naked capitalism

The New York Times reports tonight on what a great job General Electric does in tax evasion avoidance, reaping a tax credit of $3.2 billion on $5.1 billion of reported US profits. And while GE is a particularly egregious example by virtue of having the most sophisticated tax operation in the US, it illustrates a more general point. The idea that US corporations are heavily or even meaningfully taxed is a canard (and this is true at the small end of the spectrum too). While nominal tax rates may appear to take a serious bite out of corporate earnings, a myriad of loopholes and income-shifting schemes allows companies to slip the taxman’s leash.

And before some of you contend that this line of thinking is somehow anti-capitalist, consider the reaction of President Reagan when learning of GE’s skills in tax dodging:

As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill. In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E. — a company for which he had once worked as a commercial pitchman — was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.

“I didn’t realize things had gotten that far out of line,” Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.

And don’t try contending that it has always been like this. From Richard Wolf in the Guardian (emphasis his):
During the Great Depression, federal income tax receipts from individuals and corporations were roughly equal. During the second world war, income tax receipts from corporations were 50% greater than from individuals. The national crises of depression and war produced successful popular demands for corporations to contribute significant portions of federal tax revenues.

US corporations resented that arrangement, and after the war, they changed it. Corporate profits financed politicians’ campaigns and lobbies to make sure that income tax receipts from individuals rose faster than those from corporations and that tax cuts were larger for corporations than for individuals. By the 1980s, individual income taxes regularly yielded four times more than taxes on corporations’ profits…

Corporations repeated at the state and local levels what they accomplished federally. According to the US Census Bureau, corporations paid taxes on their profits to states and localities totalling $24.7bn in 1988, while individuals then paid income taxes of $90bn. However, by 2009, while corporate tax payments had roughly doubled (to $49.1bn), individual income taxes had more than tripled (to $290bn).
The article describes one of the biggest ruses used by major companies, that of shifting income to lower tax jurisdictions. Nicholas Shaxson, in his book Treasure Islands, discusses how the economic justifications are often thin to non-existant, which the operations in the tax-shelter countries often being skimpy even though the income attributed to them via transfer pricing schemes will be large. This operates to the extent that Africa loses more via tax stripping than it gets back in foreign aid. Consider the pattern at GE:

As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.

The story also recounts the lengths GE goes to in winning special tax waivers. GE’s tax chief and former Treasury official John Samuels kneeled before Charles Rangel to plead for a the extension of tax breaks favorable to GE (this seems to establish that when influential people go on bended knee before Congresscritters, the taxpayer is about to be screwed royally). By happenstance, just a month later, GE president Jeff Immelt and Rangel stood together as Immelt announced that the multinational was giving an unprecedented $30 million to New York City schools, $11 million of which would go to ones in Rangel’s district.

Another vignette of GE lobbying in action:

After the World Trade Organization forced the United States to halt $5 billion a year in export subsidies to G.E. and other manufacturers, the company’s lawyers and lobbyists became deeply involved in rewriting a portion of the corporate tax code, according to news reports after the 2002 decision and a Congressional staff member.

By the time the measure — the American Jobs Creation Act — was signed into law by President George W. Bush in 2004, it contained more than $13 billion a year in tax breaks for corporations, many very beneficial to G.E. One provision allowed companies to defer taxes on overseas profits from leasing planes to airlines. It was so generous — and so tailored to G.E. and a handful of other companies — that staff members on the House Ways and Means Committee publicly complained that G.E. would reap “an overwhelming percentage” of the estimated $100 million in annual tax savings.

According to its 2007 regulatory filing, the company saved more than $1 billion in American taxes because of that law in the three years after it was enacted.

The ugly end result of all this tax avoidance is that jurisdictions go on fool’s missions of trying to accommodate the big boys to either get special favors (in the case of Rangel) or to create jobs, when the jobs may not really add up to much (as in there is no real specific quid pro quo, save in cases like new factory openings). And GE is half financial services, every bit as dependent on the munificence of the Fed and Treasury as the big banks for its survival, and was an active user of many of the fancy special lending facilities created by the Fed. And if AIG had failed, GE would have gone down too. So a company that refuses to pay its fair share of the tax burden has no compunctions of sucking heavily at the TBTF subsidies trough.

In addition, in some cases the consequences of failing to heed threat to leave don’t come close to the level that the corporations bandy about. As Richard Smith noted regarding the saber-rattling of various financial player about leaving London if higher levies are imposed:

The second interviewee has heard some rumours. Well, so have I, and mine say that Zug’s full up with expat hedgies, Geneva’s full up with expat hedgies, and they all come dashing back at the weekend anyway for the home comforts of London. There’s more to attractiveness than your tax rate. Let’s see someone carve a whole new anglophone Canary Wharf, City of London, and Mayfair out of the bare rock somewhere in a European time zone. And add a few shops and some nice nurseries, and so on. It might take a while. Short of that, it’s worth noting that when you inspect the tax revenue figures a bit more closely, it turns out that just over a tenth of the £53Bn is corporation tax: that’s (roughly speaking) all that’s at risk if a UK bank changes its domicile.The rest only walks if the staff ship out along with the banks. Where to?

And if HSBC decamped, wouldn’t that make someone other than the UK responsible for its rescue if it got in trouble? That trade sounds like a net plus to me. (But Richard Smith’s surmise looks correct: HSBC’s threat to depart looks to be pure bluster).

But in the US, the real economy justifications for these sorts of moves are guaranteed to become more and more unhinged from reality. The Citizens United decision means the cost of winning and holding any elected Federal post has just skyrocketed. Thus big corporate donors will be even more certain of getting what they want, no matter how much damage it does to citizens and the real economy.