G.E. Earns $14.2 billion BUT Pays No US Taxes

NY Times reporter David Kocieniewski reported on March 24 that G.E. reported worldwide profits for 2010 of $14.2 billion of which only $5.1 billion came from US operations. The company not only paid no US tax but it claimed a tax benefit of $3.2 billion (see: http://www.nytimes.com/2011/03/25/business/economy/25tax.html?_r=1). According to the Times story, while the top corporate tax rate in the United States is 35 percent, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less. Moreover, even though the financial crisis led G.E. to post a loss in the US in 2009, regulatory filings show that in the last five years it has accumulated $26 billion in American profits, and received a net tax benefit from the I.R.S. of $4.1 billion. How can this be? First, contrary to some reports all foreign tax rates abroad are not greater than the rates in the US. Second, tax law permits American companies to pay no taxes as long as the money remains overseas. So, GE makes their money overseas and, by the way, hires a lot of foreign labor, and then keeps the money in those foreign countries to avoid paying taxes in the US. It’s not a very good deal for the American taxpayer.

I considered the ethics of GE’s policy to avoid paying US taxes. On the one hand what the company is doing is legal and it is done by many other US companies. But, does that make it right? Milton Friedman posited a long time ago that the only responsibility of a corporation is to maximize shareholder wealth. GE’s tax approach certainly meets that standard. In fact, it is totally consistent with GE's mottos: "We bring good things to life" and "Imagination at Work." Yes, good things for G.E. and its top executives, and its failure to pay US taxes does depend on accounting creativity.

The ethical problem is it creates an un-level playing field since it’s difficult, to say the least, for individual taxpayers to do the same thing. It’s a fairness issue. Why should a US company be able to avoid paying taxes by keeping their money overseas while individual taxpayers cannot? If a US taxpayer invests in a foreign mutual fund, for example, the reported dividend income and capital gains gets taxed. There may be a foreign tax credit if any taxes are paid to the foreign government on earned income.

The ironic part of the story is that President Obama designated G.E.’s chief executive, Jeffrey Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness. In announcing Immelt’s appointment in January Obama said: “He understands what it takes for America to compete in the global economy.” True, if competing in the global economy means outsourcing US jobs overseas and avoiding paying US taxes.

 Blog by Steven Mintz, aka Ethics Sage, April 2, 2011