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Thursday, September 15, 2011

TNR: Elizabeth Warren v. GE on Taxes

GE The New Republic, Elizabeth Warren v. GE:

In making her pitch, Warren plunged herself into a headache-inducing factual controversy. "A big company like GE pays nothing in taxes," Warren said, "and we're asking college students to take on even more debt to get an education?" Warren's source that GE paid no taxes (by which she meant income taxes) was a March 24 New York Times story by David Kocieniewski ("GE's Strategies Let It Avoid Taxation Altogether"). But an April 4 Fortune piece by Allan Sloan in collaboration with Jeff Gerth, a former Times man who now works for ProPublica, said that GE actually did pay income taxes for 2010, and will do so again for 2011. It just wouldn't pay very much. "We're certainly not siding with GE," wrote Sloan and Gerth, "which for decades has been an aggressive tax-minimizer."

The Times stood by its story, though its op-ed columnist Joe Nocera hedged his bets, citing both the Times piece and the Fortune piece and concluding, "Whatever. The point remains that the company is going to pay little or nothing in federal income taxes for 2010." (Before he came to the Times Nocera worked for many years at Fortune.) Meanwhile, Henry Blodget of Business Insider tried and failed to get a straight answer from GE. He concluded, initially, that "it is not fair to say that GE's 2010 U.S. tax bill was 'none,'" but subsequently he decided that maybe it was fair, at least with respect to income taxes, because GE spokesperson Anne Eisele told Agence France Presse, "GE did not pay U.S. federal taxes last year because we did not owe any." But on the very same day, Eisele wrote Blodget, "GE did pay almost $2.7 billion in cash income taxes in 2010 on a consolidated basis (almost 19% of pretax income from continuing operations) globally, including significant U.S. federal income tax payments." These two statements appear to contradict one another, but she might have been saying that GE paid no taxes for 2009 and some taxes for 2010.

Blogger Paul Caron, a law professor at the University of Cincinnati, provided a link to GE's Form 10-K that he said demonstrated GE did not, in fact, pay income tax in 2010 (though he was full of tax-nerd contempt for the Times piece). Forbes said GE in 2010 paid $1.05 billion in income taxes. One year before the same reporter said GE paid no taxes at all in 2009. So maybe GE did pay taxes in 2009 but didn't pay taxes in 2010. But that would contradict Caron. The NBC Nightly News said that GE's taxes were "unusually low" for both years, which would suggest they weren't zero,  but the fact that NBC is owned by GE makes it hard to know what to make of that assertion. (The Nightly News waited several days after the Times piece appeared before deciding to cover the story.)

A safe conclusion, I think, would be that there was at least one recent year--maybe 2009, maybe 2009 and 2010--in which GE did not pay any income tax. Probably when you work as hard as GE to avoid paying taxes altogether the definition of whether you pay income tax in any given year becomes subject to interpretation. Bottom line is that the Pulitzer committee should feel free to Kocieniewski a prize for his excellent piece, and that Warren is fully justified in saying "GE pays nothing in taxes," because she never said what year she was talking about.

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Comments

But GE pays payroll taxes and excise taxes, just like the 50% of Americans who pay no federal income tax.

Posted by: MLK | Sep 15, 2011 12:07:24 PM

"Tax nerd contempt"? Now there's a thoughtful, well-researched, balanced journalistic comment. Hopefully this was was just a TNR op-ed piece.

If asking reporters to research and report facts on issues is contemptuous, I am right there with you. It slays me when journalists report on tax issues, but do so in a biased manner, selectively omitting facts, and then they cast their reports as news, not opinion.

Tax nerds of the world, unite!

Posted by: NOLA | Sep 15, 2011 12:25:45 PM

Whatever you do, don't actually quote the 10-K. Just report what others kind of said about it.

All this ranting ignores the fact the the duty of corporate officers to shareholders is that they minimize expenses, including, of course, taxes of all kinds. Tax checks are invariably the largest single check a company writes each year.

I suspect that most, if not all, of the people complaining about GE's tax position pay most of their taxes through withholding. If they had to save throughout the year and write a big check for estimated taxes four times a year, their understanding might be a little deeper.

Posted by: TexEcon | Sep 15, 2011 12:28:33 PM

If one takes the disclosures in the 2010 Form 10-K at face value, GE did in fact pay $2.7 billion of income taxes in 2010. It may well be that all or most of that income tax was paid not to the IRS, but to foreign taxing authorities. But it is untrue, and contrary to logic, to assert that GE pays no income taxes anywhere when it is making money. Commentary to the effect that US corporations "pay no tax" seems ill informed, and almost never do the commenters mention the foreign tax credit. Whether the balance is properly struck between GE paying taxes abroad, and paying taxes in the US, is another debate.

Posted by: Jake | Sep 15, 2011 2:46:26 PM

66% of American Corporations between 1998 and 2005 paid no federal income tax according to GAO. The companies had a combined 2.5 trillion in revenue. I would feel a lot better if the corporations had some skin in the game.

Posted by: jim harper | Sep 15, 2011 10:03:26 PM

If you go to the 10K on EDGAR and read Note 14, I think its fairly safe to say that they have not paid CASH US taxes for years.

First, the tax expense line on the income statement is a GAAP measure. For 2010 its 1.05 billion. But in note 14 you'll see that of that, 4 million is current (or CASH) and 1.01 B is deferred (non cash or taxes payable in a future period).

More interesting though is the the 3rd para in Note 14. It is not written for clarity (many filers reconcile US income taxes and foreign income taxes in table form) but it does state specifically that "current" US taxes for the prior 3 years are a benefit. Meaning - no cash taxes paid, and likely a deferred tax asset created. That doesn't mean the USA owes them money; rather they have sufficient deferred tax assets to avoid CASH US tax for the foreseeable future.

"...Consolidated current tax expense includes amounts applicable to U.S. federal income taxes of a benefit of $3,253 million, $833 million and $651 million in 2010, 2009 and 2008, respectively, related to the benefit from GECS deductions and credits in excess of GE's current U.S. tax expense. Consolidated current tax expense amounts applicable to non-U.S. jurisdictions were $3,258 million, $2,385 million and $3,027 million in 2010, 2009 and 2008, respectively. Consolidated deferred taxes related to U.S. federal income taxes were $2,099 million in 2010 and a benefit of $2,501 million and $836 million in 2009 and 2008, respectively, and amounts applicable to non-U.S. jurisdictions of a benefit of $1,167 million, $264 million and $499 million in 2010, 2009 and 2008, respectively...."

Posted by: gaffer | Sep 15, 2011 10:52:17 PM

It should also be noted that GE lost an enormous amount in its finance subsidiary in 2008 because of the financial crisis. Its losses made it eligible for a Tarp bailout (I am not defending TARP or GE, just trying to convey the scale of the losses).

Posted by: Walter Sobchak | Sep 19, 2011 1:06:05 PM