"Cronyism in Washington Leads to GE Paying no Taxes"

Sydney M. Williams

Thought of the Day

“Cronyism in Washington Leads to GE Paying no Taxes”

March 29, 2011

At the Internal Revenue Service, General Electric must be to business what Warren Buffett is to the individual; both generate enormous profits, yet neither pays much, if anything in taxes.

An article by David Kocieniewski in last Thursday’s New York Times highlighted the fact that in 2010 GE generated $14.2 billion in profits of which $5.1 billion came from the U.S. Instead of owing taxes, the company claimed a $3.2 billion tax credit. (The reason had to do with tax loss carry-forwards at GE Capital. Mr. Kocieniewski report is not strictly accurate, as GE does pay payroll taxes on 150,000 U.S. based employees, as well as state and sales taxes.) Nevertheless, the column generated a lot of interest. The next day, after receiving 975 comments on their website, the Times issued a terse statement: “Comments no longer being accepted.

Public companies like GE are owned by shareholders; management and the board of directors have a responsibility, within the confines of the law, to run the business in the interests of their owners, and that includes adhering to a tax policy that takes full advantage of what the tax code allows. GE is not at fault in this instance; the problem lies in the system.

First, it should be understood that federal revenues collected from corporate taxes, in the past year, comprise about 6% of overall tax collections; so, as outrageous as this situation is, it is relatively small beer. Nevertheless, while as a reporter, Mr. Kocieniewski was omissive and somewhat inaccurate, as an editorialist he provided a valuable service in highlighting an untenable situation. In 1986, as part of the Tax Reform Act of 1986, the statutory corporate tax rate was cut from 46% to 34%, while closing billions of dollars in loopholes. The overall effect was to raise the effective rate to 26.5%, according to a study by Robert McIntyre and T.D Coo Nguyen in Multinational Monitor. That decline in the statutory rate (and unsurprising to anyone who understands the Laffer curve) resulted in an increase in corporate taxes. Throughout the 1990s and the 2000s, Congress, bowing to increasing lobbying pressure from corporations like G.E., began adding deductions, exemptions and credits to the tax code. As a result, the effective tax rate on corporate taxes declined, as did those taxes as a percent of total receipts, even as the nominal rate was increased from 34% to 35%. The effective rate has declined to less than half the statutory rate.

In his January 25th State of the Union message, President Obama proposed reducing the corporate tax rate, while eliminating a number of loopholes (à la President Reagan in 1986.) A February White Paper from the American Enterprise Institute notes that a number of congressional committees are working on an overhaul, including House Ways and Means chairman, David Camp (R-MI) and Senator Max Baucus (D-MT), of the Senate Finance Committee. Perhaps this injustice will get resolved. I hope so.

Today, the thirty-one members of the OECD have an average statutory corporate tax rate of 25.5% (the U.S., at 35%, has the second highest rate behind only Japan.) Corporate taxes in those OECD countries contribute about 2.75% of GDP. In the U.S., with our higher statutory rates (and, more importantly, higher effective rates) corporate taxes generate about 2.25% of GDP – another argument demonstrating that lower marginal tax rates generate more revenues.

General Electric, unsurprisingly, given that they employ 975 people in their tax department, took issue with the Times story, pointing out that if one excludes the impact of its losses in GE Capital that the effective tax rate is 21%. That is beside the point, as GE Capital is an integral part of GE. And, while GE decided not to form a bank holding company in 2008-2009, they certainly benefitted by taxpayers bailing out the banking system. There is, at the same time, a delicious irony in Mr. Obama appointing GE CEO, Jeffrey Immelt to head the President’s Council on Jobs and Competitiveness. It may work, but it smacks of hiring the fox to guard the hen house, somewhat akin to FDR’s hiring of Joseph Kennedy, a man who had made a fortune buying and selling businesses in the 1920s using information that today would be considered dubious, to become the SEC’s first chairman in 1933.

The situation that allows a GE to legally avoid taxes can largely be attributed to the increased complexity of the tax code. Those businesses (and individuals) who can afford the most competent accountants and lawyers and the best lobbyists are the beneficiaries of this convoluted system. One should expect corporations to explore every avenue to legally reduce their tax obligations. Their responsibilities to their shareholders take precedence over any benign feelings they may have toward government. In his farewell address, in January 1961, President Eisenhower warned against what he saw was a looming military industrial complex: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military complex.” One has only to substitute “financial corporations” (GE still derives about 20% of its income from GE Capital) for “military complex” and the same warning should hold. It was this cronyism between Congress and a consortium of large American corporations – banks too big to fail, Fannie Mae and Freddie Mac and large conglomerates like GE – that brought our financial system to its knees three years ago. Letting the status quo stand, as the Dodd-Frank Bill largely does in terms of banks too big to fail, presents a continuing risk with no upside.

The tax code should be simplified. Nominal rates should be lowered and loopholes eliminated or drastically reduced. And term limits should be imposed on Congress to limit their susceptibility to “unwarranted influence.”