Category: Law

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.

Consider the innovative employment policy of the Internet shoe seller Zappos. At the end of a four-week training course, Zappos offers new employees a one-time offer of $3,000 to quit. In part, the company uses the offer as a screening device. If you’re the type who prefers a quick three grand to the opportunity to work at a great company, then Zappos isn’t the place for you.

Here is a proposal to apply the same idea to law school.

I’ve been wondering that for the last few days.  These entities were capped and banned in the late 1980s but once upon a time Sears Roebuck and American Express offered full banking services and their financial arms grew at a rapid clip.  They took deposits but did not make commercial loans, thereby skirting banking legislation at the time and, I believe, avoiding FDIC premiums.

The big debate today is how to get more capitalization for the banks, and we have such absurdities as Basel III, not bad in spirit but somehow wishing that a bunch of essentially insolvent institutions magically had another $700 billion or so.  I say the way to recapitalize banks is to keep them well capitalized to begin with.  Indeed, we just bought a new microwave at Sears the other night.  These institutions have a lot of commercial capital on the line.

At the time non-bank banks were banned because many people feared — and I can see why –that the non-bank banks would take big risks, backed ultimately by taxpayer money.  (The banks also didn’t like the “unfair competition” and indeed it was unfair but of course it would have been fair had the model been allowed to spread more widely, allow more of them or by allowing commercial affiliation more generally, even mixed with commercial lending.)  Prescient, no?  Well, sort of.  In reality, it turned out that the non-non-bank banks (i.e., the banks) did that anyway.  With all the financial instruments and risky loans around, it is so much an extra problem that Sears Roebuck might initiate an overly aggressive lawnmower marketing strategy?  I don’t know.

I do see the potential downside to the non-bank bank model, namely that systemic risk can become bigger yet through the traditional commercial sector.  Not every company is as safe as Sears and even Sears has not always been safe.  Still, at a time when the radicals amongst us wish that banks could be capitalized at say forty percent, is this not a model worth looking at once again?

Here is a 1987 Cato Institute defense of non-bank banks.  Here is further background.  And you can trace Adam’s posts on the idea here.