GE's Jeffrey Immelt: Hopelessly Conflicted as Obama's Jobs Czar

Last Updated Jan 25, 2011 2:29 PM EST

Former U.S. Treasury economist Martin Sullivan cuts to the heart of why GE chief Jeffrey Immelt is a poor choice to serve as President Obama's jobs czar. The problem: A refrigerator-sized conflict of interest between the executive's duty to do right by GE and, as head of the new Council on Jobs and Competitiveness, to do right by the U.S.

Consider that like many other multinational corporations, GE has long lobbied for big tax breaks on its foreign earnings. There's a good reason for that: $84 billion. That's how much money GE had stashed overseas as of 2009. The conglomerate would love to repatriate those assets, but it doesn't want to pay the standard U.S. corporate tax rate of 35 percent. That's why GE is now pushing Congress for a tax holiday under which the rate would be slashed to 5.75 percent.

Geronimo: GE's plunging tax rates
As Sullivan notes, since the 1990s GE's effective tax rates have tumbled. And I mean fallen off a cliff, as his chart at bottom indicates. Here's why:
The decline in GE's effective tax rate has little to do with domestic tax breaks but is almost entirely due to low-tax foreign profits.
That's been a great boon to GE, since more than half of its revenue is generated abroad. With foreign sales booming, the company has in recent years moved more and more work outside the U.S. Yet GE's profits have risen even faster. In other words, Sullivan writes:
... GE is taking advantage of lax U.S. transfer pricing rules that make it easy to shift profits into tax havens.
What happened last time
Immelt would likely argue that slashing taxes on GE's foreign earnings would allow it to re-invest in the U.S., creating jobs and boosting growth. But research suggests that's not how companies typically use the money. Rather than pursuing domestic business opportunities, they do things like repurchase stock and otherwise shore up their financial position.

For instance, after lawmakers in 2004 cut the tax rate on foreign earnings to 5.25 percent in passing the ironically named "American Jobs Creation Act," IBM got a $2.8 billion refund. And how many American jobs did IBM create? Well, the following year it added fewer than 400 jobs -- worldwide. The company also significantly reduced its U.S. footprint. In short, not a lot.

Besides, players like GE with worldwide operations have other ways of bringing foreign income back into the U.S. without incurring a tax hit. One tactic: Using creative accounting to tap foreign earnings in funding the purchase of domestic competitors. Last I heard, job-creation wasn't exactly a hallmark of M&A:
"Sophisticated U.S. companies are routinely repatriating hundreds of billions of dollars in foreign earnings and paying trivially small U.S. taxes on those repatriations," said Edward Kleinbard, a USC law professor.
They avoid about $25 billion a year in federal income taxes, said Kleinbard, a former corporate tax attorney and former chief of staff at the congressional Joint Committee on Taxation.
Dueling loyalties

All of this may be good for GE shareholders, but it doesn't do a thing for most Americans. Deferring taxes on overseas income give the biggest U.S. companies a clear financial incentive to expand abroad rather than stateside, even as they lobby Washington to slash rates on repatriated earnings. The system also gives U.S. multinationals a major advantage over domestic businesses that don't enjoy the financial benefits of parking earnings abroad. Meanwhile, cutting taxes on overseas corporate profits reduces government revenue, affecting the federal deficit.

As Sullivan writes:
Citizens have a right to be concerned the president's new advisor will give priority to promoting the competitiveness of U.S. multinationals rather than the competitiveness of the overall U.S. economy. And why shouldn't he? He has a fiduciary responsibility to his shareholders to do exactly that.
How can Immelt, resolve these conflicting interests? I'd love to hear what business ethicists have to say on the matter, but here's my answer: He can't.


Thumbnail from flicker user Clearly Ambiguous; Immelt photo from Wikimedia Commons, CC 3.0
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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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