The cult of tax efficiency: The totally legal way that Tesla, Ford, Netflix and dozens of other large companies use U.S. law to pay their C-suite more than Uncle Sam

President Joe Biden is charging ahead on his long-shot bid to soak the rich, recently proposing plans to hike taxes on the wealthy and corporations, while the IRS, buoyed by a funding boost, says it is cracking down on rich tax cheats. Biden is betting that this populist approach will set him apart from his predecessor (and rival) Donald Trump, whose 2017 tax cuts dramatically reduced the government’s income.

Indeed, some of America’s most successful corporations did so well during this period, they paid more money to their C-suite than to Uncle Sam, according to research released this week from the Institute for Policy Studies and Americans for Tax Fairness, two nonprofits that support tax reform.

Ford, Netflix, Salesforce, Tesla, T-Mobile and 30 others paid more to their executives than they did in federal income taxes between 2018 and 2022, found the report. Altogether, 35 companies paid more to their C-suite than to the federal government over that five-year period, according to the research, which looked at corporate filings with the Securities and Exchange Commission and previous research from the Institute for Taxation and Economic Policy.

“It’s no coincidence that some of the nation’s most notorious tax dodgers also pay their executives too much,” write the report’s authors, calling executive pay “out of control.”

“Executives are rewarded for ‘tax efficiency’—the euphemism for corporate tax dodging—which is often an easier way to raise profits than by creating goods and services more customers want to buy,” they write.

Lose money now, pay tax maybe never

Take Tesla. The electric carmaker had been losing money for years before becoming consistently profitable in 2019; over the five-year period in the report, it booked $4.4 billion in U.S. income. CEO Elon Musk, who spent years as the world’s richest person thanks largely to Tesla stock, was able to negotiate the largest executive pay package in history. Despite this, the company’s total federal income tax over that period was less than zero—it received a $1 million refund.

That’s because Tesla has benefited from generous government subsidies in the form of grants and tax credits for clean-energy projects, whose value has been calculated between $3 and $5 billion. “They really are the king of subsidies,” Zachary Tashman, senior researcher at Americans for Tax Fairness, told Fortune.

And Tesla took advantage of a popular provision in the tax code—using years of losses, from its early, unprofitable days, to reduce its tax liability in the present.

“Companies are allowed to ‘carry forward’ excess losses to years with profits, with the old losses canceling out current earnings,” the report explains. That’s how Tesla, which last year made $10 billion in profit on $96 billion in revenue, was able to pay no federal income tax.

“Tesla had some lean years domestically, but clearly it was not so lean that they couldn't give Musk a $2.28 billion pay package in 2018,” Tashman said.

Tesla did not respond to a request for comment.

A Delaware court recently voided Musk’s record-breaking pay package, which could have netted him nearly $56 billion, in response to a shareholder lawsuit; Musk is likely to appeal that decision. “But even if that whole package gets eliminated, Tesla would still have paid their executives more than in taxes, because their overall [federal tax] rate is so low,” Tashman said.

Carrying over losses from less- to more-profitable years is a very common tactic in the corporate world. (It’s also an option for individuals, as former President Trump famously demonstrated.)

“Everybody does it; this is actually built into the tax code,” Jennifer Blouin, a professor of financial management and accounting at Wharton School of Business, told Fortune. “The federal government thinks this is a nice way to help companies over bumpy times.” Currently, no limit exists on how long companies can take advantage of past-year losses.

While Tesla benefits from many unprofitable years, competitor Ford takes a different tactic—shrinking its U.S. profits on paper, according to ATF.

“Even though 70% of the company’s assets are located in the U.S. and nearly two-thirds of its revenue is domestic, less than half of their pre-tax income is ascribed to the United States,” the report says. As a result of moving some of its profits to less-taxed nations, the company was able to pay just $121 million in U.S. federal income taxes over five years, one-third of the $355 million it gave its executives over that time period.

Ford did not respond to a request for comment.

In theory, Ford could have a good reason for reporting lower profit in the U.S. than abroad—if, for instance, it had heavy research and development expenses and the bulk of its executive team here, it’s possible those higher costs would offset its domestic revenue for a lower profit, Blouin noted.

The option to save big

Netflix, the largest and most profitable streaming service, uses yet another tactic to lessen its tax burden—offering stock options to executives. The “stock option loophole” cut Netflix’s tax liability by $1 billion over five years, according to the report.

Stock options, which let employees buy a successful company’s shares at a substantial discount, are popular with many fast-growing companies as they can allow for generous compensation packages. From a tax perspective, though, this creates a two-faced problem. Companies are allowed to report the options’ lower value on investor reports (thus making profits look higher) while reporting their higher value for income-tax purposes (thus making profits, and by extension taxes, lower).

That’s especially helpful for Netflix, which gave the bulk of top execs’ pay in stock options, according to the report.

In a statement, a Netflix spokesperson said, “Netflix complies with tax laws and regulations in the U.S. and around the world.  From 2018-2022 we paid global income taxes in excess of $2B and in 2023 we paid nearly $1.2B in global income taxes, the majority of which was U.S. federal income tax.”

Stock options are a particularly visible issue now, with the market near record highs, noted Michael Meisler, a former partner at Ernst & Young who now lectures at Baruch College.

“The use of equity-based compensation is pretty prevalent in these large companies, and you’re looking at it at a point where a lot of these companies are at all-time highs,” Meisler told Fortune. “Two years ago, a lot of these people thought they were underpaid somehow.”

Public companies report estimates of federal income tax payments in securities filings; they are also required to report the compensation of only the highest-paid five employees. Because of this, “almost certainly, we’re under-guessing what these companies pay their executives,” Tashman said.

View this interactive chart on Fortune.com

The tax paid by U.S. corporations has been flat for years, despite steadily rising profits. However, the five-year period starting in 2018 was especially low thanks to tax cuts implemented under the Trump administration.

In 2021, just 6% of the federal government’s revenue came from corporate income taxes, Meisler noted. Some of that is because not all businesses pay taxes as corporations (others are partnerships or S-corporations, which simply funnel their income to individuals), but a great deal of that is because corporate tax rates have fallen dramatically in recent decades, while tax credits and sweeteners have proliferated.

And companies are legally required to take advantage of all the breaks they can to increase their profits, according to Meisler.

“Once you write the laws, the corporate tax director has their job, within the scope of the law, to minimize their tax liability,” he said. If “I can minimize my taxes by 10 cents a share, they kind of have a duty to their shareholders to do that.”

That's a problem, according to tax-reform groups, including IPS, ATF, and the Institute for Taxation and Economic Policy. These progressive groups are advocating for a higher corporate tax rate from the current 21% and for the U.S. to join the OECD international tax framework agreement, which would implement a global minimum tax rate and reduce the incentive for companies to shift their profits globally.

In ATF’s view, the problems of highly -paid executives and insufficient taxes are two sides of the same coin.

“Executives are in part reaping rewards for the corporate tax avoidance strategies they pursue, and corporate boards have more money to spend on their highest-paid employees when they don’t have much or anything to pay in taxes,” the report says. “Until this self-reinforcing cycle is broken, we’ll have a corporate tax and governance system that works for top executives—and no one else.”

This story was originally featured on Fortune.com