James Pethokoukis

Politics and policy from inside Washington

What goes down, must come up: GE’s latest tax bill

Apr 21, 2011 14:59 UTC

Tell me what happened, Reuters:

The company, which has come under fire over the past month for reports of an unusually low 2010 U.S. tax bill, pointed out that its consolidated first-quarter tax rate was 53 percent as a result of the NBC Universal sale.

And as BBrand X noted:

GE’s consolidated tax rate was 37 percentage points higher than a year earlier, reflecting the company’s projection that the rate would rise significantly after the NBC sale.

The company’s taxes have been in the public spotlight since the New York Times reported March 24 that GE had a tax bill of zero in 2010, an assertion the company called misleading on its GE Reports website. The criticism prompted a hoax press release last week.

GE has rebuffed the tax bill claim specifically and said the company received no rebate, refund or payment from the government on its 2010 taxes.

Indeed, GE predicted this:

GE’s tax rate has been lower in recent years due to financial crisis losses at GE Capital. From 2008-2010, GE Capital suffered nearly $32 billion in losses as a result of the financial crisis. That’s not a “tax avoidance strategy.” Absent such unusual losses, GE’s overall effective tax rate would have been 15 percent over the past several years, which is comparable to the average for other multinational corporations. Our 2011 tax rate is slated to return to more normal levels with GE Capital’s recovery.

And the company has this cold:

The United States is virtually the only major industrialized country that taxes overseas earnings of companies. GE and many other companies — and, for that matter, Congress and administrations over many decades — have supported deferral of tax on foreign earnings for all companies. Doing so makes U.S. companies more competitive globally. This is not a “shelter,” it is good policy.

The U.S. shouldn’t even be taxing overseas income. Better to simplify the system, tax territorially and lower the tax rate to at least 15 percent  And don’t forget that even when you factor in various tax breaks and loopholes, the U.S. STILL has the highest average effective corporate tax rate among advanced economies.

No April Fools’ joke, U.S. now world’s highest corporate taxer

Apr 1, 2011 01:41 UTC

If only it were an April Fools’ Day prank. With Japan officially cutting its corporate tax rate as of today, America now has the highest rate among advanced economies. Even its effective tax rate is way above average despite the likes of General Electric spending billions to game the labyrinthine code. A smarter approach would be to substitute a business consumption tax.

Now the United States might cling to second place if Japan cancels the rate reduction to help pay for the tsunami and earthquake devastation. After factoring in state taxes, America’s top rate of 40 percent would still exceed the average of 26 percent for the rest of the OECD.

Headline rates, of course, are like sticker prices on new cars. The real numbers are lower, thanks in part to the $40 billion companies spend annually to comply with, and often sidestep, the maximum levy. GE, for example, has taken heat for consistently paying less than what the U.S. tax code would imply it should.

But even taking into account the efforts of attorneys and lobbyists, the average effective U.S. rate in 2010 was 29 percent against 21 percent for international counterparts, according to the  American Enterprise Institute. And before the recession, corporate tax revenue as a share of U.S. GDP was at its highest since the 1970s.

Politicians of all stripes have been talking about lowering corporate taxes and eliminating loopholes to pay for a sharp rate reduction.  A sharply lower rate —  Canada’s will be just 15 percent in January 2012 — would boost worker wages, investment, productivity, jobs and growth. Such reforms, though a big improvement, would still leave in place a flawed and unwieldy structure.

A better alternative might be a consumption tax where business would simply determine its liability by subtracting total purchases from total sales. The tax would then be imposed on what’s left, essentially a firm’s value added. Unlike the corporate income tax, a consumption tax would allow the cost of investments to be fully deducted immedi ately, providing incentives for more. Such a tax also could be imposed on imports and deducted from exports, as other nations currently do with their VATs.

The Tax Policy Center estimates an 8.5 percent consumption tax — by broadening the tax base and boosting output – would boost corporate tax collections as a percentage of GDP to 4.5 percent from the 2.4 percent the White House forecasts for the next few years. (This is the corporate tax plan, by the way, found in Rep. Paul Ryan’s “Roadmap for America’s Future.”) That’s no laughing matter.

Obama tells business to share the wealth

Feb 8, 2011 03:38 UTC

A few thoughts on President Obama’s speech to the U.S. Chamber of Commerce:

1. Would it be too much trouble for him to be more specific about how deeply he wants to cut corporate tax rates? I hope he doesn’t see the OECD average of 25 percent as a floor. Canada’s rate will be dropped to just 15 percent next year. And if he really wants more of company profits to be “shared” with workers, then he ought to propose abolishing corporate taxes altogether since 70 percent of the tax burden is passed along to workers.

2. Would it be too much trouble for him to be a bit more specific about what regulations he wants to cut? The Heritage Foundation has 20 great ones for his consideration. The think tank also has this helpful piece of advice:

Rather than require agencies to identify harmful regulations during the next 120 days, or even to eliminate unwarranted rules, the order [on reviewing federal regulations] merely requires agencies to submit a “preliminary plan” for reviewing regulations sometime in the future, with the goal of making their regulatory program either less burdensome or “more effective.” And despite promises of transparency elsewhere in the order, the results of any regulatory reviews conducted are required to be released online only “whenever possible.”

3. Not surprising that the execs in attendance clapped when Obama talked about “investing” in America. That partly means transferring taxpayer money to Big Business.  And that stuff about a new social contract between government and business? Time for a Milton Friedman break:

But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

COMMENT

If it wasn’t apparent before the 08 elections, it should be painfully clear now that Pres. Obama views business as something that should be tolerated and controlled. He does not believe ENOUGH in the free-market system to let it work. Our economy has been resilient in the past, but Mr. Obama has created incredible uncertainty among businesspeople. He PERSONALLY is probably the number-one factor holding back business investment and hiring. Businesspeople are “people” and they rely not just on financial analyses and market studies to make decisions. They also use their intuition. Intuitively I do not have confidence in Mr. Obama that he will do right by business and he never really does anything to change that feeling. Above all, he is a master (or at least he THINKS he’s a master) at careful selection of words so that an inattentive listener will believe he is making concessions or changing his tune. In reality, he’s the same semi-socialist whom some of you elected. In that (and other) regards, I greatly prefer Mr. Bush.

Posted by mheld45 | Report as abusive

Any way you slice it, U.S. corporate tax rates are too high

Feb 2, 2011 20:35 UTC

David Leonhardt (NYT) makes the point that U.S. companies often pay far less than the top statutory corporate tax rate of 35 percent:

Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.

Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades. …

The problem with the current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company — and that are indeed inefficient for the larger economy — can make sense when they bring a big tax break. “Companies should be making investments based on their commercial potential,” as Aswath Damodaran, a finance professor at New York University, says, “not for tax reasons.”

Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success.

Inefficiencies like these slow economic growth, and they are the reason that both conservatives and liberals criticize the corporate tax code so harshly. Mitch McConnell, the Republican Senate leader, says it hurts job creation. Mr. Obama, in his State of the Union address, said that the system “makes no sense, and it has to change.”

It should also be noted that whether you are talking about the statutory rate or the effective rate, the U.S. is still at uncompetitive levels (via Tax Foundation):

corprate

corprate2

COMMENT

Rubbish. Any taxes at all are too high for James Pethokoukis. Corporate tax rates in the United States are among the lowest in the world. Combine that with the loopholes that corporate lobbyists have bought for their clients, and most US corporations pay no tax at all.

Posted by GetpIaning | Report as abusive

The tough job of cutting corporate taxes

Jan 28, 2011 18:07 UTC

President Barack Obama’s State of the Union speech delivered on an idea he’s been telegraphing for weeks: corporate tax reform. And there are hints the changes he will seek could be major. But some companies will lobby hard against losing tax breaks to pay for a rate cut. Turning even sensible proposals into law is no sure thing.

For the most part, Obama has kept his distance from the long list of recommendations put forward by the debt commission he created last year. Tackling business taxes is turning out to be the exception. The panel suggested lowering the top U.S. corporate rate to 26 percent from 35 percent today and taxing only domestic income as a way of promoting economic growth. Yet it also called for eliminating all business tax breaks to fund the reductions and reduce the budget deficit.

Obama echoed the basic thrust of the panel’s proposal in his national address, though not the specific numbers. But his call for “fundamental reform” that was “revenue neutral,” implies that he wants to do more than just tinker with the existing tax code. Those goals can only be met by sharply lowering the overall rate and dramatically reducing loopholes.  Importantly: Obama did not hint that some of the money from simplifying the tax code be used for lowering the deficit, as the panel suggested. Republicans would likely view that as a tax hike and firmly oppose.

Not all companies will be pleased with the prospect. Some multinational companies, such as Pfizer, Hewlett Packard and Qualcomm, have successfully worked around the current system to have consistently managed effective tax rates closer to 20 percent or lower.

And lobbyists from a host of industries, including venture capital, private equity, and the oil patch, where tax-advantaged master limited partnerships are all the rage, will flood Capitol Hill and claim ending this or that tax subsidy will hurt competitiveness. Just look at this chart (from the NYTimes):

corptax

It’s been 25 years since the tax code was meaningfully reformed. That argues for Obama to slice indiscriminately through the Gordian Knot of corporate welfare by doing away with all business tax favors. Put everyone in the same boat and let markets choose winners. Yet as common-sensible as that sounds, it may be every bit as challenging as passing health and financial reform. This good idea will take some heavy lifting.

But it needs to be done correctly. Americans for Tax reform has some solid suggestions:

1. The rate needs to come down — way down. Our 40 percent rate is much higher than the average European rate of 25 percent. Ideally, we’d want to be under that in order to attract jobs and capital from the rest of the world

2. Don’t raise taxes. The President has argued this should be a tax revenue-neutral exercise. While we would prefer a net tax cut (at least on paper in a static score), revenue-neutrality should be the worst revenue case. This should not be an excuse to raise net taxes (like the President’s Debt Commission did).

3. Move from “worldwide” to “territorial” taxation. As part of reform, the corporate tax system should migrate away from “worldwide” taxation (where all income of U.S. companies from all around the world is liable to be taxed by the IRS) to “territorial” taxation (where only U.S.-source income is taxed). This is what the rest of the world by and large does, and would make all the international deferrals and credits unnecessary.

4. Resist the temptation to lengthen depreciation lives. The proper tax treatment of business purchases is immediate expensing (as was contained in the December tax deal). Going in the other direction by lengthening depreciation lives will only bias toward consumption and away from productive investment. It’s the government picking winners and losers, and hurting economic growth in the process.

5. Remember that the corporate income tax is only the first act of a two-act play. After-tax corporate profits distributed to shareholders are double-taxed as dividends. After-tax corporate profits retained by firms eventually come out in the wash as taxable capital gains to shareholders. An integration of both bites at the apple would truly be a pro-growth and comprehensive tax reform effort on the corporate side.

6. Don’t forget about corporate capital gains and dividends received. Unlike individuals, corporations don’t have a preferential rate on capital gains, and cannot exclude all the dividends received from other corporations. Dealing with the capital stock and portfolio income of corporations is a necessary component to reform.

7. Don’t pick winners and losers. President Obama seems to have a particular vitriol reserved for energy companies, as exemplified (again) in his SOTU speech. This hatred should not cause this sector to suffer more base-broadening than other sectors. Conversely, favored companies should not get light treatment. Rather, the goal of a revenue-neutral corporate tax reform (as opposed to a simple rate cut, which remains ATR’s preference) should be to broaden the base as much as possible in order to lower the rates as much as possible. How individual companies or sectors do is not particularly relevant.

COMMENT

Since human beings are really virtual corporations, to turn the tables a bit, then citizens of all sorts, flesh and blood as well as virtual, should only be taxed on US source income. After all, Europe does that too. No global octopus headquartered in D.C.

A good idea.

Posted by txgadfly | Report as abusive

Deferral Drama: Why Obama corporate tax reversal hints at a VAT

Oct 13, 2009 17:34 UTC

Many ideas that may have momentarily seemed like smart policy earlier this year — when rage at Wall Street and Corporate America hit a fevered pitch — didn’t survive a bit of calm reflection ((and intense business lobbying.). Like that 90 percent tax on executive bonuses. Or nationalizing the banks.

Both are certainly strong nominees for “worst idea of the year.” But they have a worthy challenger in the Obama administration’s previously announced intention to limit the ability of U.S. companies to defer the repatriation of overseas income. Probably seemed a terrific twofer at the time: a nice bit of populist political posturing (this is, after all, the “Benedict Arnold” tax break that Democrats love to harp on) that would also bring in some $200 billion over 10 ten years.

Total win-win, right?

So why then is the White House now apparently dumping the whole idea? Partly because of — you guessed it — intense business lobbying of both the administration and Congress. Technology CEOs who supported candidate Obama and congressional Democrats were, by all accounts, particularly persuasive.

They had an easy economic case to make, however. Not only would the tax plan hurt American corporate competitiveness (most other countries don’t tax their companies’ overseas profits), the changes would be a de facto $20 billion- a- year tax increase on business during a time of profound economic weakness. Bottom line: the tax changes were in no way incentives to add American jobs at a time when unemployment is climbing toward 10 percent. In this case, wealth and job creation trumped wealth redistribution and revenue raising.

Great decision by the Obama White House.

But while this was one instance where “more of the same” was better than the proposed change, the corporate tax status quo should not be preserved. For one thing, business income taxes are a lousy way to finance government. Studies show that somewhere between 45 percent and 75 percent of the corporate tax burden is shouldered by workers in the form of lower wages. And big taxes and tax subsidies encourage businesses to make decisions based on accounting benefits rather than for economic efficiency and productivity reasons.

Earlier this year, a group of centrist economists sponsored by the Tax Foundation put out a wish list of proposed corporate tax changes. Among them: lowering the corporate tax rate, broadening the tax base and permitting faster write-offs of business investment. Smart ideas all.

Or, they suggested, you could replace America’s sky-high 35 percent corporate income tax with a value-added tax of 5 to 6 percent. And that idea hints at the other reason why the White House may have scuttled their original tax plan. Obama supporters and fellow travelers have been launching trial balloons all over Washington promoting a VAT to deal with Uncle Sam’s huge budget deficits. And if that is the direction the White House wants to go, why spend the time and political capital on a corporate tax increase that may only be temporary?

So dumping the deferral limitation plan is both good economics and good politics, at least for now.

There’s your win win.

COMMENT

btw, TWH is denying that any of the CIT changes have been shelved.

http://www.nytimes.com/reuters/2009/10/1 3/us/politics/politics-us-obama-corporat e-taxation.html

Posted by PeteKL | Report as abusive
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