Who Could Blame G.E.?
By JOE NOCERA
With tax day fast approaching, many Americans are thinking hard, and perhaps a little creatively, about finding deductions to help lower their tax bills. Nobody, after all, likes paying more taxes than they have to. So why in the world should we expect the mighty General Electric to act any differently?
Because it’s a giant, profitable multinational corporation? If anything, the fact that G.E. is a big company should give it even more incentive than we mere human taxpayers to minimize its tax bill. The executives who run America’s corporations have a fiduciary duty to maximize profit for their shareholders. That’s what they’re programmed to do. One way to maximize profits is to minimize taxes, something G.E. does better than just about any other company. If I were a G.E. shareholder, I would be thrilled to learn that its vaunted 1,000-person tax department is viewed within the company as a profit center.
Yet the article The New York Times published a few weeks ago — saying that G.E. was likely to pay no federal income tax at all in 2010 — has landed like a bombshell, arousing the kind of populist outrage that hasn’t been seen since those derivatives traders at A.I.G. got their last big bonuses. In responding to the article, G.E. did not exactly help itself with its defensive tweets and conflicting statements. A week ago, a G.E. spokeswoman told a reporter that “G.E. did not pay U.S. federal income taxes last year because we don’t owe any.” On Monday, its tune changed. In an article jointly published by Fortune and ProPublica, a company spokesman said, “We expect to have a small U.S. income tax liability for 2010.”
Whatever. The point remains that the company is going to pay little or nothing in federal income taxes for 2010. And the unambiguous reason for this is that G.E. took full advantage of the various tax loopholes in the U.S. tax code that are available to it. Wouldn’t you? The real villain here isn’t G.E. for gaming the corporate tax system. Rather, the villain is a political system that makes the corporate tax system so easy to game.
There are two primary reasons why G.E.’s 2010 tax bill is so low. The first is pretty straightforward: its finance arm, G.E. Capital, lost billions of dollars during the financial crisis. Like any business entity, it is allowed to use those losses to help reduce its tax bill. This is known as a tax-loss carry-forward, and it isn’t remotely controversial.
The second tax break, though, called the active financing exception, is a whole different kettle of fish. According to Robert Willens, a corporate tax expert, this tax break was first enacted in 1997. It allows companies to avoid paying U.S. taxes on overseas profits — if those profits were derived by “actively financing” some activity or deal. (The rationale is that this is supposed to help “equal the playing field” with foreign multinationals that get the same tax breaks from their home countries. Yadda, yadda, yadda.)
The active financing exception was never supposed to be a permanent part of the tax code. Indeed, it still isn’t. But every year or two — after the usual campaign contributions and arm-twisting — it winds up back in the tax code “temporarily.” The Treasury now estimates that it costs the government $5 billion a year.
Is G.E. one of the companies that lobbies for the active financing exception? You bet it is. As Willens nicely puts it, “They are taking advantage of a loophole they helped create.”
But G.E. has also taken the next obvious step: It has managed, over time, to shift billions of dollars in profits from its U.S. income statement to its overseas income statements. Wouldn’t you know it? Most of their profits are also financing related. There is nothing illegal or even unethical about any of this. It’s Congress — the same Congress that is now screaming bloody murder about the deficit — that has paved the way for G.E.’s tax creativity.
The corporate income tax rate for American corporations is around 35 percent. If you talk to American executives for more than five minutes on the subject, they’ll tell you it’s too high. Andrew Liveris, the chairman and chief executive of Dow Chemical, claims in his new book, “Make It In America,” that the U.S. has the “second-highest corporate tax rate in the world.” A lower tax rate, he argues, could help spur a manufacturing revival in America.
And, maybe, just maybe, if American multinationals actually paid 35 percent of their profits in taxes, he might have a case. But it’s not just G.E. — none of them do. Mr. Willens told me that the typical multinational pays about half the stated tax rate. As for G.E., it says that its worldwide tax burden for 2010 was far lower than that: 7.4 percent.
The bonuses should be pretty good this year in the G.E. tax department.