G.E.’s Tax Savvy a Necessary Evil in a Stifling U.S. Tax System

Twelve days ago, on March 13, 2011, my infant son was born.  At approximately five-and-a-half weeks premature, he spent exactly one week in a Level Two Neo-Natal Intensive Care Unit, much of that time laying and staying warm in a brand new incubator-type machine manufactured and sold by General Electric.

Summerville Medical Center here outside of Charleston, South Carolina had two of the machines.  The nurses, who were all excellent, at one point explained that the machines had only been in place for a few months, and cost roughly $40,000 apiece.  A quick look around the room allowed for the discovery that, indeed, most of the hardware making the beeps, bleeps and boops sported that well-known GE logo.  At one point, I found myself shaking my head while thinking about the cozy relationship between GE CEO Jeffrey Immelt and President Barack Obama; a minute or two later, having studied my child’s still-cloudy blue eyes as he looked up at me, I found myself saying a silent “thank you” to Immelt for presiding over the corporation which manufactured and sold the machines and various accoutrements necessary to sustain my tiny son’s life.

My debt to GE in that regard is not the only reason I thought today’s piece in The New York Times, “G.E.’s Strategies Let It Avoid Taxes Altogether,” was a bit lopsided and unfair.  While the article was clearly aimed at assuaging and incensing the Old Gray Lady’s left-leaning [and dwindling] readership, I felt as though the potential reach in a populist sense demanded that I put the subject matter in a little perspective.  One look at how the piece begins, and it’s easy to see how it will be received by average folks across the country whose daily exposure to news and political opinion is limited to the late local news:

General Electric, the nation’s largest corporation, had a very good year in 2010.

Well, darn.  I wish I had a good year in 2010.  I lost my job and benefits, I’m underwater on my home loan…

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.

Well, that’s a lot of money.  It certainly explains why Aunt Bertha’s ER trip cost so much…

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

Say what, now?  They made all that money and didn’t pay any taxes?  Shoot, I made $37,000 this year before I was laid off and still had to pay my share to Uncle Sam — why don’t those fancy-pants corporate Wall Street greedy Gordon Gekko types have to pay their share?

What most Americans who find themselves too busy or otherwise engaged to pay attention to matters of business and politics may not understand is that any taxes paid by a corporation will simply be passed along to the consumer in the long run.  If a local supermarket pays $2.50 for a gallon of organic milk that it in turn sells to shoppers for $5.00, any increase in what that supermarket must pay for the milk, whether it be in the form of additional tax burden or unionized cows, will only increase the amount that moms and dads pay at the checkout counter.  General Electric is the same way — if it weren’t for G.E.’s “giant tax department” and its work in finding tax loopholes, G.E. would be paying the corporate tax rate of 35 percent (which even the Times notes is one of the highest such rates in the world). That additional cost would be figured into the cost of manufacturing, distributing and selling machines like those which sustained my son’s life, and hospitals like Summerville Medical Center would be forced to pay more.  Subsequently, that additional cost incurred by Summerville Medical Center would be passed along to my wife and I in the form of out-of-pocket expenses, and to the rest of you in the form of increased insurance premiums.

Those tax loopholes and shelters and strategies always deemed so evil by the American left and the populist center are, perhaps, the only possible mechanism by which the United States of America can compete when it comes to attracting and keeping corporations like General Electric within our borders.  Already, of the 304,000 employees noted by General Electric at this time last year in its Notice of 2010 Annual Meeting and Proxy Statement, only about 133,000 of those employees are employed domestically.  That’s less than half.  And while those 133,000 employees are adding to the tax base in their individual states and municipalities in which they are domiciled, buying groceries and eating at restaurants and paying property taxes and more, if the United States of America would take the steps necessary to ensure that maintaining operations stateside is advantageous rather than merely a barely tolerable cost of doing business, perhaps more of those 304,000 employees would be contributing to the tax base.  And that’s just one corporation.

Look, I am not going to pretend to be some sort of business genius.  In fact, I am anything but.  However, it does not take some sort of savant to understand that business will go where the cost of doing business is lowest and where the infrastructure is adequately suited for growth.  Right now, in the States, the infrastructure is there enough to offset a higher cost of doing business, but there is no reason why we cannot couple infrastructure with an irresistible business environment.

Instead of allowing our bureaucrats to constantly look for more ways to exert control over private business, we need to ensure that the federal government and its various economic tendrils are kept within its constitutional authority.  To do so, perhaps we start by doing more of this:

And, instead of vilifying corporations like General Electric for doing what it can to operate within the Tax Code while trying to minimalize the effect of this nation’s counterproductive tax system, instead of acting to shut down and restrict access to tax shelters and use of such tax strategies, the United States of America should instead adopt a business-friendly system which operates as the location where the rest of the world’s business and industry send their operations to avoid excessive burdens at home.  Just as it is with energy policy, how for long-term success we need to stop being an oil junkie and start being the dealer, when it comes to business and industry we need to quit sending our jobs and money overseas, and start putting ourselves in a position where others send their jobs and money to us.  Stop being the ones that need the shelter, and start being the ones that have the shelter.

The role of the federal government should be to bolster the private sector and provide an environment in which the private sector can grow.  Currently, however, all too often the federal government acts in an adversarial manner, putting up regulatory and legislative roadblocks to growth, and generally for no reason other than to serve a contrary special interest.  In terms of corporate taxation, the best possible way for the government to finally assume its proper part would be to scrap our current tax system and move toward a consumption-based tax, but that’s another story altogether.

So, while it may be tempting to jump on the populist bandwagon and scream and shout at the news about General Electric and its tax bill, consider that General Electric’s capacity for working within our horrendous tax system and keeping the cost of doing business down is actually serving you and me by keeping the cost of purchasing General Electric products down as well.  And, with General Electric maintaining a heavy hand in appliances, aviation, consumer electronics, electrical distribution, energy, entertainment, finance, gas, healthcare, lighting, locomotives, oil, software, water, weapons, wind turbines and more, their lesser tax burden is your greater gain.

Of course, G.E.’s excessive lobbying and Jeffrey Immelt’s role in the Obama administration–the Times correctly points out that Immelt is the president’s liaison to the business community and is chairman of the President’s Council on Jobs and Competitiveness–means that he and his company are benefiting from tax breaks that he has had a hand in making happen.  That much is a problem.  But the bigger picture demands that our federal government do more to foster economic growth so that G.E.’s “giant tax department” and its counterparts in businesses everywhere are rendered obsolete when it comes to dealings on American soil.  No corporation should have to scramble and bend the rules in order to get around our system.  That G.E. was forced to do so should not be met with indignation toward G.E., but rather toward the very system which made such conduct necessary.

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Comments

  1. Boston Blackie says:

    I am certainly happy that your son received the care he needed thanks to a G.E. made incubator. I also agree that we need to “Stop being the ones that need the shelter, and start being the ones that have the shelter.” However, I have little sympathy for G.E. since it came to light that they were still doing business with Iran illegally a few years back. I stopped purchasing G.E. made products, no big sacrifice since they have always been good at making the big things like jet engines but well known that they make crappy small appliances.
    I don’t normally reference the Boston Globe but this article from last fall shows the true G.E. (and others) and how they get most of their tax breaks.

    http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2010/11/21/ge_wants_money_for_nothing/

  2. Randy Wills says:

    Good article, Jeff. I watched the Bill O’Reilly interview with Lou Dobbs on “The Factor” earlier this evening regarding the NYT piece on GE’s tax situation and, unfortunately, there was a lot more heat than light in that conversation. You did far better.

    If there is any argument to be made against GE’s tax treatment, it should not be with the amount that they, as a corporation, were ultimately liable for but rather with the fact that large corporations have the clout and financial resources to extract tax concessions that small corporations are unable to match. This creates great inequities in the current tax system which results in an unfavorable (to the small-to-medium-sized business) distribution of investment dollars.

    Our business is an “S-corp”, so all of our earnings are passed through to the shareholders who, in turn, pay personal income taxes on their share of the profits, regardless of whether the profits are distributed or retained. In the case of “C-corps” such as GE, I’m not sure that they should pay any taxes on profit in the first place until that profit finds its way into individuals’ hands in the form of shareholder equity. Corporate taxation always has a dampening effect on growth simply because it is a non-productive allocation of resources. The less a corporation pays in taxes, the more money that it has to invest in product development and other growth-producing expenditures, resulting in more jobs. The problem with our current structure is that we are all-to-often unable to compete on a global basis and corporate taxation on profits (along with superfluous and costly government regulations) only exacerbates that problem.

    Andrew N. Liveris’ (Chairman and CEO of The Dow Chemical Company) recently released book, “Make It In America” is an excellent resource for understanding how we can reverse the problem of dwindling employment in the critical (for economic recovery) manufacturing sector while broadening out our overall employment spectrum. This book is well worth the read for anyone interested in practical solutions rather than the drivel coming out of the White House about “out-innovating” our global competition considering that we have a domestic secondary educational system which produces students who, as of 2006, ranked 25th out of 30, relative to our primary competitors, in “STEM” (Science, Technology, Engineering, and Mathmatics) proficiencies. Good luck, America.

    Randy

  3. Randy Wills says:

    That was supposed to be “all-TOO-often”, not “all-to-often”. I just don’t seem to be able to make a comment without at least one blunder. There’s probably one in this comment, to.

    Randy

  4. Jeff Schreiber says:

    Randy,

    I forgot how good you are at breaking this stuff down. I should have asked YOU to write this piece. (Actually, you’re still welcome to.)

    Jeff

  5. Anonymous says:

    May I please see a flat tax (personal and corporate) in my lifetime?
    Or a fair tax at the register, I mean really? Tax codes suck.

  6. Randy Wills says:

    Thanks, Jeff.

    I have an unfinished piece on the economic problem titled “Last Exit to Recovery” that I’ve been working on for a couple of weeks but keep putting it aside because I know, deep down, that there can be no “recovery” without a sweeping sea change in the national moral attitude and I don’t think that’s what most people want to hear.

    But maybe you’ve motivated me to get it done. I miss being in the fray, but I sure am glad to see you back in action at AR.

    Randy

  7. Gail B. says:

    Randy, you’re a trip! I caught that INTENTIONAL “to” at the end!

  8. Gail B. says:

    In my Internet ramblings yesterday, I discovered that Dr. Janet L. Yellen, Vice Chair of the Board of Governors of the Federal Reserve System, will be attending the meeting with Immelt, Obama, and other “money men” in April. Her bio says, “Dr. Yellen has written on a wide variety of macroeconomic issues, while specializing in the causes, mechanisms, and implications of unemployment.”

    With her admirable educational background and achievements, she should have a better handle on the causes of unemployment, as she specializes in it.

    Read about her here:
    http://www.federalreserve.gov/aboutthefed/bios/board/yellen.htm

    Knowing what we do about the Obama administration, the people he chooses to surround him, and Obama’s method of operation, doesn’t it seem obvious that SOMEBODY is undermining the U.S. economy?

    The telephone numbers of my congressmen are stored in my phone.

    Jeff, thank you for the article on GE. Every story I have read about their not paying any U.S. income taxes has had the same negative slant that you mentioned. GE did, however, fill out 7,000 tax forms in foreign countries where they did have to pay taxes for 2010.

    I hope your son is doing well!

  9. graypanther says:

    large corporations have the clout and financial resources to extract tax concessions that small corporations are unable to match.

    Oh, if that were only all they could extract. How long will rational policies at our borders be stymied by corporate hegemony over the profits to be realized from illegal immigration? Come on, DoJ, go up against the big corps…I dare you.

  10. whats_up says:

    Jeff,

    Nice article. I am torn here. I would have no problem lowering the corporate tax rate if all companies would agree to pay that share and we got rid of all tax loopholes. However companies have shown that they dont really want to do that either. Randy could speak better to the moral breakdown of companies with-in our system of which their are many examples. However there are some outstanding companies out there as well, so to label them all is problamatic. There is room for movement in my opinion on this. However the general populace will only stand for the current record profits for only so long, as they see that thier profits continue to dwidle and dwindle further. Something in that regard must be done.

  11. kcrailroader says:

    OK, I am going to have to call BS here. GE is the evil empire incarnate and any noise about why they should be defended is not going to fly with me.

    I have watched over the last 10 years as they have taken a good little company and railroad supplier they purchased for one product, damaged that now subsidiary’s customer relationships since the dynamic of the customer relationship changed from small vendor/large customer to large vendor/small customer with all the big company’s attitudes, ran the product into the ground by stupid purchasing decisions (value engineered replacement of mill spec components with commercial grade), movement of manufacturing (outsourcing of a board plant and offshoring of metals fabrication to Mexico), offshoring low level engineering / drafting to India and the revolving door of Six Sigma Black Belt idiots into the general manager’s position. The latest insanity was the sale of half the subsidiary’s product line to a competitior who thankfully is trying to reverse the damage that has been done (but alas another multi-national corporation – Caterpillar).

    Jeff, this has happened over and over with them. I would like to know what former supplier that was run, paid taxes, and based here in the good old USofA they bought up that manufactured that preemie life support bassinet. I would bet that you would find a similar history to the above. The result is a destroyed small company, offshore manufacturing and engineering, reduced US employment, reduced tax base and more profits that are not being taxed.

    Another corporation that is too big to fail.

  12. Greg Roberts says:

    I see several issues in the GE tax situation. First, we have a tax code that invites special interests to get unfair competitive advantage. Large corporations, farmers, renewable energy companies, etc. distort the intended level playing field. For this we should blame the federal and state governments, not GE. The tax code should be simplified to eliminate loopholes and preferences. Second, there is apparent collusion between GE and both federal and state governments to advantage GE products. GE’s large lobbying efforts force us to buy new, more expensive GE light bulbs, force the Pentagon to buy GE products they don’t want, subsidize renewable energy investments that make no economic sense, etc. This collusion is evident with GE, other large corporations, strong lobbying groups, unions and other organizations with the political influence to distort the economy at taxpayer expense. Third, too many U.S. corporations take U.S. government help while simultaneously transitioning related jobs out of the U.S. For GE, it is interesting to see how much of the wind energy subsidy ends up producing products and technology overseas. Fourth, high taxes and over-burdensome regulations on U.S. companies motivate them to move their business out of the U.S. and, instead of letting businesses keep this money for shareholders and investment, and to operate more efficiently to compete globally, this money to federal and state governments to sustain their drag on and distortion of the U.S. economy. A start in eliminating all these abuses is elimination of tax loopholes (corporate and personal), elimination of government subsidies (corporate and personal), and a relentless drive to reduce the cost of government and their interference in the private sector. Government should create economic opportunity and make the U.S. attractive to private sector business, not influence winners and losers and fund activities that can’t be economically justified without government assistance.

  13. Jeff Schreiber says:

    What’s up — what about the FairTax?

  14. Al Gore says:

    Why wasn’t little baby Jeff under a CFL bulb? hmmmm?

  15. NEWS NEWS NEWS says:
  16. I think one of your last lines said it all: No corporation should have to scramble and bend the rules in order to get around our system.

    I have a hard time defending GE on this considering their ties to the Obama administration and the “fruits” they have born because of this. Most notably, as mentioned above, forcing us to buy expensive (and dangerous) light-bulbs in the name of some global crisis that is still debatable today.

    At the same time, our tax code is ridiculously complicated. I can hardly begrudge a company for taking its business overseas. The problem seems obvious: The corporate tax is too high. Until the powers that be begin to foster a more business friendly environment (via lower taxes and less regulation), this issue will not be solved.

    Until then, I’ve decided to also boycott GE as much as possible. There are plenty of other great companies who make similar, if not better, products than General Electric.

  17. Randy Wills says:

    To “kcrailroader”:

    I understand where you’re coming from completely, and a lot of decisions made at the corporate level have harsh consequences at the local level, often without consideration for the “little guy”, but that was not what I was talking about, and I don’t think that Jeff was either. I am no fan of GE management and I detest Jeff Immelt, – “sleazebag” comes to mind – but that’s a different subject. GE makes excellent medical products which save innumerable lives.

    In this case, I was talking about corporate tax policies in general. I doubt that GE is any more “successful” in avoiding taxes than most large, multi-national corporations, and frankly, that’s what shareholders expect from their management. Anything less is a dereliction of fiduciary duty to your shareholders and some sharp lawyer will bring a shareholder suit against you if you make a practice of it. My guess is that there is no one who will read this that pays more taxes at the personal level than the law absolutely demands, and corporations are no different.

    Now, if we want to talk about morality, that is entirely a different subject and, as I mentioned in an earlier comment, it is the fundamental root of our problems, both economic and social. It is on this point that I can find little agreement with my views but by ignoring it as the central issue guarantees failure, again, both economically and socially.

    Randy

    P.S. to “Gail”: I can’t get much by you, can I?

  18. L. Banks says:

    Thanks Jeff for your insight into GE. GE may be savvy on some things, but internally they are having problems. Since my brother-in-law is a key corporate executive there, I have some insight others may not have. GE is going the way of the Obama administration:

    1. They celebrated Ramadan, but not any other religious holidays.
    2. They have very, very, very close ties with China to the point they do not secure their internal computers and receive direct e-mails from China on a daily basis and as a result have suffered company-wide shut downs.
    3. The unions receive better benefits than the scientists and researchers at GE and as such they are losing their talent to other corporations.
    4. GE has some interesting solutions right now for the high cost of energy, but delay or put blocks or do not fund the implementation and production of these solutions. They would make so much money because it would make this country truly energy independent.

    I will agree with you that our government needs to do more to foster economic growth and it can be argued this administration does that with selected corporations who bow to the administrations policies. Maybe they do not get corporate tax breaks, but they do get contracts which gives them more money and appointments which give them access to information and high ranking officials and clearance to export technology overseas increasing their national and international markets.

  19. Randy Wills says:

    The “Corporation” is just a group of individuals acting in concert to achieve goals financially favorable to them and the shareholders. So, is the problem with the “Corporation” or the shareholders who care only for the bottom-line-effect on their portfolio?

    I suggest, as it is with national economic issues, the answer lies with the individuals involved in the process. Citizens and investors alike are willing to turn a blind eye to the truth as long as they are pesonally benefiting from the activities of the corporation or the government.

    As James Carville used to say, “It’s the economy, stupid”, I say “It’s the individual,————- (but I’m not calling anyone “stupid”)

    Randy

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