David Cay Johnston has an interesting column at Reuters about the distribution of GE's tax payments over the last decade that raises some questions about the impact of corporate tax rates on the company's activities. The US has offered GE lower effective tax rates than it's foreign operations, but GE has been reporting more of its profits overseas, where it's been paying higher taxes. (The fact that GE pays much lower taxes than the supposed US corporate tax rate is also instructive.) This trend of their reported profits shifting overseas where the corporate rates are effectively higher for GE counters the "conventional wisdom" about how taxes drive the investment decisions of a major global business:
Aug 23 (Reuters) - Washington politicians say high corporate tax rates are driving U.S. companies to invest offshore where tax rates are lower. But that is not General Electric's experience.
GE's disclosures show that over the last decade it paid much lower tax rates in America than offshore, just the opposite of the Washington political mantra. Even more puzzling, the U.S. corporate giant chooses to take more of its profits in other lands despite the higher tax rates there.
Given that GE (GE.N) has a roughly 1,000-person tax department dedicated to paying as little as possible in taxes, what the disclosures show is that something other than tax policy is driving GE's business decisions.
The law gives companies a great deal of latitude in deciding how to arrange where they report profits from multinational transactions. GE won't elaborate on why it takes so much of its profit in higher tax jurisdictions offshore.
HIGHER RATES ABROAD
From 2001 through 2010, GE's total American corporate tax burden averaged 9.4 percent of its profits in American corporate income taxes compared to its 17.9 percent foreign tax rate.
GE's accounting for taxes, both current and deferred, shows that its American tax rate is just a bit more than half its foreign rate and only about a quarter of the statutory 35 percent rate set by Congress.
Gary Sheffer, GE's top spokesman, insists that the average 9.4 percent rate over 10 years is misleading because GE suffered big losses in its finance unit that lowered its 2010 American taxes.
"GE's tax rate was lower than normal in 2010," Sheffer advised me, because "we lost billions of dollars in GE Capital, our financial arm, during the global financial crisis. Our tax rate will be higher in 2011 as GE Capital recovers."
But that anomalous year pales compared to the long-term trends.
Break the first decade of this century in two and you can see the trend clearly.
From 2001 through 2005, GE paid almost identical tax rates on its profits, 19.3 percent in the U.S. and 19.7 percent offshore. During those five years GE reported 56.1 percent of its profits in the United States.
But for 2006 through 2010 a number of significant changes show up in the fine print of GE's 10-K disclosures.
FALL OF 28.3 PCT
First, the share of profits taken in the U.S. fell by half to 28.3 percent. On the surface that fits the Washington political debate that high taxes are driving capital and profits offshore.
But during those same years GE's offshore tax burden was 28 percentage points higher than its American rate. GE reported tax rates of 16.7 percent on offshore profits, compared to minus 11.5 percent on U.S. profits.
During those five years GE reported $26.6 billion in U.S. profits, but its accounting shows a negative $3 billion tax expense. Offshore the company made $67.3 billion and its taxes by the same measure came to $11.3 billion.
Of that $3 billion negative tax burden over five years, GE relied heavily on business tax credits that Sheffer described as "widely available" and included "the credit for manufacturing energy-efficient appliances in the U.S., the credit for research performed in the U.S., and the credit for energy produced from renewable sources."…
All these numbers show the same basic trend line -- despite higher taxes offshore and much lower domestic taxes, GE keeps taking more profits offshore. That cuts against the simplistic theme of the growing bipartisan consensus in Washington that corporate tax rates must come down.
These facts all raise the question of whether our elected leaders in both parties will stop memorizing talking points and get to studying data points so we get reality-based tax policy. That means paying attention to nuance, including those business tax credits GE relies on so heavily, as well as posted tax rates.
Congress may be blind to such facts, though, because of the money GE spends to influence Washington. Last year GE spent $39.3 million lobbying Congress, roughly $73,000 for every senator and representative. That's four times what it spent back when its American tax rates, and its share of profits taken in America, were both much higher.
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