The New York Times has an interesting story:
The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.
Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.
That may be hard to fathom for the millions of American business owners and households now preparing their own returns, but low taxes are nothing new for G.E. The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.
There are so many lessons to be learned from this story that it’s hard to know where to start.
In the first place, it should be noted that there is a distinct difference between the nominal rate and the actual rate. The corporate tax ranges from 15% to 35% of corporate income. As should be obvious, GE isn’t paying anywhere near that. The difference between the nominal rate and the actual rate, then, is explained by two things: loopholes and tax credits.
Incidentally, conservatives will usually scream bloody murder about how high corporate tax rates discourage people from starting businesses in the states, which is true to an extent. However, if a company has offshore headquarters and a good tax attorney, then that company will be able to avoid taxes like GE currently does. It should also be noted that tax avoidance has costs, and cuts into a firm’s bottom line.
But when a company like GE is actually getting money from filing taxes, conservatives’ complaints start to ring hollow.
In the second place, it should be noted that the easiest way to raise taxes is to close loopholes. One way that GE managed to avoid taxes was by exploiting loopholes. In fact, it’s a way that everyone avoids taxes. The rich are usually very good at this sort of thing, which means that their nominal tax rate of 39% is generally laughable, since they virtually always pay significantly less than 39% of their annual income.
Reagan did this great effect in the ‘80s. He lowered the nominal rate while closing loopholes, leading to a net increase in one’s tax burden. This was spun as “tax cut,” even though it was practically a tax raise. Of course, that’s just how language is used in Washington. Anyway, the point in all this is that one effective way to raise GE’s tax bill would be to close the loopholes it takes advantage of.
In the third place, it should be noted that the current tax code is as much a redistributionist scheme as welfare. On the individual level, this is seen in the “Making Work Pay” credit and the EIC, and other such nonsense.
Note that credits differ from deductions, which means that if the credits one claims on one’s tax return exceed the taxes owed on one’s return, then one will receive a check from the government. This does not hold true for deductions. As such, GE was able to take advantage of certain credits, which is why they could claim a $3.2 billion credit.
Finally, it must be noted that only people pay taxes. This is important because the knee-jerk reaction to tax corporations more is fundamentally misguided. In reality, corporate taxes (when paid) are paid in one of two different ways. Either the increased costs are passed on to consumers, or profits are deducted from shareholders’ dividends.
Thus, if one wants to prevent this from happening again, it would simply be better to tax shareholders directly, preferably at a flat rate. In doing so, deductions and credits would be eliminated, and loopholes would be closed. This would be more fair and effective system. Naturally, there is no chance of it ever happening.
Oh, and the best part in all this? GE received bailout money in 2008. (Also, Jeff Immelt is tight with President Obama.) This is crony capitalism at its finest.
Enjoy the decline!
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“Thus, if one wants to prevent this from happening again, it would simply be better to tax shareholders directly, preferably at a flat rate.”
I agree with that. Corporate taxes are a middle-class tax. They are taken right out of your supposedly untaxed 401K. It’s a tax that sounds like it taxes the rich, which is why retarded liberals think it’s a good idea, meanwhile the actual rich are hiding their money in offshore accounts. It’s another transfer payment from the young to the old.
Better yet is to simply tax consumption instead of income. Right now a rich person living off a $2m trust fund pays less in taxes than someone earning $60k a year. A hedge-fund manager making $100m a year pays taxes at a lower rate than a wage slave. Tax consumption instead of income and you end up with a perfectly fair tax — and no need for all those tax lawyers and accountants.
Finally, it must be noted that only people pay taxes.
Precisely.
While I agree that the GE situation sounds deplorable, it should be noted that the real taxation of a corporation is at the personal level, through income taxes on all employees, taxes on shareholder earnings, etc.
If you tallied up all the payroll and income taxes paid by every GE employee in the US, the number would be very high.
It would be illuminating to me as a GE shareholder to know how much individual tax is paid by Immelt and his cronies at the top of GE’s food chain.
There should be no corporate tax. Period.
For individuals, the only two ways to fairly tax people are :
1) Sales tax, and/or
2) Flat income tax
A progressive income tax is absurd. At the moment, 51% of voters pay no income taxes, while the top 1% pay 40%.
Tax consumption instead of income and you end up with a perfectly fair tax —
Plus, illegals would have to pay up too.
Also remember that a complex tax code is a disaster.
Currently, about 20% of taxes collected just go towards compliance, processing, and auditing. The IRS is itself a jobs program.
Individual taxes should take just 20 minutes to do no matter what your income is, and the IRS should have a staff of no more than 1000 (unlike the 100,000 or so employees it currently has).
If you were to bypass the corporations and tax the shareholders directly what form would the new tax take? Dividends are already taxed, but many profitable companies pay no dividends. Capital gains are taxed but only when realized. Some stocks go down even when companies post a profit. I believe Fifth Horseman has it right. The best corporate tax rate is ZERO. Coupled with a flat 15% income tax with a generous deduction (maybe the first $20,000 or so in income would be tax free). The best way to get this tax scheme passed is to ride your unicorn on the marshmallow highway to Washington and then click your ruby slippers together 3 times while wishing upon a star. Never gonna happen. Washington derives too much power due specifically to the complexity of the tax code.
Can you give examples for these loopholes?
TFH,
That day discussing about some social benefits etc, the taxing issue came up and something like this was uttered:
“The person earning 20.000 a year pay 30% tax, then it rises gradually untile the one earning 50.000 pays 50%, and then it is capped, and the one earning 100.000 euros also taxed at 50%, . Why is it capped? The tax should rise with the income without cap”
I told her:
“The one earning 50.000 is paying 25.000 in tax, the one earning 100.000 is paying 50.000 in tax, it is already double, what more do you want to increase it for”
Another friend on the table told her
“It is about the incentive for people to work. If you tax more, why should one work more?”
Of course, these two sentences did not get registered by her, nor will they ever be.
If you let it to these people, everybody is taxed so that they have a 20.000 euro a year income. We all live happy and everybody does the hard work necessary, takes the business risks necessary, and goes through (mainly technical) education that is necessary.
Because, the value of a neurosurgeon for the society is the same as a hairdresser.
I hate the rich as much as anybody.
The rich are as dangerous as the poor.
But, taxing companies is ridiculous.
America is supposed to tax PEOPLE.
America is supposed to tax PEOPLE.
Indeed. There is also the flip-side of taxation without representation: representation without taxation. That is its own evil.
The best way to get this tax scheme passed is to ride your unicorn on the marshmallow highway to Washington and then click your ruby slippers together 3 times while wishing upon a star.
LOL
One man’s “loophole” is another man’s tax deduction.
As a renter, I consider the mortgage tax deduction to be a “loophole”.
“Anyway, the point in all this is that one effective way to raise GE’s tax bill would be to close the loopholes it takes advantage of.”
Maybe, giving a moral justification for those taxes would mean closing the biggest loophole of all.
Any welfare is a loophole.
Given that the wealthy consume the vast majority of government services, a progressive tax rate really is pretty much a consumption tax.