GE's Bright Idea: No Taxes

Recently General Electric announced that it made $14 billion in profit last year ($5.1 in the US). Its tax bill? Nothing. Nada. Zero. Zip. In fact, it claimed a tax benefit of $3.2 billion.

It did this through a maze of loopholes and tax breaks, and by not moving profits back to the United States. According to the Times article:

In a regulatory filing just a week before the Japanese disaster put a spotlight on the company’s nuclear reactor business, G.E. reported that its tax burden was 7.4 percent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.

In other words they're playing a shell game to avoid paying taxes. This has serious implications for the rest of us:

Such strategies, as well as changes in tax laws, have pushed down the corporate share of the nation's tax receipts -- from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.

This is not the first time GE has done this sort of thing:

As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill. In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E. — a company for which he had once worked as a commercial pitchman — was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.

“I didn’t realize things had gotten that far out of line,” Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.

Some people don't find anything wrong with this, and think that corporations should pay any taxes at all. "It's double taxing," they'll say. Or, "They'll just pass it on to the customer."

First, it's not double taxing: corporations deduct all their expenses -- including salaries they pay to workers, cost of materials, local and state taxes, cost of production, even hotel stays and meals for CEOs -- to calculate profit.

As for passing the cost on: since taxes are only on profits, that price increase may be insignificant. Let's say I buy a blender for $100 and the company's profit is $10. Let's say the manufacturer's effective tax rate is 6%, or 60 cents on that blender. If the company's tax rate goes to 30% it will pay $3.00 in taxes. If it passes every penny of that on to me -- which is not a given for many reasons -- the blender will cost $2.40 more, or 2.4%.

But more importantly, if I don't buy a company's products, they won't be passing the cost on to me at all. If I save my money instead of buying big sailboats, and giant TVs and $500 tickets to football games, I won't be paying the taxes for those companies.

The money to pay for things like roads and the military has to come from somewhere. By reducing corporate tax burdens we are increasing the tax burdens on regular people. If corporations pay more, citizens can pay less.

But when you come right down to it, most everything the government spends its money on -- weather satellites, the FBI, the Nuclear Regulatory Commission, highways, bridges, harbors, ports, the military, education -- is for the benefit of business. Yes, individuals benefit from these things, but they would have never happened without business demanding them.

For example: if you're like most people, the majority of the time you spend driving is between home and work. The highways are filled with trucks delivering stuff to businesses. Almost every time a new highway is proposed the argument is, "it'll be good for business."

Our military is used to "protect our interests" abroad. Those interests are entirely business interests. We invaded Iraq to ensure a stable supply of oil from a volatile region. We need oil to run our businesses. Shouldn't businesses help pay the salaries for the men and women in uniform who are protecting their interests?

Even the education system is essential for business. Without a system of free public education the United States would be totally uncompetitive in the world marketplace.

To be honest, there are some taxes that corporations already do pay their fair share of: Social Security and Medicare, the biggest part of the federal budget. Corporations should contribute their fair share to the rest of the federal budget as well.

Finally, when the Supreme Court ruled that corporations can spend unlimited amounts of money to influence the political process they declared that a company is a person for the purposes of free speech. If a corporation has the same right to free speech as a person, it should have the same responsibility as a person to pay taxes.

I'm not talking about sticking it to big corporations: I'm just talking about restoring effective corporate tax rates to the reasonable values they had under Eisenhower and Reagan. Is it right for companies like GE to turn their backs on America and avoid taxes by shipping all their profits off to the Caymans?