Factual Information
Elon Musk is known globally for his ambitious innovation and business acumen. The South African-born billionaire currently CEO of the American electric-car maker Tesla Inc., rocket-ship builder Space Exploration Technologies Corp and artificial intelligence (AI) firm Neuralink Corp., is also notoriously vocal about his distaste for taxes. In 2018, Musk declared on Twitter that “taxes are for the little people,”something for which he was criticized by some. But does this mean he does not pay his taxes?
Musk has an unusually high tax profile, though some of his companies manage to stay profitable despite his low taxes. For instance, Tesla reported an adjusted profit of $2.1 billion in the third quarter of 2020, up from $57 million the previous year. That’s thanks, in part, to a reduction in the amount of income tax Musk pays. Musk does not actually dodge taxes, though he does have a lot of options for minimizing and deferring them — and often times, that’s what he does.
Tesla reported a federal refund of $178 million in 2016, which was likely due to dollar-for-dollar reduction in taxes paid and taxes earned in the U.S. In addition, the company gained a $150 million refund in the Netherlands in 2016 and 2017, and a $55 million refund in China in 2015. When faced with these tax authorities, Musk often makes use of legal tax deferral and other maneuvers, including stock option payouts, to not only lower his personal tax burden, but the tax burden of his companies.
Tax Optimization Strategies
There are several ways Musk has used tax optimization techniques to reduce his and his companies’ tax bill. For one, he has used stock option payouts to his benefit. Tesla has paid Musk hundreds of millions in stock options, not salaries, which are taxed at a lower rate. Further, Musk has diversified his investments to countries with better tax incentives, such as Ireland.
Another strategy Musk has adopted is deferral of taxes. Deferring taxes allows a company or individual to delay paying taxes until later. Notably, in 2015, when Tesla reported a $702 million tax liability, they effectively used tax deferral by claiming Domestic Production Activities Deduction (DPAD) credits. DPAD incentives allow businesses to deduct 9% of their domestic manufacturing income, which, in turn, reduces their tax burden in the U.S.
Musk has also taken advantage of tax breaks in other countries. For instance, Tesla operates a battery factory in the Netherlands, where it benefits from a “Knowledge Development Box,” which is a special tax break for research and development investments. Further, in 2016, the Irish government announced Tesla Motors Ireland Ltd. received an immediate €4.4 million tax break for its new Dublin factory and a €17 million tax break for its investments in research, development, testing, and product launch activities there.
Third-Party Perspectives
Tax experts have noted the various strategies employed by Musk and his companies to minimize taxes. Dan Marcec, Tax Director at the TaxTalent recruiting firm noted: “Companies can identify and use certain tax incentives, such as the R&D tax credit, to reduce taxable income to pay less in taxes. These strategies can also be used to reclaim tax in prior years by filing amended returns in states like California, which allows businesses to go back as far as five years.”
John Stancil, partner in the tax practice at accounting firm BDO USA LLP said “Ultimately, tax incentives are designed to encourage businesses to bring jobs to their state, invest in research, and build factories –– which Musk has done in states like California. Nevertheless, it is difficult to understand how Musk and his companies are taking advantage of this loophole to pay very little in taxes.”
John Smeaton, Tax Good Governance Manager at Oxfam International, noted: “Elon Musk is not the only one who uses tax incentives to his benefit or to stay profitable, many companies do that. However, I think the important takeaway here is that tax incentives have a role to play in global investment, but not when governments distort markets for a handful of wealthy individuals or companies.”
Analysis
It is clear from the evidence that Musk’s companies benefit from an array of tax breaks, which is both legal and justifiable. Though some might argue that if not for tax breaks he and his companies wouldn’t be as successful as they are, ultimately these are incentives that are meant to help businesses grow and create jobs in the wider economy.
At the same time, it is important to consider the impact of these tax incentives. Generally, tax breaks are intended to benefit the greater public, however, such incentives are often only available to wealthy individuals and companies, who can afford costly lawyers and advisors to make the most of tax exemptions. This is something which should be addressed by governments to ensure that these incentives are used to benefit everyone, not just those at the top.
Income Taxes
Musk has become notorious for his ability to dodge taxes, with his companies taking advantage of tax breaks and deferring tax payments to stay profitable. However, that being said, Musk still pays taxes –– albeit at reduced rates ––including income taxes. While they do not get as much attention as corporate taxes, personal taxes make up large sums of money that are due to the government every year.
Musk’s personal income tax payment has been a bit of a mystery due to the nature of his enterprises, though in 2016, the entrepreneur wrote a check for over $200,000 to the U.S. government. While his income tax payment may not be the maximum amount for someone as wealthy as him, it still shows that he does pay taxes, albeit at reduced rates and by taking advantage of tax exemptions.
Tax Contributions to Society
Though Musk does capitalize on certain tax exemptions, he and his companies are also making meaningful contributions to society when it comes to taxes. For instance, Tesla has invested billions in the US economy, with more than $1 billion going towards investments in states like Nevada and California. Further, in 2019, the company paid $2.3 billion in taxes to the US and local authorities, which exceeded the amount they paid in 2018. Tesla is also expected to pay more taxes in 2020, as its profits grow.
In addition, Musk is also investing in renewable energy initiatives, such as solar and wind power, which help reduce the amount of taxes that need to be paid to the government. This not only helps reduce the overall tax burden but also helps the environment, by reducing the amount of carbon emissions and other pollutants that are produced by traditional energy sources.
Finally, Musk is also involved in philanthropic activities, donating money to charities like GlobalGiving and local causes. He has also helped fund educational initiatives, as well as initiatives to combat climate change and promote social justice. Such contributions help to offset some of the tax breaks and exemptions he may receive, benefiting both the government and society at large.
Tax Avoidance vs. Tax Evasion
It is important to note the difference between tax avoidance and tax evasion, two things which Musk and his companies have often been accused of. Tax avoidance typically refers to using legal methods to reduce one’s tax burden, such as making use of exemptions and incentives. On the other hand, tax evasion, which is a criminal act, refers to willfully avoiding paying taxes by hiding income or under-reporting it. Musk and his companies are not guilty of the latter, as they are making use of legal tax exemptions and incentives to reduce their tax burden.
Further, while it can be argued that by taking advantage of tax incentives and deductions, the amount of taxes that a company pays can be reduced, the amount of taxes paid still cannot be legally reduced to zero. Tesla has paid billions of dollars in taxes over the years, which is evidence that even with tax incentives, companies, and individuals still have to pay taxes.
Tax Regulations
It is also important to note that the tax regulations Musk takes advantage of are actually there to benefit the public. Governments offer tax breaks and incentives to encourage businesses to invest in the local economy, create jobs, and boost the economy. These incentives are meant to bring long-term benefits and spur investment, which is what Musk is doing with Tesla and other companies. Without such incentives, the amount of taxes companies and individuals would have to pay might be too high, making it impossible for them to stay profitable or grow their businesses.
Tax incentives and breaks are also beneficial to the government, as they help spur (economic) growth and create jobs in the wider economy. Such growth has a trickle-down effect, with more money and resources released into the market, benefitting everyone, not just the wealthy. Thus, it can be argued that even though Musk takes advantage of such incentives to stay profitable and grow his businesses, these regulations ultimately help society in the long run.
Public Opinion
Though the amount of taxes paid by the wealthy, particularly Musk, is often called into question, public opinion of him and his companies remains largely positive. This is due to the fact that he and his companies have made great strides towards benefiting society in recent years, such as the creation of jobs and investments in new technologies.
In addition, Tesla and Musk’s other companies have become advocates for green energy initiatives, contributing to the fight against climate change and reducing the amount of emissions from traditional energy sources. As a result, a large majority of the public has a favorable opinion of Musk and his businesses, despite the fact that he takes advantage of tax breaks and incentives.
The reality is that, like all businesses, Musk and his companies are legally obligated to pay taxes. However, due to their size and the amount of investment they have attracted, they are able to take advantage of various tax exemptions and incentives, which lowers their overall tax burden. Despite this, they are still making meaningful contributions to society, while also helping to reduce the amount of taxes paid by others due to the increased investment they are bringing in.
