GE's Scandalous Tax Breaks Are Rooted in Politics

Last Updated Mar 26, 2011 10:04 AM EDT

General Electric's (GE) U.S. profits in 2010 came to $5.1 billion, while worldwide it earned $14.2 billion. It's tax bill for the year? $0.00. Over the last three years, GE's effective tax rate -- how much it actually pays the feds -- is a minuscule 3.6 percent. By the way, since 2002 the "imagination at work" company has put its thinking cap on and cut 20 percent of its domestic work force, while shipping thousands of jobs overseas.

How does that happen? The short answer is simple enough: GE is the best corporate tax dodger in all the land. As the NYT's David Kocieniewski documents in his excellent piece today, the company's peerless mix of aggressive lobbying in Washington, creative accounting and battery of in-house tax experts has paid off handsomely. In fact, GE actually earned tax credits of $3.2 billion in 2010.

Yet the long answer, while more complex, is even more important in understanding how a giant multinational can escape the tax man. Although a range of factors have played a role, from the declining influence of organized labor to runaway executive compensation, the story begins with major shifts in politics and public policy dating back to the 1970s. Because GE, while clearly best-of-class in exploiting these changes, is merely a symptom of a more serious disease. As Kocieniewski says:
While General Electric is one of the most skilled at reducing its tax burden, many other companies have become better at this as well. Although the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less.
The tax man leaveth
Reasonable people can disagree over how much businesses should pay in taxes. What's indisputable is that in the U.S. these taxes have been falling for decades. And while the nominal corporate tax rate of 35 percent is the highest in the industrialized world, extensive loopholes mean that American companies pay far less than firms in most other advanced countries.

Between 2000 and 2005, the average corporate tax rate in the U.S. was 13.4 percent, according to Washington think tank the Center on Budget and Policy Priorities. That was the second-lowest among the G7 leading industrialized countries and nearly 3 percent below the average rate paid by nations in the Organization for Economic Cooperation and Development, which comprises the world's biggest economies (see chart at bottom for a list of average international tax rates). Said the nonpartisan Congressional Research Service in a 2007 report:
Despite concerns expressed about the size of the corporate tax rate, current corporate taxes are extremely low by historical standards, whether measured as a share of output [i.e., GDP] or based on the effective tax rate on income.
As a result, the amount of corporate taxes collected in the U.S. has been falling for more than 30 years, even as it has risen in other developed economies. During the 1950s, federal corporate tax revenue in the U.S. averaged 4.7 percent of GDP. By 2009, corporate taxes as a percentage of GDP had fallen to 1.9 percent. That has hit the nation's pocketbook hard. In 2007, the Treasury Department estimated the loss in government revenue from corporate tax breaks at $1.2 trillion over 10 years. Says financial pundit Yves Smith:
The idea that U.S. corporations are heavily or even meaningfully taxed is a canard (and this is true at the small end of the spectrum too). While nominal tax rates may appear to take a serious bite out of corporate earnings, a myriad of loopholes and income-shifting schemes allows companies to slip the taxman's leash.
Trans-partisanship in action
Now here's a vital point in understanding this trend and, more specifically, why GE's taxes are so low: Corporations have seen their taxes decline under both major political parties. Former Democratic president Jimmy Carter got the ball rolling in 1978, when he bowed to pressure from pro-business lobbyists and slashed corporate tax rates. In another concession to moneyed interests, he also cut the top rate on capital gains from 48 percent to 28 percent. Republican Ronald Reagan went even further in lowering corporate rates and capital gains in 1981.

In other words, this massive decline in corporate taxes goes way back, and it transcends differences in economic philosophy. The engine of that change is politics. If rival lawmakers in Washington have been able to agree on one thing over the years, it's that their political interests are deeply enmeshed with corporate interests.

A recent case in point is President Obama's move this year to appoint GE chief executive Jeffrey Immelt as his "jobs czar." Although this role requires Immelt to think broadly -- and objectively -- about how to boost employment in the U.S., GE has helped block legislation that would eliminate tax breaks for U.S. corporations that transfer jobs overseas. Why? Because the bill, which sought to raise taxes on multinationals' foreign earnings, would've cost GE billions of dollars.

Or take GE's efforts in 2008 to sway Rep. Charles Rangel, D-N.Y., who as chairman of the House Ways and Means Committee at the time had the power to thwart Congress in eliminating lucrative tax shelters for GE. Kocieniewski describes the company's head tax wonk, one John Samuels, imploring the lawmaker to preserve the tax breaks:
As he sat with the committee's staff members outside Mr. Rangel's office, Mr. Samuels dropped to his knee and pretended to beg for the provision to be extended -- a flourish made in jest, he said through a spokeswoman.

That day, Mr. Rangel reversed his opposition to the tax break, according to other Democrats on the committee.

The following month, Mr. Rangel and Mr. Immelt stood together at St. Nicholas Park in Harlem as G.E. announced that its foundation had awarded $30 million to New York City schools, including $11 million to benefit various schools in Mr. Rangel's district.
Interests align like planets. Executives like Immelt and Samuels -- and every pol in Washington -- know how the game is played, and none play it better than GE. Other corporations also expertly work the system. But the problem, finally, is political. GE will continue stiffing the tax man until someone in charge stops them.


Tax chart from the Center on Budget and Policy Priorities
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    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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