Letter to Wall Street Journal

The reference to Google's "30% tax rate" [Did Google Make Taxes a Scapegoat? February 3, 2006], is misleading. Although not unique to Google, it is worth pointing out that two-thirds of Google's tax expense is pure fiction. The company deducted stock-based compensation of $1.2 billion dollars on its tax return in 2005, which lowered taxable income to the point where its actual tax rate was only 11%. In accounting parlance, the stock-based compensation expense in the tax return is a permanent difference because it never shows up in the income statement. Nevertheless, to hide such a low tax rate from the public, FASB allows these stock option laded companies to debit the tax expense line and credit shareholders' equity with the tax effect of the stock-based compensation deduction taken in their tax returns. Accountants will readily recognize that both the debit and credit ultimately ends up in shareholders' equity, making it a wash and nothing more than pure window dressing. Two-thirds of Google's tax expense, which is reported in the cash flow statement as a "tax benefit," is not an expense by any stretch of the imagination.

Albert J Meyer