February 29, 2012
WSJ: The $45 Billion Tax Bailout of GM
Following up on yesterday's post, NY Times: Treasury Bent NOL Rules to Provide $26 Billion to AIG: Wall Street Journal editorial, The Other GM Bailout: The $18 Billion Tax Gift Obama Didn't Mention:
Corporations in the red, as GM was for years, are allowed to carry forward net operating losses that reduce their future tax liability when they are making money. GM had accumulated about $45 billion in such profit-shielding chits by 2008, with a book value of about $18 billion. When companies enter bankruptcy, carry-forwards disappear or are greatly limited under § 382, which kicks in when ownership changes by more than 50% points.
The point is to prevent companies from buying assets solely for tax arbitrage or tax avoidance. But starting in 2009, Treasury began to issue regulatory "notices" that suspend this law when it comes to Treasury-owned stock. The provisions also apply to AIG and Citigroup.
So when GM entered bankruptcy in June 2009, the government swapped the debt the auto maker owed it as a creditor for 61% of "new GM," while handing another chunk to the United Auto Workers. But new GM also inherited the accumulated net operating losses that would have turned into a pumpkin in normal bankruptcy.
In a 2011 working paper, J. Mark Ramseyer of Harvard and Eric Rasmusen of Indiana University argue that by manipulating corporate tax rules by fiat, "Treasury gave the firm (and its owners, including the UAW) $18 billion more in assets." Thus a Democratic Administration gave "a massive tax benefit to one of the party's biggest supporters." The other problem is that the move put Ford and GM's other competitors at a disadvantage, as bailouts always do.
Mr. Obama crowed yesterday about GM's "highest profits in its 100-year history." We'd be interested to hear how its effective tax rate compares with Warren Buffett's secretary's.
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The policy behind 382 was not implicated by Treasury's investment because Treasury was not engaged in loss trafficking. Thus, 382's potential application here was a result of an overbroad tax rule applying in situations where it shouldn’t. It is only a gift to the firm in the sense that they avoided a wholly-unnecessary and unjustified penalty.
Posted by: rob | Mar 1, 2012 10:56:18 AM
Tax privileges are allocated by this administration just like the way it does stimulus grants.
The Autoworkers Obama Left Behind -- "Let’s clear the fumes (again), shall we? The bailout pain was not distributed equally. It was redistributed politically."
Posted by: Woody | Mar 1, 2012 3:21:50 PM
so every time the purchase would have been made regardless of the NOLs will treasury allow the NOLs to transfer?
Posted by: m fox | Mar 1, 2012 11:58:10 PM