The 57,000 Page Tax Return

by on November 22, 2011 at 7:38 am in Economics, Law | Permalink

The NYTimes reported earlier this year that through an extraordinary use of tax breaks and clever accounting:

[General Electric] 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.

The Times highlighted the skill of GE’s dream team:

G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

More recently from The Weekly Standard we find what kind of effort it takes to pay no taxes on $14 billion in profits:

General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked.

(FYI, the length of GE’s tax return has doubled since 2006 when it (first?) filed electronically at an equivalent of 24,000 pages.)

GE’s tax bill illustrates both why our corporate tax rate is too high and too low. The nominal rate is too high which encourages a real rate which is too low.

Consider the resources that GE spends to lowers its tax bill, not just the many millions spent on clever accounting and accountants and the many millions spent on lobbying but also the many inefficient ways that GE structures its businesses just to avoid paying taxes and the many millions it invests in socially wasteful projects just in order to produce privately valuable tax credits. Now add to that the allocational inefficiencies of taxing some firms at different rates than others and you have a corporate tax system which wastes a lot of resources and raises relatively little revenue. Indeed, a corporate tax system with a tax rate of zero could well be preferable as it would waste fewer resources and raise not much less revenue.

Hat tip: TaxProf blog.

TallDave November 22, 2011 at 7:52 am

Tickling Leviathian in all the right places is a growth industry.

Brett November 23, 2011 at 10:59 am

Nicely said!

Steven Kopits November 22, 2011 at 8:00 am

If I look at GE’s 10-K for the year ending Dec. 31, 2010, I see the following:
http://www.sec.gov/Archives/edgar/data/40545/000119312511047479/d10k.htm#tx37537_40, Statement of Earnings, p. 90

Benefit (provision) for income taxes (Note 14)

2010 -1. 05 billion

2009 +1.148 billion

2008 -$1.102 billion

Thus, GE Consolidated is showing tax liabilties for both 2008 and 2010. 2009 shows a net tax benefit, notably due to losses incurred at GE Capital Services (which are consolidated into GE for reporting purposes).

So, I am not entirely convinced that I see in the financial statement that GE is paying no taxes. But maybe I’m reading it wrong.

NS November 22, 2011 at 8:02 am

GE is the #1 stock holding for members of Congress. I’m sure it’s just a coincidence.
http://www.cnbc.com/id/45307704?slide=11

jpd November 22, 2011 at 8:06 am

“GE’s tax bill illustrates both why our corporate tax rate is too high and too low. The nominal rate is too high which encourages a real rate which is too low”

give me a break. if the tax rate was lower they wouldn’t do this bull shit?

dcp November 22, 2011 at 8:13 am

Surely if the tax rate was 0% they would just fire the whole tax department, no?

anon November 22, 2011 at 8:21 am

+1

Robert Williams November 23, 2011 at 11:15 am

If the tax rate was 0%, then the tax department would have better things to do than fiddle with 70,000+ pages of tax code, fend off IRS agents, come up with excuses the public still won’t accept, and create a 57,000 page tax return that equaled ZERO….like maybe aiding in GE’s investments.

DLew On Roids November 22, 2011 at 8:30 am

Of course they wouldn’t! What kind of fool are you??? If the nominal tax burden went from $1.785 billion (35% of domestic operations) to, say, $800 million, what idiot executive at GE would spend $50 million on a division to eliminate the entire tax burden?

Oh. My badsies.

Finch November 22, 2011 at 10:08 am

You think it only costs $50 million to do this? It isn’t somebodies personal finances where close is close enough. They’d spend $799 million to avoid $800 million in taxes.

Notably, the paychecks of the tax lawyers are not the major expense. Irrational firm behavior is the major expense.

Cliff November 22, 2011 at 8:43 am

High rates encourage lobbying for and granting of of deductions, credits, etc. A low flat rate with no deductions would be a vast improvement and would also encourage companies to repatriate profits.

ian November 22, 2011 at 9:23 am

eliminate lobbying and the unemployment rate among liberal arts majors would really jump. future job opportunities for all the ivy league history and political science majors would plummet…

Nate November 23, 2011 at 2:40 pm

Good call. Unfortunately, that seems like a self-perpetuating cycle

JWatts November 22, 2011 at 1:03 pm

“give me a break. if the tax rate was lower they wouldn’t do this bull shit?”

If they lower the tax rate and ‘remove the deductions’, yes they wouldn’t do this ‘bull shit’.

doctorpat November 24, 2011 at 10:18 pm

All “this bull shit” costs money. If it wasn’t worth it they wouldn’t do it.

C Campbell December 12, 2011 at 1:08 pm

Actually – no. High tax rates encourage this sort of thing as tax avoidance becomes less expensive than just paying the taxes. The lower the tax rate the less benefit there is to tax avoidance. Remember that there is a huge cost to GE in avoiding taxes, one entire department devoted to this job; deliberate orginizational ineffeciencies (wasted money); money wasted on ineffective social projects in order to gain tax credits; and even the money spent on lobbyists in order to preserve the tax loopholes.

If you drop the tax rate to just under the costs of all of these then it is cheaper for the company to just pay the taxes. And not only that – all the money formerly spent on tax avoidance becomes taxable income!

The Bush tax cuts worked on a similar principle. After the tax cuts the government was recieving more tax revenue from the upper income earners than they were before the tax cuts. (This is one reason I oppose repealing the tax cuts on ‘the rich’ – I suspect that the net result may be less tax revenue as money that was formerly paid in taxes is spent on tax avoidance.)

Torben November 22, 2011 at 8:16 am

Quite amusing and scary at the same time.

An undistinguished observer November 22, 2011 at 8:27 am

Given that GE is effectively gaming the system to pay net zero (or even negative) corporate taxes, what then to make of Soros encouraging higher taxes on high earners? Ha ha!

You’re right, lowering nominal rates to zero would yield a small drop in tax revenue, if any, but on the downside would provide little opportunity for graft. And what would all those tax lawyers do for a living?

All snark aside, how do we change this model? A uniform, small corporate tax code, with known variables and little opportunity for insider deals could radically alter the competitive environment across industries, but how does this ever get passed? I don’t see it.

anon November 22, 2011 at 8:38 am

GE is one of the most visible examples of today’s crony capitalism, and an example of “Utter lack of imagination at Work TM”.

Jeff November 22, 2011 at 9:41 am

Maybe so, maybe not, but that has absolutely nothing to do with the subject of this discussion.

Gabe November 22, 2011 at 1:32 pm

I think it has lot to do with the topic. GE pays/lobbies to increase the costs of doing busines for it’s competition. They also use their media outlets to put out propaganda in favor of facism(strong government/corporate cooperation) that will benefit itself.

Turkey Vulture November 22, 2011 at 8:52 am

Eliminate the corporate income tax and tax all capital gains and dividends at an individual’s marginal rate.

Nicoli November 22, 2011 at 9:12 am

+1 but, the accounting lobby will fight to the death to prevent that from happening.

Turkey Vulture November 22, 2011 at 11:35 am

As some commenters point out below, GE would probably fight it as well, since it would reduce barriers to entry.

Gabe November 22, 2011 at 1:35 pm

They would fight it with all resources at their disposal…media outlets they own and politicians they own.

Matt November 23, 2011 at 10:49 am

Which goes to show that it really doesn’t matter what the tax rate is. As long as they own the political system, they will game the political system. If it’s not tax subsidies it’s direct subsidies, if it’s not that it’s government contracts, and on and on and on and on. The tax system isn’t really the main issue here.

jimi November 22, 2011 at 9:34 am

+1 more.

TallDave November 22, 2011 at 11:40 am

It’s not a terrible idea, but unfortunately it will make it possible to avoid taxation entirely as well as impeding the flow of capital.

There’s really no good way around a corporate income tax, because pass-through is nearly impossible to calculate for C corps. There is not, however, any reason corporate tax law needs to be so ridiculously complicated.

Turkey Vulture November 22, 2011 at 12:09 pm

I don’t know much about the intricacies of either the corporate income tax or the corporate form, but it seems like there should be some ways to address those problems, so that on net we are better off without the corporate income tax even if we are still far from the optimal.

For instance, couldn’t we impute an income for shareholders every fiscal year even if the corporation decides to retain earnings? Or re-figure the company’s valuation every year and tax any appreciation? I know a realization event makes it a lot easier to figure out whether there has been true appreciation, but there must be some reasonable way to make the estimate – I mean, that’s what investors are supposed to be doing all the time to figure out if something is a good investment.

If shareholders were taxed yearly for the retained earnings or appreciation in value of a company, they would probably start to demand greater distributions. This would reduce corporate cash-hoarding, which would make it more likely that capital would find its most valued use. I think it would also reduce the super-sizing of corporations, and hence reduce distortionary market power.

TallDave November 22, 2011 at 2:59 pm

so that on net we are better off without the corporate income tax

The deadweight losses are getting to the point that may soon be true if it isn’t already.

For instance, couldn’t we impute an income for shareholders every fiscal year even if the corporation decides to retain earnings?

For a large C corp it would be nearly impossible. You’ve got daytraders who owned a stock for 5 minutes, you’ve got millions of people who own mutual funds, stock index funds, options traders, etc.

Turkey Vulture November 22, 2011 at 4:35 pm

Well, so say we go down the valuation path instead.

For the day traders the rule could be the difference between the basis and realization value, as it is now.

For anyone, the basis can be calculated based on what they pay for it. Then, if it is still held at the end of the fiscal year, impute year-end value to it, treat the difference between that and the basis as taxable income, and step-up the basis accordingly.

Certainly gameable, but it seems like a step in the right direction compared to where we are. But that may just be because of my lack of specific knowledge on the topic.

Dan Weber November 22, 2011 at 12:42 pm

While C corps could be taxed like S corps, the usual way Turkey Vulture’s idea is implemented is to just tax capital gains and dividends like wages. Even if a company hoards a massive amount of cash, it still ends up being taxed when people trade its shares that have presumably appreciated.

TallDave November 22, 2011 at 3:01 pm

Yep, the downside is you make capital much stickier. But corporate income tax is getting to be such a godawful mess it might be worth it.

gR November 22, 2011 at 3:57 pm

We could just keep the existing accumulated earnings tax to encourage dividends or reinvestment in the business and address the sticky problem. So instead of trying to tax C corp income as pass through (which would be a logistical nightmare), tax dividends paid (we already have 1099s) and tax accumulated (retained) earnings above a certain point (I think it is currently 250k/150k depending on the industry).

byomtov November 22, 2011 at 1:39 pm

You are right that it doesn’t need to be that complicated. The reason it is is that the corporations want it that way. What do you think is in all those 57,000 pages? Lots of gimmicks that GE and others lobbied to have included in the code.

My own favorite reform is simple, and would eliminate a lot of accounting effort. Calculate and pay taxes due on the income as reported to the SEC and shareholders. Only one set of books to keep, among other things.

valuethinker November 23, 2011 at 11:06 am

And what do we do with tax exempt institutions?

Mark November 22, 2011 at 9:24 am

Alex,

Revenues from the corporate income tax in FY 2009 were $225 billion, which is well above zero.
(http://www.irs.gov/taxstats/article/0,,id=102886,00.html)
Some form of corporate income tax will always be necessary because otherwise high-income individuals would merely incorporate themselves to escape all individual income tax.

PKSully November 22, 2011 at 10:53 am

I think the idea is that all income would flow to the owners of the corporation, like an LLC. There’d still be lobbying, however, because income would still have to be defined to calculate the P/L that flows through to the owners.

Noah Yetter November 22, 2011 at 12:03 pm

This is already possible. People don’t do it though, because it’s illegal, and the IRS will come down on you like a ton of bricks.

Mark November 22, 2011 at 1:01 pm

So you think there will be less of it if the corporate income tax is zero?

D November 22, 2011 at 3:29 pm

Possibly. GE has many shareholders. Individually they don’t have the lobbying power that GE consolidated does. OTOH some new association might pop up to become their lobbyists. OTOOH it might be less effective because of the principal-agent problem.

Crenellations November 22, 2011 at 12:10 pm

Check out Subchapter G of the IRC, titled “Corporation Used to Avoid Tax on Shareholders”

Ryan Stambaugh November 22, 2011 at 9:27 am

Come on, MR, I expect more out of you guys then shoddy reporting. First, the $14 billion is a GAAP number, not a tax number (i.e. you can’t carry losses forward for GAAP reporting). Second, even then, it isn’t true that they didn’t pay ‘any’ tax on the $14 billion. They filed something like 6,000 tax returns, and their Statement of Cash Flows disclosure shows $2.671 billion was paid in taxes, worldwide, in 2010. The $3.2 billion is a GAAP reversal of tax-deferred liability (perhaps due to winning a tax court case(s)), not a refund or credit from the IRS.

No doubt GE is at the forefront of using transfer pricing and other avenues to minimize its tax burden. Mileage will vary on whether that is fair or unfair, right or wrong. But, still, it doesn’t give license to conflate, confuse, and obfuscate the numbers involved.

Jim Clay November 22, 2011 at 9:41 am

First, the $14 billion is a GAAP number, not a tax number (i.e. you can’t carry losses forward for GAAP reporting).
So you’re saying they made $14 billion in actual profit, and used accounting methods (carried losses forward) to reduce that profit on the books. So how is that different from what Alex said?

Ryan Stambaugh November 22, 2011 at 9:58 am

Jim,

Because there are two (at least, if they filed 6,000+ returns there are, well, lots of conventions) conventions we are discussing. One is GAAP used to report income to shareholder’s, this is accrual based (match revenue and expenses). Further, GE is a multi-national firm, so the $14 billion is a worldwide, GAAP, figure not of any import to what their US tax liability should be.

The other convention is IRS rules, which is more cash-based (especially now with the depreciation write-offs). A tax-loss carry forward isn’t using an accounting method. It’s one of the basis of tax rules, i.e. the ability to pay. If you make $100 in Year 1 and lose $200 in Year 2, looked at as a whole you haven’t made any income and for tax purposes can carryback (and forward) your Year 2 loss.

GAAP and tax-accounting speak two different languages (you have to estimate Bad Debts per GAAP, but can only deduct actual write-offs on your tax return. Which method is correct or proper? I don’t know, both methods have their own goals and purposes. The problem arises when the two start being meshed together and discussed as one language. That isn’t their purpose).

Tom S November 22, 2011 at 12:21 pm

Ryan nails it. Comments ignoring his points shouldn’t be given much weight.

Bill Harshaw November 22, 2011 at 2:56 pm

A stupid question: would it be possible/feasible/desirable to scrap tax accounting and assess taxes based on GAAP.? If corporations give solid information to their stockholders, seems as if IRS should be able to live with it.

Ryan Stambaugh November 22, 2011 at 3:42 pm

Possible? Sure. I believe countries such as Germany and Japan require (at least at the parent company level) that companies financial reporting conform with their tax reporting.

Feasible/desirable? Ask 100 people and you’re likely to get 100 different answers. Managements do have incentives to maximize shareholder reported income and minimize taxable income, so it would eliminate that part of it.

GE has to consolidate a vast number of companies, spreadout throught the world, into one set of Financial Statements. Should a subsidiary in Germany be consolidated into GE GAAP Financial Statements and pay U.S. income tax in addition to German income tax? How about foreign exchange rates causing inflated U.S. income (i.e. no real income effects), i.e. you have to convert the German subidiary’s Euro operations into U.S. dollars.

I’d come down on the side that it isn’t feasible or desirable – it would create just as many, or more, issues then it solves.

It might be nice if the SEC just told companies under it’s purview that they have to disclose A) U.S. taxable income and B) U.S. income taxes paid per their return (this would be done with a lag, because GE files its 10-k to shareholders months before it files its taxes on 9/15/xx since they always ask for extensions). You really cannot figure that out, with precision, under current GAAP Disclosure rules.

Colin November 22, 2011 at 3:48 pm

Ryan Said: “… it isn’t true that they didn’t pay ‘any’ tax on the $14 billion”. Who argued this? Not the original post you responded to.

The quote in the original post was “… Its American tax bill? None. …”. It also states “$5.1 billion of the total came from its operations in the United States”. Your argument about conflating GAAP and IRS unfortunately conflates the (admittedly imprecise) point that the original post conveyed – that it’s the US Federal tax liability that is being discussed, not the ancillary taxes of other taxing jurisdictions. I don’t think anyone believes that GE paid /no/ taxes – it still had the employer’s share of payroll, sales taxes, excise taxes, property taxes, etc. to pay.

35% of $5.1 GigaBucks is still $1.785 GigaBucks. So their games eliminated nearly 40% of their (presumed, using the numbers presented here) total tax liability, and 100% of their US Federal tax liability.

Ryan Stambaugh November 22, 2011 at 3:57 pm

Colin,

The original post, still up, says: “More recently from The Weekly Standard we find what kind of effort it takes to pay no taxes on $14 billion in profits:

General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked.”

And, you’re missing the point if you’re going down the “35% of $5.1 (billion) is still $1.785 (billion). But, I’m not here to solve everyone’s misunderstanding of GAAP and tax accounting.

emerson November 22, 2011 at 9:27 am

Has anyone pointed out that GE is behaving perfectly rationally, and probably owes it to their shareholders to do every (legal) thing possible to minimize or eliminate their taxes? I’d want any company I hold shares in to do the same things.

Paul November 22, 2011 at 9:55 am

It saddens me that people valorize this behavior. You may disagree about how much it spends, or on what it spends, but government is a legitimate, necessary, entity that needs revenue to function. Taxes are a democratically legitimate means of collecting that revenue. How would we fare as a society if everyone thought it was perfectly rational and morally acceptable to go to extraordinary lengths to avoid their tax bill?

If you had a (legal) opportunity to cheat a customer, would you do it? It’d be the rational thing to do, after all. If you wouldn’t cheat that customer, why doesn’t the same standard apply to your democratically legitimate government?

k November 22, 2011 at 10:36 am

but taxation can vary in its efficiency.

Having a legal opportunity to cheat a customer: yes, you ought to do so, if only to get the right laws in place.

Paul November 22, 2011 at 1:13 pm

Funny, I would say that the appropriate way to get the right laws in place would be to form a voting bloc and elect leaders and hold them accountable for putting the right laws in place. Not gaming the system because you can, inevitably causing regulators to write even more complexity into the law.

Jesse "The Butthole" Ventura November 22, 2011 at 8:52 pm

You’re a tool.

Yancey Ward November 22, 2011 at 11:34 am

Paul,

Do you take no deductions when you file your tax return?

Paul November 22, 2011 at 1:26 pm

I understand your point is to make me appear hypocritical. As it happens, I take the standard deduction. And I don’t begrudge others who take advantage of the bulk of tax policy as written, such as the mortgage interest deduction or continuing education credits. My point is not to decry people who respond to targeted tax incentives appropriately. I may disagree with a particular credit as policy, but that doesn’t make me hypocritical for using it as intended.

I think there is fundamental difference between taking a handful of targeted middle class deductions and spending millions to eliminate a tax burden of slightly more millions. For all the same reasons Alex cited in his post. I think gaming the system like this only serves to make the tax code more complex, not less. But most importantly, if you think simpler corporate tax code is preferable to the one we have, than try and change it through elections. Spending millions to eliminate your burden is only going to make the code more complex, not less.

TallDave November 22, 2011 at 2:45 pm

My point is not to decry people who respond to targeted tax incentives appropriately.

According to their lawyers, that’s exactly what GE did.

You have to remember, all those loopholes sound like great policies to someone — green energy, doing stuff for the poor, etc.

NAME REDACTED November 22, 2011 at 6:37 pm

One man’s loophole is another person’s tax incentive. All these “loopholes” were created on purpose by someone who was trying to use the tax code to change human behavior.

Paul November 22, 2011 at 7:06 pm

Certainly for many incentives/loopholes that is the case. But it’s wrong to assume it was only idealistic social engineering that brought about the complexity of the tax code. Let’s not forget utterly how complex the economy is, and how it changes every day, and laws don’t. We didn’t always have huge multi-national companies with hundreds of subsidiaries operating in dozens of jurisdictions. You didn’t use to need tax laws to deal with that.

Let’s say the law says that all revenue resulting from activity A is taxable. Then one day, a company realizes it can claim that a bulk of its revenue actually results from activity B and not Activity A, though in reality, the two activities are inextricable. Now you need to change the tax code to reflect the existence of activity B in order to continue to collect that revenue. And so on and so forth, until we have a complex tax code that attempts to deal with multiplicity of ways that people earn and spend money (and try and get out of paying taxes.)

TallDave November 22, 2011 at 12:09 pm

If you had a (legal) opportunity to cheat a customer, would you do it?

Generally speaking, your shareholders would rightly consider your failure to do so a breach of fiduciary duty.

The problem is not GE, it’s the way Congress has started writing gigantic laws with thousands of pages of loopholes. This is great for politicians and their staffers, good for big corporations that can lobby their interests at the expense of smaller competitors, bad for everyone else.

Paul November 22, 2011 at 1:32 pm

I said: If you had a (legal) opportunity to cheat a customer, would you do it?

You said: Generally speaking, your shareholders would rightly consider your failure to do so a breach of fiduciary duty.

I disagree. I suspect many people, myself included, would not wish the companies in which we are shareholders to regularly cheat their customers, even if it would improve dividends.

(How do you do the italics thing?)

TallDave November 22, 2011 at 2:42 pm

It doesn’t matter if you want them to or not, it’s still a breach of fiduciary duty.

Legally “cheating” is a pretty fine needle to thread, because fraud is illegal. It would mean something like you charge customer X more than customer Y because you know customer X doesn’t have the leverage of Y.

Paul November 22, 2011 at 5:42 pm

I’ll admit I’m not a lawyer, or accountant, but it strikes me that your definitoin of ‘fiduciary duty’ would imply that if as a shareholder or group of shareholders I have no rights to constrain my firm’s behavior if that could negatively affect dividends. I couldn’t elect board members or a President who promises to change certain employment practices if those practices can be shown to hurt profits.

Something tells me that’s not true. And if by some crazy measure it is true, that somehow a legal definition of “fiduciary duty” prohibits myself and 51% of the other shareholders in a company from dictating certain practices to the company we invest in, than that certainly doesn’t seem to be a very libertarian position to be defending.

TallDave November 22, 2011 at 6:58 pm

With 51% you can elect anyone you like, but even at 99% you bear a fiduciary duty to other investors — minority shareholders do have rights. If you decide you’re going to start paying the janitors $250K because you think that would be neat, they have a cause of action against you.

The libertarian position is generally to protect property rights.

TallDave November 22, 2011 at 7:01 pm

Anyways, getting back to the original point — if GE mgmt decided it would forego all its tax benefits, then yes shareholders would be extremely pissed at them.

Paul November 22, 2011 at 7:28 pm

Again, not a lawyer, but I take your point. I can see that if my majority-bloc tanked the company, there may be legal cause against us for violating that minority shareholder’s rights. But how high is that bar for violating fiduciary duty? And how can it be proven? I honestly haven’t hear of shareholders routinely suing over sub-par performance of the companies they invest in. Would they have to prove that a decision was being knowlingly made at the expense of greater profits?

If a company says “We’re going to divest entirely from Tyrannia, it’s the right thing to do” Could a shareholder sue them and say they are violating their fiduciary duty? Would they have to prove the company lost profitability in the endeavor? How would they do that?

I’m being sincere, I honestly don’t know. I’m enjoying this conversation with you, btw.

What if a company makes the case that they’re not going to take all their tax benefits and eliminate their tax burden, because they feel that will damage their reputation (and sales) to a greater degree than the tax payment. That paying some corporate taxes would be the better business move. They wouldn’t be violating their fiduciary duty to shareholders then, right?

Jesse "The Butthole" Ventura November 22, 2011 at 8:54 pm

“I’ll admit I’m not a lawyer, or accountant”

Then shut the fuck up!

TallDave November 23, 2011 at 8:56 am

I honestly haven’t hear of shareholders routinely suing over sub-par performance of the companies they invest in.

Bad performance in good faith isn’t actionable. Bad performance because you think good performance is “cheating” certainly could be under the right circumstances. especially if documentation exists in the form of internal memos. The bar is whatever a jury or judge can be convinced was an action taken in breach of fiduciary duty.

It does happen, especially with VCs. You should pick up Cryptonomicon sometime, this possibility of such litigation weighs heavily on the actions of the protagonists, in interesting ways.

Urso November 22, 2011 at 4:01 pm

“Generally speaking, your shareholders would rightly consider your failure to do so a breach of fiduciary duty.”

I used to believe this. But now I don’t. Do you really think that the man on the street who owns some shares in F500 companies (ie, all of us) is in favor of those companies screwing the average consumer over every chance they get? Or is this just a fig leaf that corporate honchos hide behind to cover their own unethical behavior? “It’s not my fault, the shareholders made me do it. Well I mean, I didn’t ask them, but I’m pretty sure that’s what they’d have told me to do.”

Urso November 22, 2011 at 4:08 pm

Sorry I obviously didn’t read the post above me.

Gabe November 22, 2011 at 1:37 pm

We would be much better off if people all at once stopped paying taxes.

D November 22, 2011 at 3:32 pm

It’s not valorizing behavior to recognize that incentives matter. For every GE executive who believes in noblesse oblige there are 10 tax accountants selling them on the improvement in earnings, ROE what-have-you that comes with minimizing tax burden.

Hell, they can sell it based on the number of new jobs it will create. Who’s the bad guy now?

Paul November 22, 2011 at 5:15 pm

Of course incentives matter. Which is why I find it sad when people say “it’s great Company XYZ is spending countless resources to eliminate their tax burden. That’s what they ought to do.” Instead of saying “It’s shameful that Company XYZ is spending countless resources to avoid paying taxes, which, after all, are necessary to fund government. If everyone did this, our economy would be incredibly less efficient, and government would be so starved of revenue that it will continually have to devise new methods of trying to collect it.”

To paraphrase the great Louis C.K., If you do something, that if everyone else did it the world would be worse off, that makes you Hitler. Comedic Hyperbole aside, I don’t think we should celebrate blatant tax avoidance. We should encourage tax compliance as part of being responsible citizens with a representative government.

NPW November 22, 2011 at 5:29 pm

All the collective brilliance, education and expertise here and you people can’t keep up with your average idiot. Ever hear, ” Don’t hate the player, hate the game” ? Arguements about the correctness of the system I can see, but not questioning the ethics of the people who respond in predictable ways to the current system.

Paul November 22, 2011 at 6:03 pm

Well, I began by criticizing people who applaud tax avoidance, as though it were the right thing to do, and not an unfortunate by-product of the system. But then, I did ultimately call the behavior shameful, so your point is taken, I did criticize the ethics of those who “respond in predictable ways to the current system.”

Part of my frustration is that the behavior is predictable. It shouldn’t be. I may be fighting against the tide, but I’d like to think people are capable of recognizing that paying taxes is necessary and important. I’m in that strange group of people who gets a parking ticket and has his anger tempered by the fact that at least I’m helping fund our cash strapped city government. Too many people, I think, would rather pay the fine by burning the money.

Luis November 23, 2011 at 1:04 pm

> Taxes are a democratically legitimate means of collecting that revenue.

Uh? “democratically legitimate”? So you can actually vote to have it changed? How does that work?

doctorpat November 24, 2011 at 10:37 pm

If democratic government is legitimate, then all those tax rules and incentives that were introduced by the democratic government are legitimate.
If all that tax legislation is corrupt and evil, then why would I want to give those crooks any more money than I have to?

question the question November 22, 2011 at 9:31 am

On the one hand, this is a crying shame in terms of a waste of resources (great and creative minds working on valueless “products”).

On the other hand, at least these particular great minds aren’t busy engineering new and exciting exotic financial instruments.

k November 22, 2011 at 10:39 am

it ISN’T valueless –> they’re reducing the amount of tax they have to pay!

Now, aren’t the guys employed by GE to evade corporate taxes also paying tax? How does that alter Prof Tabarrok’s analysis?

Tom November 22, 2011 at 12:10 pm

Yes! lets call it Stimulus.

PrometheeFeu November 23, 2011 at 7:15 pm

Now I understand… complicated tax codes are Keynesian…

DougT November 22, 2011 at 9:33 am

It ain’t so easy.

Eliminate corporate taxes and individuals will incorporate and form sham businesses to escape taxation. GE’s taxes are accrued, but not paid. That item becomes “deferred taxes” on the liability sheet.

Harmonization of the tax code is a noble goal (9-9-9?), but the devil really is in the details. High nominal rates encourage system-gaming, just as the d-n financial aid racket dues for college expenses.

The irony is, crooks and cranks like Dan Rostenkowski and Bob Packwood were needed to bring Reagan’s dream of a flatter tax to reality. But the dream lives on. There are 57,000 reasons why it must live on.

Gabe November 22, 2011 at 1:33 pm

That is a feature not a flaw.

Albert November 22, 2011 at 9:49 am

Yes, corporate taxes are absurd. Yes there is massive room for improvement. It is, however, profoundly naive to think that it will be possible to just “eliminate loopholes”. Serious prospects for a more manageable tax code are as much a matter of political will and public oversight of elected officials as they are of applied economics. Look at what happened to the Volcker Rule – a seemingly simple restriction is now 200+ pages. Any reform of the tax code will result in a similar miscarriage.

Albert November 22, 2011 at 10:09 am

Put another way: there are many people who profit from the particular nature of the tax law (e.g., GE, capital gain earners,etc.), and that seems to be where much ire is currently directed. This post illustrates one result of a system where another group (tax professionals) profits from the complexity of the law itself, rather than its specific content. In both cases, the groups have significant reasons to resist the simplification of the tax code. For the former group, they have spent a lot of money figuring out ways to game the current system. For the latter, a simple corporate tax code would kill their business.

Bill November 22, 2011 at 9:54 am

1. It’s not rates folks, it’s deductions.

2. GE is an MNC and does a lot of transfer pricing–in effect, transfering IP assets abroad and requiring the US sub to pay royalties to a foreign sub in a tax haven. Your local auto dealership down the street, or your local entrepreneur who may compete with GE, can’t do this. Fix the tax code, because changing rates won’t change the inequity.

Albert November 22, 2011 at 10:12 am

Royalties paid to foreign subsidiaries are almost always Subpart-F income for the subsidiary, and any profits made off of those transfers are deemed to have been repatriated to the US, i.e., the US corporation will have to pay taxes on that income.

Bill November 22, 2011 at 10:48 am

No, they are not taxed until repatriated. The way it works is that the foreign sub (with the IP asset) contracts with the US sub to do R&D work, for example. The patent that is developed by the US sub gets transfered back to the foreign sub (actually, the patent is owned by the foreign sub because the US sub was simply performing contract work). The US sub when it uses the patent then pays a royalty back to the foreign sub.

If you want to go deeper into this, I will look for and post a link from Bloomberg. I could also post something from Deloitte but would have to upload it to someplace, but if you want to do more on your own, I suggest you do some research on transfer pricing and repatriation of profits.

KLO November 22, 2011 at 1:31 pm

Wrong. Royalties paid to CFCs by related U.S. persons are foreign personal holding company income and therefore subpart F income.

What firms are doing with these offshore entities is to shift royalty income paid by unrelated foreign persons from the United States, where the IP was arguably created, to a foreign tax haven. This has the effect of shifting the location where these royalties from unrelated persons are earned from the U.S. to a foreign tax haven. As long as there is no subpart F inclusion of this income, it will not be taxed in the U.S.

Bill November 22, 2011 at 11:13 pm

KLO, You seem to be confusing interparty transactions

From Bloomberg (excerted)

“Losing $60 Billion

That’s only about a fifth of the $60 billion in annual U.S. tax revenue lost to thousands of companies’ income shifting, according to a study published in December in the National Tax Journal by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.

The lost revenue could pay the federal government’s share of health coverage for more than 10 million uninsured Americans, such as Hurst — more than a third of the people who will gain insurance under the health-care overhaul passed in March. The administration’s proposed tax on certain financial institutions would take almost seven years to generate $60 billion.

“Transfer pricing is the corporate equivalent of the secret offshore accounts of individual tax dodgers,” said Sen. Carl Levin, a Michigan Democrat and chairman of the Senate’s Permanent Subcommittee on Investigations, in a statement to Bloomberg News. Levin has overseen hearings on tax shelters including those sold to wealthy people by KPMG LLP. “Now that progress has been made in addressing offshore tax abuse by individuals, transfer pricing is an issue that deserves scrutiny.”

…..”“If multinationals cannot be prevented from shifting profits to low-tax jurisdictions, then it becomes impossible to maintain the domestic corporate tax base,” said Reuven S. Avi- Yonah, director of the international tax program at the University of Michigan Law School in Ann Arbor. If that bleeding can’t be stanched, “we might as well abandon the income tax.”

$1 Trillion Offshore

U.S. companies amassed at least $1 trillion in foreign profits not taxed in the U.S. as of the end of last year, according to data compiled by Bloomberg. That cumulative total, based on filings by 135 companies, increased 70 percent over three years, from $590 billion in 2006.

While some of the offshore earnings reflect sales abroad, much of the growth results from expanding use of transfer pricing, said Martin Sullivan, a tax economist who formerly worked for the Treasury Department and Arthur Andersen LLP.

The system allows for creating paper transactions between subsidiaries of the same company to allocate expenses and profits to selected countries. For instance, when technology firms license their patents to offshore subsidiaries in low-tax countries, profits from sales overseas are booked to the foreign units, not the U.S. parents. The tax savings add to profits.

“A very significant part of this accumulation of profits offshore is the artificial shifting of profits using transfer pricing,” said Sullivan, now a contributing editor to the trade publication Tax Notes. “There’s been a significant increase in its aggressiveness over the past decade.”

Here is the full link: http://www.bloomberg.com/news/2010-05-13/american-companies-dodge-60-billion-in-taxes-even-tea-party-would-condemn.html
You can also read the the article about this in the National Tax Journal.

Bill November 22, 2011 at 11:39 pm

KLO, regarding deferral and later repatriation, NBER study of last holiday showed that it did not have a job effect:

NBER Working Paper No. 15023
Issued in June 2009
NBER Program(s): CF IFM ITI PE

This paper analyzes the impact on firm behavior of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals. The analysis controls for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in domestic investment, employment or R&D — even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed. The results have important implications for understanding the impact of U.S. corporate tax policy on multinational firms.

Bill November 23, 2011 at 10:32 am

KLO, please see Mark Anderson’s comments below confirming my statement. He was a former GE tax accountant

Jesse "The Butthole" Ventura November 22, 2011 at 8:55 pm

What? You won’t just post from Wiki like you usually do? You’re an ass-wipe.

Jim November 22, 2011 at 9:55 am

You guys need to read more Steyn.

The fact that GE has to file a 19-foot income tax return is not amusing, or amazing, or unfortunate. It is a national disgrace. We are $15 trillion in the hole, we have staggering unemployment, and this is what we spend our time making Americans do?

Fiddling and burning.

Jacob November 22, 2011 at 10:58 am

Why should the size of the tax return or its length matter in the slightest? GE is a single, standalone entity for convenience purposes only. It’s actually a conglomerate of many, many businesses conveniently trading under a single ticker. The heads of its business units are paid like CEOs. It works remarkably well together, but don’t lose sight of the fact that it has thousands of legal entities within it. If GE didn’t own them, they’d each be filing separate tax returns that would likely total well over 57,000 pages.

TallDave November 22, 2011 at 11:36 am

Because all the effort that went into it is a deadweight loss, and the size of such returns has grown out of proportion with the economy.

JWatts November 22, 2011 at 1:11 pm

+1

57.000 page tax returns are rather obvious signs of a serious misallocation of resources.

Jim November 22, 2011 at 5:46 pm

>>”57.000 page tax returns are rather obvious signs of a serious misallocation of resources.”

Yes, it really is.

And isn’t just absolutely soul-crushing that this needs to be explained?

Gabe November 22, 2011 at 1:41 pm

Talldave answered your question well. Do you understand why you were stupid now?

libert November 22, 2011 at 1:46 pm

Not necessarily. Much of the work is likely done anyway for the firm’s own accounting purposes and reports to shareholders. Further, many of the pages are likely reused every year, meaning it’s possible that they haven’t required much additional work, if any, over the course of GE’s existence.

I notice this when I’m reviewing many companies’ annual reports (10-Ks). If you download the redline version, you’ll notice that for many companies, 90%+ of the 10-K is identical, word-for-word, to the versions written for previous years, with only minor changes.

Further, a lot of 10-Ks repeat the same paragraphs, word-for-word, in different sections of the report. This is common in the case of holding companies and their subsidiaries: the holding company has a description of activities done by its subsidiaries, but it also repeats that description in the 10-Ks of its subsidiaries. In the case where subsidiaries themselves have subsidiaries, this repetition compounds on itself, sometimes resulting in large portions of annual reports simply being duplicate pages.

I don’t know as much about corporate tax returns, but I bet these kinds of issues appear at least as much as they do in 10-Ks.

TallDave November 22, 2011 at 2:52 pm

Money spent on tax avoidance is a deadweight loss to society in a way that money spent on financial reporting is not. Also, GE’s (and other large companies’) tax returns have been growing much faster than their earnings, meaning the losses are getting larger.

Ed November 22, 2011 at 10:00 am

You can’t look at a single year’s return to determine whether a company is paying their “fair share”. If you lose $200 in year one and make $200 in year two, you will look like you’re paying zero taxes on $200 in income in year two when you offset the income with NOLs from year one. How is that unfair? At the end of two years you’ve made no money and paid no taxes. It’s not a trick, or a gimmick, or a game, it is just the logical result of recognizing that every year of a corporation’s existence does not stand on its own.

question the question November 22, 2011 at 10:21 am

Are you implying that GE hasn’t made any money in the past two years?

Ryan Stambaugh November 22, 2011 at 10:57 am

The problem is what do you mean by “made any money the past two years”. That isn’t as straight forward as some would like.

For tax purposes, using the Income Tax Footnote in GE’s 2010 10-K, I would say, “no, they didn’t make any money the last two years.” I base that on this from the 10-K: “Consolidated current tax expense includes amounts applicable to U.S. federal income taxes of a benefit of $3,253 million, $833 million and $651 million in 2010, 2009 and 2008, respectively, related to the benefit from GECS deductions and credits in excess of GE’s current U.S. tax expense.” Though, even there it’s hard to say how much of 2010’s $3.2 billion benefit is due to 2010 or, say, 2001 or 2002.

If GE buys $16 billion worth of Plant and Equipment (like it did in 2008), how should this be accounted for? GAAP has you spread out that $16 billion for many years (based on useful life of the epuipment, estimated salvage value, etc.). Tax accounting can have you write-off big slugs of it in the first year.

However, to get the tax write-off GE had to spend $16 billion, and eventually the tax and GAAP difference for this $16 billion will unwind and net to zero (i.e. in future years, sans any new purchases, tax income would be higher then GAAP income). But, as they keep buying new equipment, this difference in accounting conventions remains.

One can view the Deferred Tax Liability as a source of funds for the company. However, to maintain it, the company has to keep buying equipment; which may or may not tell a different story as to the economics of the underlying business.

gR November 22, 2011 at 3:37 pm

+1

This is what is frustrates me about this whole discussion. Comparing P&L income tax expense to P&L EBT is not comparing apples to apples. The biggest obstacle in this discussion (aside from the tax code itself) is trying to explain the difference between accrual- and tax-basis income to people who can often only think in terms of cash-basis.

Steve C. November 22, 2011 at 10:06 am

Why not tax simplification for corporations (LLC, LP, Sched C etc). You could do it on a post card!

List your total receipts : X
Multiply line 1 by .01 : X x .01
Send us a check for the amount on line 2

KLO November 22, 2011 at 10:43 am

How do you define “total receipts”? This seems eminently gameable to me.

Dan Weber November 22, 2011 at 1:48 pm

So if I buy a piece of heavy equipment for $10,000,000 and sell it for $10,050,000, I end up in the hole after taxes? While a company that transfers that piece of heavy equipment within itself doesn’t pay any taxes?

Thanks.

Dan Dostal November 22, 2011 at 8:49 pm

Now that’s a side-effect I could live with. As that sale grosses the company $50,000, why wouldn’t you pay $500 overall? The company that kept the equipment didn’t net $49500. I’m not sure what’s to complain about.

C November 22, 2011 at 10:13 am

My view of these kind of tax shenanigans is that they’re main purpose for GE is to act as a barrier to competition. A small company wouldn’t have the scale or opportunity to take advantage of the loop holes much less the overhead to spend a fortune on a tax dept.

Bill November 22, 2011 at 11:58 am

+1

TallDave November 22, 2011 at 12:02 pm

When I was starting out, an older told us about another company he’d worked at, a gov’t contractor. They hired a lawyer to go through their contracts and find loopholes, his pay was 1/3 of anything he found. He made $4M for about 60 days’ work. They also had a partner whose entire job was to sit at a desk and be a minority, because it made the company “minority-owned” which got them more contracts. These are not the incentives of a healthy economy.

AndrewL November 22, 2011 at 10:41 am

GE would not want the corporate tax rate to be zero, that would be bad for their business. How many other firms can hire the tax accountants that they have? the corporate tax code is a barrier of entry into GE’s area of business and gives GE a competitive advantage.

John November 22, 2011 at 11:48 am

This is why Tyler’s recent post on the corporate income tax was such bad economics. A tax can be simultaneously terrible for efficiency and collect very little revenue. A low point, Tyler!

Noah Yetter November 22, 2011 at 12:04 pm

Wasn’t the “GE paid no taxes” thing debunked shortly after it was published?

TallDave November 22, 2011 at 2:53 pm

You’re thinking of the “GE received billions in refunds” thing. It turns out some reporter confused “tax benefit” with “tax refund.”

valuethinker November 22, 2011 at 12:24 pm

A small note.

There is no evidence that if we simply lowered GE’s tax rate, it would spend less effort reducing taxes.

Since we cannot reduce GE’s tax rate to say, 2%, there’s no evidence that they would cease tax minimization efforts.

The cost to benefit ratio, even at a corporate tax rate of 20%, say, would still be too low– spend say $1bn avoiding $3bn of taxes is still worthwhile. OK before it was 4.5 billion, but it’s still a net present value of $2bn, an excellent investment of corporate time and money.

Tax simplification: yes. A goal might be to reduce corporate tax rates in a revenue-neutral fashion. That should be, in macro, politically acceptable. And is in fact what Reagan set out to do in 1986.

Say set a reasonable goal, a corporate tax rate of 24% (the UK’s target level) and then mandate that the reform Committee has to kill enough deductions and loopholes to make that revenue neutral.

Tax simplification might reduce avoidance maneouvres. But not, at realistic levels of final corporate tax rates, simply reducing tax rates. It would still be too profitable for large corporates to avoid tax, if they could.

Andreas Moser November 22, 2011 at 8:26 pm

How much does it cost the IRS to read these 57,000 pages?
Maybe there should be a filing fee for tax returns of more than 4 pages, even if you don’t owe any taxes.

Mark V Anderson November 22, 2011 at 8:31 pm

I am a corporate tax accountant. I even worked in the GE tax department for 1 1/2 years, although at the division level, so I didn’t know what they were doing as a big picture.

Ryan does know what he is talking about. Listen to him.

Although I do agree that our tax system is way over-complicated, I don’t know that it explains much when talking about GE. Business taxes are inherently complicated, so no matter how much they simplify there will still be complications. A corporation with multiple affiliates will never be filed on a postcard. Some of the biggest complications relate to breaking down the corporation into its separate affiliates. As a tax accountant, I spend as much time doing that as anything. One cannot simply take the 10K and turn it into a tax return. The book accountants that create the 10K don’t care about how the affiliates break down; the SEC reports are filed on an aggregate basis. Also, the book accountants don’t care about income by state, whereas the tax accountants have to file state returns for every state in which the corporation does business.

When I look at GE’s tax footnote, it appears to me that they have decreased their taxes mostly through the use of foreign tax methods. As someone pointed out above, this is probably largely due to favorable transfer pricing methods. This too has nothing to do with the complexity of our tax system. Our system has to know how much income was earned in the USA and how much was earned outside, and there is no simple way to figure this out. This will always be a contentious issue, no matter how it’s done. The way the tax system works, all USA corporations are subject to US taxes 100%, but foreign corporations (including those owned by US corporations) are subject to US tax only to the extent they have US income. Even though US corporations are 100% taxable, we still need to know their US vs foreign income, because that is used to determine the amount of foreign tax credit they receive. Also there are certain kinds of foreign corporations owned by US corporations that are also subject to US tax, even for income earned elsewhere (subpart F, which was also discussed above). It certainly isn’t fair to tax corporations for earnings they received outside this country, so there has to be a way to divide US and foreign income. Taxing foreign-earned income would be the ultimate in US imperialism, in my opinion.

There is nothing we can do about GE taking advantage of whatever tax breaks they can find. GE can afford the best tax experts in the land, while the IRS cannot. No matter what new tax law is written, or if they make it as simple as possible (yeah right, as if that will happen), the GE tax folks will always out-think the IRS and pay less tax than we want them too. That may be a bad thing, but it is unavoidable. Congress has tried to give the IRS more powers to change this, such as with the codification of business purpose, but GE will always find ways around it. It is tax slobs like me working for medium sized companies that will suffer from this inordinate increase in the IRS power.

By the way, I generally favor using GAAP income for tax returns. Most other countries do this and it works for them. I don’t know how this works in detail, but it seems like it would work better than our system. For one thing it might keep Congress from constantly jiggering with the system.

Jay November 23, 2011 at 6:58 am

I concur. Ryan definitely knows what he is talking about (unlike the liberals that are completely ignorant of accounting). I’d add that GECS (the leasing business) depreciates equipment on its balance sheet on a straight-line basis for GAAP to the tune of about $8 billion a year. I do not have access to GE tax returns, but I’d bet a lot of money that for tax purposes GECS depreciates its equipment using MACRS (if you have to look up up MACRS you are one of the liberals completely ignorant of accounting and your opinion is as meaningful as a chimpanzee’s opinion). So long as GECS continues to invest in capital at a sufficient rate they can ensure that depreciation on their IRS tax returns is higher than depreciation on their GAAP financial statements, effectively shielding them from paying taxes today.

Mark V Anderson November 23, 2011 at 10:00 am

Actually, for 2010 and 2011, the law allows 100% depreciation the first year. I am sure that GE is using that method. In fact, that might be a large part of the explanation as to why GE paid no tax in 2010. GE is pretty capital intensive, so the 100% depreciation allowance will cause a large decrease in tax for those two years. Essentially, GE is taking advantage of the law that Congress passed to specifically help capital intensive businesses. And now GE gets blamed for using this law to its advantage.

Ryan Stambaugh November 23, 2011 at 10:19 am

Mark,

You’re more versed in this then I, and as you know there are thousands upon thousands of moving parts in figuring GE’s tax situation. But, it doesn’t seem depreciation was a large factor in 2010, or if it was the impact was indirect (essentially recouped via leases to customers).

In the Income Tax Footnote (#14) only $951 million is listed as a Deferred Tax Liability attributed to depreciation (and this is for GE excluding GECS)). Compare that to GECS Deferred Tax Liabilities of $6.168 billion and $4.182 billion for Financing leases and Operating leases, respectively. There’s no breakdown under GECS for depreciation even though they accounted for ~75% of Property, Plant and Equipment purchases in 2010.

Also, while GE lists non-US loss carryforwards, they do not list US-loss carryforwards in the Deferred Income Tax breakdown in Note 14 (totaling ~$3.4 billion as a Deferred Tax Asset between GE and GECS). This would lend credence to GE’s statement that it did pay US tax in 2010.

Mark V Anderson November 23, 2011 at 12:16 pm

Ryan, yes it does appear from the footnote that depreciation was not a major factor in the low taxes paid by GE. It even appears that deferred taxes for depreciation went down for the GE division, which seems pretty inconceivable to me, considering the 100% depreciation in 2010. Who knows what games GE is playing with their footnote? During my time with GE, I was not very impressed with the integrity of their accounting. But if you can believe their footnote, it does say that there was about $1 billion of decreases in taxes due to timing differences, so if it wasn’t a depreciation difference, there was some other major deferral of taxes. But the general tenor of the footnote does imply that it is mostly playing with foreign taxes that allowed GE to have lower taxes. So I take back my comment that it was the 100% depreciation that did it.

GE said they paid US tax? Where? In the narrative they talk about a US tax benefit of over $3 billion. It’s true that doesn’t seem to match up with no US NOLs significant enough to list on the Deferred Tax schedule. But now I am working on my own ignorance. I can’t remember the rules for the footnote; is the benefit they talk about an actual refund of their liability or else is it just the net amount of what they paid less received in 2010, which could mean that they merely overpaid estimated taxes in 2009, and this was the refund for that? I think it may be the latter, in which case the refund doesn’t really mean much.

Fred November 23, 2011 at 10:29 am

“the liberals”

valuethinker November 23, 2011 at 11:05 am

‘the liberals that are completely ignorant of accounting’

OK. Those would be ‘the liberals’ who wondered if the banks were, in 2006 and 07, really making the money they reported?

Profits which, in fact, proved to be completely falsified?

Robert Williams November 23, 2011 at 11:02 am

Does nobody here understand that Corporations don’t pay taxes?? When you buy stuff, you pay their taxes for them. If corporations didn’t have a “tax burden” (which corporations like GE pay MILLIONS of dollars to eliminate), their products would be less expensive. Eliminate the tax burden and you make American products more affordable to everyone IN America and on the Global Market.

This is just one more reason the FairTax needs to be implemented immediately! Learn more at FairTax.org

Tom November 23, 2011 at 11:16 am

Why not just have an AMT (that’s Alternative Minimum Tax) for US based corporations? The goal would be to increase the US Treasury receipts from corporate taxes back to a reasonable level of around 3%. In the year ended October 2011, corporate taxes amounted to less than 1.2% of GDP. GDP is $15T, so the difference of 1.8% is $270 billion per year … more than twice as much deficit reduction than the Supercommittee’s mandate

Maybe something along the lines of:
$________________ (enter here your sales to US Households, Businesses and Governments)
X_______3%______ (three percent tax rate on sales into the US)
= ________________(Domestic Sales AMT)
$_________________(Your tax; the maximum of Domestic Sales AMT and the bottom line on your 57,000 page return)

What … no deductions? Nope .. you said a 35% tax rate on income was too high, right? So we got you the lowest marginal rate imaginable.

But what about fairness? Should Wal-Mart (whose pretax profit margin is 6%) pay the same tax rate on US sales as AAPL (whose pre-tax margins are over 30%) ? The answer is fairly simple. The 3% rate (should it be 4%?) is the average rate to be applied to US-based corporations, GE is a decent example whose pretax margin is about 10%. Let the low margin industries have a lower rate (say, 2%) and the high margin companies a higher rate (say, 6%). But —– base the rates on the industry margins and not the company margins. So, if supermarkets average pretax margin is 2%, the rate for the US Domestic sales AMT would be (say) 2%. If the software industry has pretax margins of 30%, maybe their US Domestic sales AMT would be (say) 8% of sales. IMPORTANT: don’t give lower tax rates or refunds to money-losing companies … why should we subsidize failing companies? Encourage creative destruction! When the real estate tax or sales tax needs to get paid .. do they care if you are unemployed or underemployed? NOPE! Why should failing companies be able to claw back taxes they paid in their profitable years?

Also IMPORTANT: Get rid of the “second set of books.” Taxes paid should be very transparent to investors, and based on the GAAP definition of sales. Make it so that if the company fudges its revenues to reduce its taxes, that investors get the exact same message of lower-than-expected sales .. and of course the entire investment community becomes the IRS auditor. The stock would probably fall on the disappointment, and there would be a tremendous incentive for investors to pore through balance sheets, etc. uncover the bamboozle.

Bill November 23, 2011 at 11:51 am

@Robert Williams: Using your definition, no one pays taxes!

If a landlord didn’t have to pay real estate taxes, he could charge less rent, and the renters would have more money to spend .. then if the stores didn’t have to charge sales tax all the merchandise would be cheaper, so everyone would be able to put more money in the bank, and if the savers didn’t have to pay tax on the interest they receive, then the corporations would be able to borrow from the savers at a lower interest rate and increase their profit margins even more, or pass on the savings to their customers, who would be able to buy more of their neccessities at even lower prices and thus save even more !
WOW JUST THINK OF THE WONDERFUL ECONOMY WE COULD HAVE IF NO ONE PAYS ANY TAXES AT ALL!

Think of how much money you would have .. so you could easily rebuild your house if it burned to the ground because there were no firemen to put out the fire! And of course, you would be really rich, so you could easily replace the car that the bad guys stole, because there were no police to stop them. You don’t worry about the fact that the public schools closed, because your kids are at private school. You would probably need a Hummer 4×4 to get to work, because the roads would be in really bad shape, and the bridges would all have tolls reflecting the cost of maintaining them. You wouldn’t dream of taking the train, though, because it would cost a lot more than it does now … say about $50 from Greenwich to New York .. because it lost the subsidy.
But it was a good idea when someone suggested an electrified fence protecting the entire Mexican border, because the US economy looks even better to foreigners because everyone is so wealthy! But there is no money to put up the fence and no border control agents either.

But that’s ok, because a couple of IRANIAN destroyers just cruised into New York Harbor and started shelling your office building, and a bunch of helicopters with funny writing on the side just landed at JFK airport … maybe those guys will protect us from those coming in from the Southern Border …. oh S___T! Why is Canada starting to build a fence from Maine to Washington???

Bill November 23, 2011 at 3:40 pm

There are two people using Bill as a name.

UChicago Economist November 23, 2011 at 11:53 am

“GE’s tax bill illustrates both why our corporate tax rate is too high and too low. The nominal rate is too high which encourages a real rate which is too low.”

What is this BS? If we made the corporate tax rate half of what it were now then GE would still do everything it could in order to get its real tax rate down to zero. Don’t criticize the nominal tax rate for producing these results – criticize the abundant tax loopholes.

Tom November 23, 2011 at 11:57 am

@Steve C.

Sorry I didn’t see your post before posting mine … good idea .. how much would 1% raise?

Would that apply to global “receipts”?

Please see mine of 1116am .. any thoughts …?

Mark V Anderson November 23, 2011 at 12:30 pm

Robert is correct that corporations don’t really pay taxes (in an ultimate sense), people pay taxes. When corporations pay governments for these assessments, they in turn must charge the various stakeholders of the entity — customers in the form of higher prices, workers in the form of lower wages, and shareholders in the form of lower dividends. Most economists believe that most of this tax is passed on to customers and workers, and thus corporate taxes are highly regressive. But I am against most corporate taxes not so much because they are regressive, but because they are opaque. Most taxpayers don’t understand that corporate taxes are really on themselves as consumers, employees, and shareholders, and even economists are mostly guessing as to who pays the ultimate tax. I think corporate taxes should be only for the amount that benefits the corporation directly, such as for the infrastructure and security that the company needs to operate. It is of course somewhat subjective how much federal spending supports corporations, but it is definitely much less than they now pay.

Of course if corporate taxes were decreased, individual taxes would have to increase to compensate. But then at least taxpayers would know how much they were truly paying in taxes.

Bill November 23, 2011 at 1:24 pm

@Mark: Great post. But if you extend the thought, you can say that no one pays taxes, Everyone just passes them along in the form of higher costs for their products or services.

Some people think that 35% is a high rate to pay on corporate profits. But remember they get to deduct all of the costs (COGS, SG&A) etc, and they pay tax only on what is left.

If my body was a corporation, I shouldn’t have to pay income tax on my “top line” revenue of $15/hour, but I would get to deduct all of my costs of providing my labor to an employer … cost of food, shelter, clothing transportation to the job site etc. etc. Not to mention the depreciation on my educational costs. I could probably get away with charging my vacations, too, as long as I discussed business for a couple hours a day before heading off to the links!

Is it any surprise there is a high correlation between the cost of our government (State Dept. Commerce Dept, DoD, foreign aid, EMF contributions etc) and the number of multinational companies that want to be based here? If we decided to revert to isolationism the way some suggest, it seems that multinationals would find their US domicile as incrementally less attractive, as our influence over global events would probably subside.

We don’t have to determine how much federal spending supports corporations, though I would hazard a guess that it is much more than you believe. The simplest answer is to adopt a tax based on access to US consumers (including households, businesses, and government). The tax would apply equally to all corporations, foreign and domestic and would not attempt to tax US companies based on their foreign activities. Ideally, an identical approach would be adopted in all other countries.

Bill November 23, 2011 at 3:41 pm

This is a different Bill than the other Bill

Ryan Stambaugh November 23, 2011 at 1:27 pm

Mark,

I didn’t have the option to click Reply on your post above, so replying here.

<<<>>>>

Most recently, if you click on Alex’s hat tip link to the “Taxprof blog” there is a statement from GE to the Weekly Standard piece. When the story first broke upon the release of the 10-K GE hadn’t completed its tax return; but if memory serves even then they said they expected to pay something. The quote is, “GE paid income taxes for our 2010 return”. And, with no NOL (for U.S. operations) carryforward this seems to jive. Though, they used to say “substantial” income taxes for 2010 (iirc), and that word is missing. ;-)

<<<<>>>>

There’s probably quite a bit of things moving in and out of the Consolidated Current Tax Expense. They do reference tax audits in their favor for 2003-2005 (iirc), resolution of audits reduced their Effective Tax Rate by close to 6%.

So a good chuck of the Current Tax Benefit is the reversal of prior years’ accruals, some of this reversal would be due to the audits and some would be do revisions of prior years estimated.

It would raise more questions to me as an investor (as it would relate to earnings quality).

Meijer (a midwest grocery chain) is HQ’d in Grand Rapids, where I live. Going back, oh, 20 years or so I had one of their higher tax people as an Adjunct Professor. Two things have always stuck with me that she said (no it wasn’t ACRS and MACRS…). First, all their returns were audited, de facto. So much so, that there were two (iirc) IRS agents that had offices at Meijer HQ and worked their full-time. It was just easier on everyone. Complete the return and shoot it over to the Regulatory Capture(d) Dept., er, IRS tax officials down the hall. Second, her job consisted of arguing their cases before the Tax Court in Cincinnati. Okay, dog bites man story there; however she was arguing, say, 1974’s tax return (they were 20 years behind or so). So, she had to know 1974’s tax laws. And, she said, the next year they’d be taking on 1975. Lather, rinse, repeat.

Ryan Stambaugh November 23, 2011 at 1:34 pm

Hmmm, okay, I had copy and pasted your questions/comments in-between the brackets. It just posted the brackets, without the questions.

The first one was: “GE said they paid US tax? Where?”

Second: “the benefit they talk about an actual refund of their liability or else is it just the net amount of what they paid less received in 2010, which could mean that they merely overpaid estimated taxes in 2009, and this was the refund for that?”

Small Business Owner November 23, 2011 at 12:38 pm

No offense intended, but unless you have run a small business making more than $1 million per year, you have little or no appreciation for how screwed up the tax code is, and how it encourages–demands–this kind of behavior.

Just to file a ‘compliant’ tax return requires a company to become intimately aware of the too-many ways to account for payroll, inventory, income, cash-flow, expenses, owner draws, etc. The entire tax code pretty much looks like it’s a trap to put a small business out of business (e.g. that’s why we’re seriously considering *throwing away* $100-200K of inventory this year, because we can’t afford to pay the taxes on unsold inventory).

Whether we pay our ‘fair’ share or ‘game’ the system is a matter of whether we are able to pass the tax costs along to our customers and still survive. Yes, that’s what happens with business taxes, our customers pay them, as part of the cost of our product. Of course, you don’t see it that way, you just see our price. If a competitor is more aggressive (though still legal) with their tax strategy, they will charge less, and you’ll probably buy their product instead of ours. And this doesn’t even account for companies outside the US that often pay significantly lower taxes.

Which means that unless we look for and exploit every ‘loophole’, and ‘game the system’ as much we feel we can do without getting in trouble, we’d end up going out of business and laying off 4 people (and not paying any taxes at all). Every (small) business in the US is in this exact same predicament.

So, before you accuse businesses of ‘gaming the system’, maybe you should educate yourself on exactly how the system works. Listening to politician sound-bites doesn’t count as education.

NewBill November 23, 2011 at 10:01 pm

Sir, this is incredibly interesting. Let’s make it a lot easier and get rid of the tax entirely. Then how do we as a nation best pay our bills? I mean the ones that we cannot eliminate? In the US, we try to levy tax on economic transactions, ie the exchange of value ( money or goods/services) for value. If I paint your house in return for you building an addition onto my house, that should be taxable income to both parties. It’s easier to collect if there is an invoice and exchange of money. We do not as a rule tax wealth, ie money sitting in the bank or other financial instruments, (although some other countries do this).
I think there is a benefit to having the lowest possible marginal rate applied to as broad a base of economic transactions as possible, but once people started making up more and more deductions to benefit this or that special interest, it became necessary to raise the marginal rates incrementally over time. So now we have a high federal rate on corporate income, which many large corporations are very adept at minimizing the reported income on which that high marginal rate actually applies.

But every other company without the benefit of GE’s 1000 person tax department is left trying to navigate a very complex system in order to try to get the maximum benefit of the deductions they have every right to employ. What do you think … How can we improve the system while collecting a fair amount of revenue to help pay the country’s bills and still help you stay competitive relative to larger companies that can afford bigger tax
departments and foreign competition, too?

Appreciate your thoughts and ideas…

Mark V Anderson November 23, 2011 at 4:29 pm

Bill (the one with the comment to me) —

Individual expenses to stay alive aren’t really comparable to expenses required to run a business. It certainly doesn’t make sense to charge tax on corporations based on revenues, instead of net income after expenses. Revenue of a retailer of say $1 million, with maybe $950,000 of expenses, are not comparable to revenue of $1 million of a high quality good manufacturer, with maybe $600,000 of expenses. The amount of money they make as income is a much better indicator of how well the company is doing. On the other hand, two people earning salaries of $100,000 are comparable. If one has a lot more expenses than the other, that only indicates their spending habits, not the value of their income.

In order to determine how much tax each person in the U.S. is paying, one needs to determine who truly pays corporate taxes. Corporations don’t vote and don’t have feelings; it is only when the people pay the tax that it matters. What’s the point in determining how an individual spend their money when they are taxed? Certainly a person’s spending habits don’t affect whether or not a tax is fair.

Your last two paragraphs elude me. I don’t understand what you are talking about. I don’t know what our tax system has to do with isolationism, and I don’t see why there should be a tax based on access to consumers. As I said before, business taxes are opaque as to pays them and so should be avoided, beyond direct benefits.

Ryan —

I didn’t think of audit resolutions. Good point that a big chunk of the taxes may have been a reversal of tax accruals after a favorable audit conclusion.

Dealing with old audits is certainly a pain. Sometimes I lose track of what year it is; with working on audits from several years ago, putting together the previous year’s tax return, doing estimated taxes for the current year, and budgets for the next year. And when significant tax laws have been changed between those various years, it gets even more difficult. Larger companies are subject to so called large case audits, which means the IRS never leaves. When I worked at GE, I was told that they never actually filed amended returns for changes; they just sent schedules to the IRS guys down the hall. I have mostly worked for companies too small to be large case, so we were only audited some of the time.

Bill November 23, 2011 at 7:57 pm

Mark, thanks for the thoughtful reply. Reading all of the helpful comments here makes me realize how much expertise one must have to do accounting and tax returns.

Several of the other commenters here have discussed the real issue, which I think is whether or not corporations ought to be taxed at all. Perhaps you agree … I just wanted to add that a 35pct rate on corporate income after expenses is really not that high when you consider some individuals pay almost that same rate on gross income with relatively few deductions.

the US federal government we spent $3.6 trillion last year and received only $2.2 trillion in taxes. Large US corporations (as a group) are far below where they ought to be in terms of tax receipts. Some are probably are receiving refunds, others appear to be booking a larger part of their profits overseas than justifiable.

Bill November 23, 2011 at 8:29 pm

Continued to Mark,
So the question is whether a fair tax could be designed for corporations or whether their tax rate should just go to zero. Of course we understand the wide range of pretax profit margins by industry as you pointed out a retailer with 5pct margins and a manufacturer with 40pct margins. My thought would be to recognize the disparity in margins when setting the rate. So the 5pct retailing industry would be taxed at 1.5pct of sales and the 40pct manufacturing industry would be taxed at 12pct of sales. Multiple industry companies can report their revenues in each NAICS code and easily calculate the appropriate rate. Note each of the two examples you gave would work out to an effective rate on profits of 30pct.

So in effect, if the average pretax margin is say 10pct, then 3pct of sales equals 30pct of pretax income

Also, perhaps we should tax sales to US consumers (I.e. households,
businesses and governments), and not try to tax foreign sales or profits. Tax us and foreign corporations alike, based on their US sales.

Bill November 23, 2011 at 8:37 pm

Continued to Mark,
So might that help us get a reasonable amount of tax revenue from corporations without the extraordinary complexity that exists now? Yes, companies who are struggling to match the industry margin will have a higher effective tax on their (underperforming) profits, but really, why should we subsidize inefficient companies?

Bill November 23, 2011 at 8:42 pm

To other Bill, sorry for confusion. I should have checked all other comments before writing mine. Yours are a lot smarter. that Bloomberg article was good and he repatriation issue is really important. Let’s hope they can get some kind of tax reform for corporations, maybe as a compromise with some limited repatriation holiday. NewBill

Bill November 23, 2011 at 8:53 pm

Last to Mark, thanks again for your patience …. You really know what you are talking about. My idiotic musing about multinational corporations benefitting in a huge way by all the spending we do to maintain 1) the world’s largest military, 2) Huge depts of State and Commerce, ready willing and able to help US companies protect their interests and open doors all around the world etc etc. It was really just in response to your suggestion that US companies probably overpay taxes compared to the benefits they receive. I think the opposite may be true. So we cannot prevent a determined dictator from nationalizing assets belonging to US companies, but we have a lot more sway than a company based in (say) Portugal.

Mark V Anderson November 24, 2011 at 10:22 am

I see that this posting is now too old to be on the main page of marginalrevolution, so maybe we should tail off this discussion. But I do want to say that a tax on revenues would be enormously simpler, and so much superior to a corporate income tax in that way. I think the tax would ultimately be a tax on consumers, similar to sales tax. So there are good things about such a tax. But I still don’t like the opaqueness of charging a corporation tax when it ultimately is paid by individuals.

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