Yes, GE Paid Taxes in 2010 (We're Pretty Sure)

It turns out that a Fortune/ProPublica team has also been working on a story about GE taxes.  The upshot: GE lobbies a lot on tax provisions, which isn't very surprising.  Many of those tax provisions involve their worldwide distribution of income. Like virtually all companies, GE strives to take its income in forms and jurisdictions where it will be subject to the least tax, and since GE is very large and profitable, it has a lot of resources and flexibility to devote to this tax.


However, it seems that the New York Times was simply factually incorrect on the claim that wound up in its headlines: that GE paid no US taxes in 2010, and gained a "tax benefit" of $3.2 billion.  The company paid estimated taxes all year, and seems to have some tax liability for the year, though no one right now knows how much.  Including GE.  Frankly, the company probably won't know for several years, as large companies essentially have branch offices of the IRS in their headquarters, and their tax bills are the subject of lengthy negotiation.

Much of the confusion seems to be due to a technique that the New York Times has become very fond of: comparing financial accounting results to tax accounting results, and assuming that differences between financial accounting income and tax accounting income represent some sort of tax chicanery.

This is not a very good technique.  Financial accounting and tax accounting are not supposed to be the same; they're measuring different things.  The aim of financial accounting is to provide a true and complete picture of the company's financial condition; the aim of the tax code is, to put it crudely, to match taxes to ability to pay, net of special credits and deductions for things we like, such as investing, hiring, or making your company more environmentally friendly.  As one person quoted in the article notes, "Any correlation between the 'current tax expense' and the current tax payable is likely coincidental". To offer just one example: financial statements recognize changes in asset values when they're reasonably certain, because that gives the clearest picture to stockholders.  But tax accounting usually recognizes capital gains and losses when you actually sell the asset, because that's when you have the cash in hand to pay your taxes.  

In my original piece on this, I noted the confusing use of "net tax benefit" in the lead of the New York Times article, without ever explaining what that benefit was, where it was derived, or how it had affected GE's final tax bill, is a primary symptom of this sort of reporting.  I assume that the reporters would have explained it had they understood it (though perhaps I am uncharitable, and an editor simply cut it for space).  Whether they had a better understanding or not, the piece reads as if they simply ripped an item out of the financial statements and dropped it in because it sounded impressive, not because it had any particular relationship to what they were writing about.

Does GE take advantage of the complexity of the code to reduce its tax bill beyond what congress intended? Absolutely.  And does GE lobby a great deal on tax provisions that benefit the company?  Again, absolutely.  But unlike most people, this doesn't seem to me to be specially evil for doing so.  I don't think it's particularly different from the AARP lobbying on the taxation of social security benefits, or middle-class journalists taking every conceivable home office deduction they're allowed.  People, whether singly or in organizations, will ever strive to pay as little in taxes as possible.  As long as they're operating within the law, they have the same level of moral culpability.

For me, this is an argument against complexity, not an argument against GE.  Sure, maybe you'll gin up enough outrage to cut back on the foreign tax breaks that GE now takes advantage of.  But they--or something else--will come back.  It takes a constant mustering of political energy to prevent a corporation from getting this sort of thing through; as soon as you let that energy flag for a second, they'll slip through.  (So will the AARP!)  And not because of campaign contributions, but because congressmen are ill-informed about the many, many, many subjects they must vote on; because these corporations have headquarters in congressional districts; and because there are frequently at least some good arguments in favor of even tax breaks which are, on net, a bad idea.

If we want good tax policy, we need to get rid of the fantasy of "eliminating the loopholes" in the corporate income tax.  A corporate income tax needs to start by calculating income, and as anyone who has ever looked at a corporate financial statement knows, that's really complicated.  (Yes, I know I just said financial income and taxable income aren't the same--and they aren't.  But they suffer from many of the same problems.) Equipment has to be depreciated.  Assets have to be valued.  The expenses necessary to generate the income have to be netted out, and this is always a judgement call--do I need high-speed internet for my freelance pieces?  I'd say yes, but maybe you could make the argument that I should just walk over to the coffee shop two blocks away.

So we're not going to eliminate the loopholes, because "loopholes" is another word for "disagreements about what constitutes a reasonable expense". 

Given how much time and energy we spend arguing about these loopholes, I'd like to suggest that we stop, and instead focus on somewhere it's less taxing to capture the money: at the taxpayer.  The richest leech of a trust-fund baby in the world does not have enough money to hire GE's tax department.  Why not just eliminate the corporate income tax, along with the special treatment of capital gains and dividends, and the basis-step up in the estate tax, and collect the taxes when the money hits a person?  It wouldn't cost us that much money (it couldn't--the corporate income tax only collects a few hundred billion a year) and it needn't cost any, if we readjust the tax code appropriately.  It would allow us to target higher collections to actual rich people, rather than laying the burden equally upon every pension fund and 401(k) in the country.  And it would free up all the resources that are spent lowering corporate tax bills every year.

I know the objections.  

  • Corporations should pay their fair share (but corporations don't--ultimately either managers, employees, customers, or shareholders pay 100% of the tax)
  • This would help rich people (not if we taxed capital gains and dividends at ordinary income tax rates)
  • People would just shelter income inside corporations (I don't care if people don't have access to the money--if their company is growing tax free, bully for them.  If they're using the corporation to shelter money they get to spend on themselves, then I do care--but the IRS is already rather good at preventing this sort of thing, because there's already considerable tax benefit in shifting your expenses from a person, who can't deduct them, to a corporation which can).

Then there are the people who suggest replacing it with a gross receipts tax.  But there's a reason that we don't use a gross receipts tax--companies with low profit margins would end up with an effective tax rate much larger than their profit margins, while Microsoft skated.  If you spend a lot of time worrying about the decline of American manufacturing jobs, then don't suggest a gross receipts tax.

There are better ways to collect the same amount of revenue.  There are even more efficient ways to collect more of the revenue from rich people and corporate managers.  And if you're worried about offshoring, it seems to me that a simple answer is for the US to become a corporate tax haven.

Yet there's something that just sticks in peoples' craw about corporations not paying taxes--as I tweeted the other day, you'd think that GE had done something really terrible to people, rather than selling them stoves and wind turbines.  So I'm prepared to suggest a compromise.  Let's have a trivial corporate income tax, too small to much bother avoiding--say, 1%.  It will raise a little bit of revenue.  It will make people feel like corporations are contributing.  And we won't have to spend valuable hours of our lives worrying about tax credits about which the average voter knows little and cares less.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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