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The corporate tax shuffle

By Dylan Matthews

Christopher Helman of Forbes has a great piece on the corporate tax payments of prominent companies. Here's how GE managed to avoid paying a cent to the U.S. government in 2009:

The most egregious example is General Electric. Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.

[...] It's GE Capital that keeps the overall tax bill so low. Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain). Not only do the U.S. losses balance out the overseas gains, but GE can defer taxes on that overseas income indefinitely. The timing of big deductions for depreciation in GE Capital's equipment leasing business also provides a tax benefit, as will loan losses left over from the credit crunch.

But it's the tax benefit of overseas operations that is the biggest reason why multinationals end up with lower tax rates than the rest of us. It only makes sense that multinationals "put costs in high-tax countries and profits in low-tax countries," says Scott Hodge, president of the Tax Foundation. Those low-tax countries are almost anywhere but the U.S. "When you add in state taxes, the U.S. has the highest tax burden among industrialized countries," says Hodge. In contrast, China's rate is just 25%; Ireland's is 12.5%.

Hodge has a point, inasmuch as the U.S. corporate tax rate really is (pdf) larger than in most developed countries, even as revenues are considerably lower and shrinking. But that doesn't suggest that a simple cut in the corporate income tax would bring back this revenue. If these companies have developed practices for sheltering income overseas, what's to say they won't continue to do so even after the tax rate is cut, meaning that revenue would actually fall? The Wyden-Gregg reform package takes the right approach, lowering the rate at the same time as it subjects foreign profits to the tax. This makes evasion both harder and less attractive, and would hopefully boost revenue, though we'll have to wait for a JCT score to be sure.

-- Dylan Matthews is a student at Harvard and a researcher at The Washington Post.

By Multiplatform Editor  |  April 6, 2010; 12:38 PM ET
Categories:  Taxes  
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Comments

All of this discussion stems from the chattering class' bereft understanding of economics.

Tax is simply another cost of doing business and is passed on to the consumer just as any other cost is.

Bottom line is there is really no such thing as a corporate tax. Corporations don't pay tax....YOU DO....everytime you buy their goods and services.

Posted by: WrongfulDeath | April 6, 2010 1:03 PM | Report abuse

WrongfulDeath, I respectfully disagree. Corporations that pay taxes (and there should be a corporate alternative minimum tax, so this kind of sh*t doesn't happen) don't have as much money to buy off congresscritters as these expenses are not deductible. And corporations can't raise prices indefinitely, as people will reach a point where they stop buying, or other less greedy corporations are willing to take less profit to increase market share move in. Oil is an exception, because everyone uses it and it is a virtual monopoly with only a few players that have created an informal cartel and use monopoly tactics to regulate prices, but even here, taxation is a way to limit their ability to buy influence.

Remember, the supreme court said that corporations are people, so they should pay taxes like everyone else.

Posted by: srw3 | April 6, 2010 1:14 PM | Report abuse

this is a great example but I believe that Wrongful death is right. While this should be fixed I don't think that anyone should really believe that this won't be passed onto the consumer. It always is.

srw3,

what does GE for example make? They owned NBC in 2009. You don't think they'd pass that cost onto lesser salaries for their employees, higher advertising costs etc. They make MRI machines. You don't think those prices would go up with no explanation and worse yet no one ever seeing that because its hidden? That's two of likely hundreds of products and services GE makes and they'll all be affected if the author got his way.

I agree it needs to end and I think the Wyden/Gregg plan is a good start but don't be naive to think that just any old company can turn around and take General Electric's place.

Sorry, it just won't happen. They're too ingrained in the fabric of America.

Posted by: visionbrkr | April 6, 2010 1:29 PM | Report abuse

VB, what's your point? GE has a monopoly position in MRIs, so they shouldn't pay taxes on their profits? That networks shouldn't pay taxes on their profits because it will cost them money? Why do you assume that corporations can't pay the taxes out of existing profits and instead have to raise prices every time a cost of business increases? If this is the case, then we need to radically rethink how we charter and regulate large corporations.

Posted by: srw3 | April 6, 2010 1:47 PM | Report abuse

The study you referenced is a good first step to counter the new push to lower corporate taxes. The study correctly points out that the statutory tax rate is just one of many inputs needed to determine the effective corporate tax that is actually paid and that influences corporate behavior.

In the US the "effective" corporate is actually about half of the statutory rate being bandied about these days. The effective rate, corporate taxes as a share of corporate profits in the US is just barely over 20% or about half of the statutory rate.

I find it hard to believe that such researchers as the ones who did this paper can not calculate the "effective" rate for other countries. The data on tax receipts as a share of GDP implies that the US effective rate is one of the lowest in the world unless profits in the US are a much different share of GDP than in the rest of the world. But this data should be available and researchers could easily make apples to apples comparisons of effective tax rates across major countries.

Since virtually no US corporation pays anywhere near the statutory rate you article is a good first step in correctly identifying the movement to lower corporate taxes as a pure piece of propaganda designed to severely distort the facts.

Keep up the good work.

Posted by: seerrees | April 6, 2010 1:50 PM | Report abuse

VB: Doesn't seem perverse to you that GE got a tax rebate on profits of 10 billion?

What I hear you saying is that there is nothing to be done and corporations can continue to use their tax free profits to influence congress to keep them from having to pay taxes in the future.

Posted by: srw3 | April 6, 2010 1:54 PM | Report abuse

"While this should be fixed I don't think that anyone should really believe that this won't be passed onto the consumer."

This is such a stupid argument. I've never heard anyone argue that higher payroll taxes or higher income taxes are simply passed on to the person's employer! But by the same logic that says the customer "truly" pays for corporate taxes, it should also mean that the employer "truly" pays for income taxes.

The fact that nobody says that proves the people who say this aren't really informed about about the economics--they're just passing on a talking point fed to them by organizations who don't want to pay corporate taxes.

Posted by: theorajones1 | April 6, 2010 2:06 PM | Report abuse

Anne from GE here:

GE's U.S. tax expense reflects the fact that we had losses in our financial services business in 2009, which resulted in tax benefits. Because we file a consolidated tax return, we could use these tax benefits to offset income earned by our U.S. industrial businesses.
Like many other financial institutions, GE Capital incurred a pre-tax loss in 2009 during the worst economic crisis since the Great Depression. In contrast to the 2009 results, GE’s cumulative U.S. current tax provision from 2000-2009 totaled almost $7.4 billion. GE paid almost $23 billion of taxes to governments around the world from 2000-2009, making it one of the highest payers of corporate income taxes.

Posted by: AnnefromGE | April 6, 2010 2:06 PM | Report abuse

srw3,

Sure its perverse and it should be fixed but don't be naive when you "fix it" to think that GE is just going to say, "oh well let's keep our profits down so we'll keep the srw3's of the world happy". Its a matter of who they care more about and the answer is their shareholders not you and me.

Posted by: visionbrkr | April 6, 2010 2:36 PM | Report abuse

theorajones,

you don't think that I think twice when hiring a new employee as a small business owner when i realize what my payroll tax burden is going to be? Its not passed onto the employer but many small businesses don't hire more employees because of the cost. Mine included.

Damn sure I do. Its easier to get the employees I have to work harder (especially in this economy).

Posted by: visionbrkr | April 6, 2010 2:45 PM | Report abuse

So VB, you agree its perverse, but you don't have any solutions for the problem.

How nice of you to squeeze more out of your present employees without giving them any extra pay for the extra work they do. No wonder you defend the status quo. I am sure that if work slowed down sufficiently, you wouldn't hesitate to cut their hours/jobs/benefits.

A perfect example of the golden rule: He who has the gold makes the rules. Mighty Christian of you...

Posted by: srw3 | April 6, 2010 2:56 PM | Report abuse

srw3,


do you even know what I pay my employees? Let's put it this way I'm not eligible for the subsidy for HCR because my employees make over the threshold.

I also took a 20% pay cut last year and I didn't cut my employees pay a cent. They just didn't get a raise for the first time in 5 years.


I'm also the first one here, last one to leave, work many times at night, weekends. I also work from the very few vacations I get thanks to my crackberry. I also give my employees for the last 3 years (since i can afford it) a 6% bonus in a defined contribution retirement plan. All as an employer who worked 3 jobs to start my business and fight every day to keep it afloat.

Please don't lecture me unless you have a clue about me other than what is typed in a comments section of a website. I'd hope to think I wouldn't judge you.


I also don't defend the status quo and if you listened to what I said I'm in favor of resolving the issue as you and the author say but I also want all to be realistic as to the consequences of it. Companies with shareholders don't care. You can't legislate them to have a conscience no matter how much you'd like to.

Posted by: visionbrkr | April 6, 2010 3:12 PM | Report abuse

People tend to focus far too much on the top marginal tax bracket. Wether corporations or individuals the top marginal tax bracket doesn't really tell you that much.

I do taxes for high wealth individuals and without exception their income tax burden, as a percentage of income, is far less than mine. Yes, they pay more in taxes, but roughly 20% of my income is taken back by the federal government in income taxes compaired to their 10% (the imbalance varies, of course.) This is why Warren Buffet fealt comfortable walking into a meating of hedge fund managers and offering to give any of them one million dollars if they could prove they pay a higher percentage of their income in taxes than their secretaries do. None of them took him up on it.

Corporations are the same way. Rich corporations hire lobyist to get special tax breaks and loopholes inserted into the tax code. It works, indeed it is some of the smartest money a corporation can spend.

http://www.msnbc.msn.com/id/30113628/

Posted by: nisleib | April 6, 2010 3:32 PM | Report abuse

VB its true that I only know you by what you write, but you certainly implied that you got your present employees to work harder without actually paying them more. If you wanted to make a different impression, I suggest you improve your writing style or be more explicit in what you are writing.

" I don't think that anyone should really believe that this won't be passed onto the consumer. It always is."

you just said that tax increases would be automatically passed on which I disagree with.
Why didn't you just pass the costs on to your customers this year, instead of taking a pay cut? Don't the same rules of economics apply to corporations?

"I agree it needs to end and I think the Wyden/Gregg plan is a good start"

I don't see the wyden plan as positively as you do. I want to see the tax code get more progressive along with simplifying it. Wyden goes the wrong way.

In terms of corporate welfare
"Wyden-Gregg directs
the Congressional Budget Office to identify the least productive of this spending for possible cuts and
report those findings to the House and Senate Budget Committees for consideration."

OOHHH maybe they will draft a strongly worded letter along with the suggestions for cuts...There is no substance to this kind of fluff.

Meanwhile, in order to actually make a difference, do you support eliminating corporate personhood, in terms of corporations or their front groups being able to donate to (bribe) congresscritters?

I agree with nisleib. Corporations get a much bigger ROI by owning a few key congresscritters than investing in new technology or paying their low level employees more.

Posted by: srw3 | April 6, 2010 4:42 PM | Report abuse

Companies with shareholders don't care. You can't legislate them to have a conscience no matter how much you'd like to.

You can't legislate a conscience but you can penalize bad behavior and eliminate perverse incentives to offshore profits and workers.

there are things that can be done, and I want to see that happen and not just say "While this should be fixed I don't think that anyone should really believe that this won't be passed onto the consumer. It always is."

Posted by: srw3 | April 6, 2010 4:46 PM | Report abuse

srw3,

admittedly grammar and prose are not my strongest suit.

If my employees are working harder but i was paying them more than similar businesses in my industry, would me not giving them a raise for working more hours (as a salaried employee) be wrong? I'm sorry I don't think so.

I'm assuming your original post to me was in regard to my reply to TheoraJones. In that i said, "Damn sure I do. Its easier to get the employees I have to work harder (especially in this economy)."

That implies that I could but doesn't mean that I did.

And not every business can just raise prices. Its simplistic to think that's the case. Some businesses have little impact on pricing. Mine is one. I have no impact on the pricing myself so i cannot just pass along the costs as you suggest.

Posted by: visionbrkr | April 6, 2010 5:02 PM | Report abuse

What srw3 and those like him don't understand is there is a prevailing level of return demanded by investors and when costs go up (and taxes are just another cost), the investors will not take less.

If you try to force them to take less, money will flow from that enterprise to one that will pay the prevailing standard rate.

It's a balloon that srw3 tries to squeeze and then is mystified when the other end of the balloon expands.

Posted by: WrongfulDeath | April 6, 2010 5:10 PM | Report abuse

Wow, *DYLAN MATTHEWS*! It's so enlightening to get the views of a *STUDENT RESEARCHER* (known as an "intern" at every other viable business, FYI), as endorsed by the Post!

Pathetic, once again. Where does the downward slide end, Fred?

Posted by: Jerkstore | April 6, 2010 5:16 PM | Report abuse

#VB: If my employees are working harder but i was paying them more than similar businesses in my industry, would me not giving them a raise for working more hours (as a salaried employee) be wrong? I'm sorry I don't think so.

If you are asking your employees to do more for the same money, then they are definitely getting the short end of the stick, salaried or no...Does being a salaried employee somehow make it ok to add to their workload without more compensation? I don't get this, especially having been an "exempt" employee for most of my life. What difference does it make what other people are paying. YOu hired them saying here is your salary for doing this much work, then you add work without salary increases. Workers get the shaft.

@WD:What srw3 and those like him don't understand is there is a prevailing level of return demanded by investors

Is this some kind of immutable rule of the universe? I don't buy it. The prevailing level of return is a supply and demand thing like other things in a market economy. If all corps had to pay their share of taxes, then no corp would have an advantage. Its called a level playing field. And things like investment security, potential for growth, and freedom from having to pay penalties for trying to avoid taxes also come into play when selecting an investment.

Posted by: srw3 | April 6, 2010 6:06 PM | Report abuse

"If all corps had to pay their share of taxes, then no corp would have an advantage. Its called a level playing field."

Nations compete for the advantages of having corporations locate in their nation. It's the free market of tax avoidance. What you advocate (surprise) is more central control and the only way to achieve that is total world dominance.

Ok with me as long as the US is the ones doing the dominating!

Posted by: WrongfulDeath | April 6, 2010 6:34 PM | Report abuse

@ WrongfulDeath:Nations compete for the advantages of having corporations locate in their nation. It's the free market of tax avoidance.

If this were true, every coporation would set up shop in somalia, as there is no corporate governance or taxation scheme for corporations. There are advantages like transparent markets, regulatory agencies, stable currency, etc. that corporate taxes pay for, right?

Posted by: srw3 | April 6, 2010 8:03 PM | Report abuse

Dylan, I believe you've missed the point of the original article.

There is no suggestion that US corporate taxes be lowered in order to level the playing field.

Instead, the proposal is to tax foreign income, as described in the following passage on page 2:

"If the plan passes, a U.S. company that pays a 25% tax on profits in China would have to pay an additional 10% income tax to Uncle Sam to bring it up to the 35% corporate rate."

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Posted by: secret123 | April 7, 2010 5:55 AM | Report abuse

srw3:

If you are asking your employees to do more for the same money, then they are definitely getting the short end of the stick, salaried or no...Does being a salaried employee somehow make it ok to add to their workload without more compensation?

. . . YOu hired them saying here is your salary for doing this much work, then you add work without salary increases. Workers get the shaft.


you really don't get the idea of what a salaried employee is do you? There is no "set" at least in my business amount of work that needs to get done and then that's it. Its not as simple as you make it. When i suggest that occasionally an employee may work longer hours its for example time at the end of the day required to complete a project under deadlines. Likewise I look the other way and don't dock them when they show up late, take extra time at lunch or have to take a child to the doctor's, go to a school function etc.

Ask nisleib who I believe at one point said he was an accountant how much time he's put in over the last several months.

Not everything fits into your nice little box you'd like it to and not every boss is like the scumbag at Massey who is looking to drag every drop of energy from their employees.

You just don't get it and sadly never will.

Posted by: visionbrkr | April 7, 2010 9:26 AM | Report abuse

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