the online information of an Americans is accidentally collected, it cannot be searched). The USA FREEDOM Act has been referred to committee.

Unlike the bills introduced by Sensenbrenner and Leahy, Feinstein's legislation was only made public after it was passed out of committee. EPIC's Stepanovich notes that the secrecy with the which the Feinstein bill was crafted does not bode well for real reform. "This is the problem with all of these programs," she says. "You don't find out about them until it's far too late, and you have secret collection approved by a secret court, that's now being reformed by a law that's kept secret. It is unclear to what substantive 'improvements' the title [of the bill] refers to."

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