Monday, January 31, 2011
NPR: Why Does GE Pay 3.6% Tax Rate, and Wal-Mart Pay 33.6%?
During his State of the Union address, President Obama said the current tax system is broken. "Those with accountants or lawyers to work the system can end up paying no taxes at all," he said. "But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change."
Just how broken is the corporate tax system? Consider the tax rate paid by two of America's biggest companies — Wal-Mart and General Electric. Wal-Mart paid 34 cents in taxes for every dollar of profit it made in the past three years. General Electric paid just 3.6 cents on the dollar.
Welcome to the mysterious world of the corporate income tax, says tax expert Len Burman at Syracuse University. "There are big companies that consider their tax departments to be profit centers," he says.
That's right; instead of concentrating on making light bulbs, power plants or whatnot, companies use the tax system to boost their profits.
The source of the data in the chart to the right is the January 20 testimony of Martin A. Sullivan (Tax Analysts) before the House Ways and Means Committee.
(Hat Tip: Francine Lipman.)
https://taxprof.typepad.com/taxprof_blog/2011/01/npr-why-does.html
Comments
"That is certainly true, but has nothing to do with the relative merits of income taxes vs. sales taxes."
True, but it *does* have merits when you're talking about a type of tax that calls itself "fair".
"Instead of believing that tax increases don't affect them, but spending increases might confer some benefit, they will understand that any tax increase will make everything they buy more expensive."
I wish this were true, but as I said before, a Sales Tax is just as easy to hide as an Income Tax. In the latter, you just implement "withholding", with the former, you just hide the tax in the price of the item.
And it is my understanding that part of the "Fair Tax" proposal is to do just that--although I could be wrong, because it's been a while since I've looked at it.
In any case, a good example of this is gasoline: around 40 cents of every gallon goes to Federal or State government. People don't seem to notice this, though, even though there are stickers on the sides of gas pumps declaring this, and this can be seen when people get angry that oil companies are making "record profits" which are the results of 8 cents of profit per gallon gasoline.
(Another point I failed to make previously--and it's probably the doozie--is that implementing a Sales Tax will be dangerous if we don't cut off other methods of tax. Before I will even entertain such a sweeping tax reform, I want amendments banning income taxes and corporate taxes, of all kinds!
As it stands, Democrats are just itching to introduce a so-called "Value-Added Tax", which is a type of sales tax that is prevalent in Europe--this, in addition to all the corporate and income taxes we currently pay.)
Posted by: Alpheus | Feb 2, 2011 7:00:57 AM
GE is well-connected to this administration. Walmart can't even get set up shop in Democrat power center like Chicago.
And you find the disparity odd?
Posted by: wilky | Feb 1, 2011 7:54:43 PM
"First of all, all taxes are inherently unfair"
That is certainly true, but has nothing to do with the relative merits of income taxes vs. sales taxes.
"ANY tax that tries to be "revenue neutral" is automatically unfair, because we're currently taxed at unfair levels!"
FairTax has the advantage that voters who currently believe that Someone Else is paying those taxes will know better. Instead of believing that tax increases don't affect them, but spending increases might confer some benefit, they will understand that any tax increase will make everything they buy more expensive. It will provide strong pressure to hold the line on tax rates, and eventually to drive them down to lower levels.
Posted by: The Monster | Feb 1, 2011 3:09:12 PM
The article is a good argument to eliminate the corporate income tax and tax the distibutions to the shareholders instead.
Posted by: cubanbob | Feb 1, 2011 2:07:04 PM
Oh, and I forgot: A so-called "Fair Tax" is just as easy to hide, as the income tax currently is. Just require the tax to be included in the price, as it already is in Great Britain (among other places).
Posted by: Alpheus | Feb 1, 2011 1:35:05 PM
"The great advantage of the FairTax is that it is out in the open on your sales receipt. No one pretends that somehow Someone Else is paying the tax for you. It's clearly being passed along to you (as existing income taxes are now being invisibly passed along to the consumer)."
First of all, all taxes are inherently unfair: they take money from individuals by gunpoint, and then use those moneys to fund programs that such an individual may disagree with. Furthermore, ANY tax that tries to be "revenue neutral" is automatically unfair, because we're currently taxed at unfair levels!
Second, what's to keep a Fair Tax from being immune from manipulation? Every constituency will want exceptions--indeed, the proposed so-called Fair Tax *starts out* with such a constituency--those who make a certain percentage below some "poverty line"--and it's only a matter of time before more are added.
It's far past time that the Federal Government take a tax holiday of a decade or two, and start selling off all that land that it has horded over these last hundred years or so. Land that is Unconstitutionally held, for that matter!
Posted by: Alpheus | Feb 1, 2011 1:33:37 PM
Of course they have a lower effective tax rate.
They have to write off all that NBC/CNBC/MSNBC
loss leader um..."news" propaganda stuff. They have to write off all that
"community service" dredging of the Hudson that
SOMEBODY laced with PCB (just upstream from the GM Tarrytown paint dumping plant) Those windmill dynamos arent going to build themselves after T. Boone Pickens bailed on pre-orders, with other peoples money, and apparently, the Chinese are going to make their OWN "spare parts" for aircraft engines now-right off the blueprints.
Where are those "mandatory" GE mercury vapor CFL lamps actually made? Where DO those middle eastern centrifuge drive motors come from?
Yeah sure, apples and oranges, "It's complicated!!!"
Really?
Posted by: CaptDMO | Feb 1, 2011 10:33:39 AM
> Taxes are any business' largest expense and it their job to minimize them.
Taxes aren't GE's largest expense....
The assumption that taxes are a biz' largest expense is a symptom that something is seriously wrong.
Posted by: Andy Freeman | Feb 1, 2011 10:13:32 AM
To chastise corporations for minimizing taxes, calling it a "profit center," is just cynical. Taxes are any business' largest expense and it their job to minimize them.
However, it does speak to the obvious fact that lobbying is very effective in determining a corporation's taxes. This part is just wrong.
Hey, isn't that GE guy, Immelt, involved with the administration somehow? I'm sure I read that somewhere.
Posted by: Pablo | Feb 1, 2011 8:15:14 AM
"WE MUST go to a Fairtax or Flat tax....my preference is a Flat Tax!"
The tax we have now started out "flat" (albeit with a high exemption aka Zero Bracket). If Congress passes a flat income tax, before Obama's signature dries, there will be lobbyists pushing for special exemptions for their constituencies. Within a few years, the tax code will be as Byzantine as it is now.
Then we'll flatten it out again. Lather, rinse, repeat.
The FairTax prevents later unflattening; there is no way for a retailer to charge a "rich" person a higher rate than a "poor" person. The only meddling that could be done with it is to start excluding certain goods/services from taxation entirely, or to fiddle with the Prebate.
The great advantage of the FairTax is that it is out in the open on your sales receipt. No one pretends that somehow Someone Else is paying the tax for you. It's clearly being passed along to you (as existing income taxes are now being invisibly passed along to the consumer).
Posted by: The Monster | Feb 1, 2011 8:05:48 AM
"The problem with these comparisons is that you are comparing apples and oranges. The various industries have different GAAP rules and effective tax rate for a corporation is usually income tax expense for financial reporting purposes divided by pretax accounting income. We are not talking about taxable income. Most people including probably NPR don't know the difference. You cannot make any conclusions by comparing these two."
-- Something tells me that Marty Sullivan, the source of this data, is aware of the differences in GAAP that you allude to. According to his biography, he is an economist who has written more than 400 articles for Tax Notes, Tax Notes International, and State Tax Notes. Formerly, he was an economist at the U.S. Treasury Department, the congressional Joint Committee on Taxation, and a major accounting firm. He got his B.A. at Harvard University and his Ph.D. at Northwestern University.
Posted by: Mike | Feb 1, 2011 7:19:59 AM
The problem is that corporate "income tax" is a bit of a mis-nomer. Corporations do not pay income tax. The collect additional revenue from their customers to cover the income tax and then pass that money on to the gov't.
To a corporation, taxes are an expense item, to be managed like other expenses and to be covered by revenue.
Posted by: Phil Snyder | Feb 1, 2011 6:42:22 AM
The likely answer is that GE is deep into the heavily-subsidized "green" energy market, from CFLs to wind turbines. The "green" market is a textbook example of how government intervention results in socializing the costs while privatizing the profits. And GE is deeply in bed with the Obama administration, with CEO Jeff Immelt leading a presidential council on job creation, despite GE's having outsourced much production to China during his tenure and despite the obvious questions about conflict of interest.
Posted by: craig | Feb 1, 2011 6:39:23 AM
Wow! NPR!!
Look how people start to work when we threaten to cut off their welfare. Maybe we should cut off welfare to illegals, cut off unemployment at ONE YEAR.
Note to NPR: If you did real journalism like this, you could sell ads like FoxNews, Rush Limbaugh and Sean Hannity. You could be a real news company rather than the Pravda propaganda mouthpiece of the Politburo, er, Obama White House.
The lesson to be learned here goes back to the original compromises in the Constitution. Taxes on exports should be prohibited. They drive up the prices of American products thereby increasing demand for products from other nations. All the taxes on American businesses are killing our economy. All the taxes on American businesses are insincere indirect taxes that consumers end up paying anyway. There are NO business taxes, only consumer taxes. We pay these business taxes with higher prices and higher unemployment.
Congress raises taxes on everyone, then they give their cronies tax breaks. The real theme in this story is not the legal department is the profit center at GE, their lobbying department is the profit center. GE paid enough to get their guy in the top spot in the Obama Brothel.
Posted by: JoeS | Feb 1, 2011 6:38:18 AM
Would you mind if I asked the tax rates for GM, Chrysler, Ford, Nissan USA, Toyota USA, and Honda USA?
Posted by: Alexander D. Mitchell IV | Feb 1, 2011 6:28:16 AM
To the contrary, Sid, I can and will draw a couple of conclusions. GE is well-connected to this regime now in power in DC, and is perhaps one of the worst offenders when it comes to receiving government largesse. I call it crony capitalism, or corruption. The Obama Administration uses up resources rewarding the GEs at the expense of the private sector that doesn't receive favored treatment. And causes serious misuse of scarce capital, again at the expense of others.
Posted by: templar knight | Feb 1, 2011 6:26:53 AM
The "losers"-- retailers/distributors-- tend to have relatively stable income year to year. Walmart, as a discount seller, tends to make a profit even in recession, sometimes even doing better due to the substitution effect as consumers bargain hunt. Insurers like United Health Group tend to make stable (but fairly low) profits every year, because they adjust premiums to actuarial requirements. These sorts of companies don't have carry over losses. The "winners" have much more volatile income year to year. They are much more likely to lose huge amounts in bad years, and carry over their losses.
You have to be very careful about computing effective tax rate on a company that lost money two years ago but made a lot this year.
Posted by: John Thacker | Feb 1, 2011 6:24:10 AM
'winners appear to be manufacturers/suppliers' except GE hasn't been a manufacturer for years. A great deal of their profit since the time of Welch has been from finance activities - before the finance crash and bailout in '07 GECS accounted for half of their profits - as reported.
There were probably all sorts of financial games played with that to impact the tax bill as well. It's not debt it's equity, it's not US revenue it's based in the Bahamas . . .etc.
Posted by: Steve Adams | Feb 1, 2011 6:19:44 AM
"...You cannot make any conclusions by comparing these two.
True, but you can demagogue the issue by comparing the two.
Posted by: David Walser | Feb 1, 2011 6:16:56 AM
Which is why, if WE are serious about reforming the government and taking away the power to buy votes, then WE MUST go to a Fairtax or Flat tax....my preference is a Flat Tax!
Posted by: JadedByPolitcs | Feb 1, 2011 5:59:12 AM
GE had a near meltdown during the sub-prime crisis from its GE Capital subsidiary, which had accounted for more than half of its profits. That is why Immelt needed a bailout from TARP. I assume that the experience resulted in NOL out the wazoo.
Posted by: Walter Sobchak | Feb 1, 2011 5:53:33 AM
Is this tax as a percentage of domestic profit, or as a percentage of global profit?
Posted by: Fearsome Tycoon | Feb 1, 2011 5:42:59 AM
The problem with these comparisons is that you are comparing apples and oranges. The various industries have different GAAP rules and effective tax rate for a corporation is usually income tax expense for financial reporting purposes divided by pretax accounting income. We are not talking about taxable income. Most people including probably NPR don't know the difference. You cannot make any conclusions by comparing these two.
Posted by: Sid | Jan 31, 2011 1:33:52 PM
One distinction between the two groups in the list is the losers tend to be retailers/distributors whereas the winners appear to be manufacturers/suppliers. I would guess that the IRC is titled toward encouraging manufacturing and creating products and letting the sales and distribution of products take care of itself.
Posted by: Matt | Jan 31, 2011 12:19:37 PM
Hear, hear.
Lots of tax inequities out there.
I own my condo, my neighbor rents. I pay less taxes (assuming his rent equals my mortgage plus other payments).
I own my condo, a company owns the condo next to me. Neither of us have a mortgage. The company gets to depreciate its investment, I don't (but I do get a much higher basis upon sale).
I pay about $2,000/year for an accountant, for personal and small business taxes. If the tax system were simpler, perhaps I would pay $1,000 more to the government, but it might be offset by paying $1,000 less to the accountant.
Simplification is the way to go. But, since GE has the money, they will get their deduction. Unless, that is, Walmart, Disney, and the others get together to pressure from the other side...
Posted by: Allan | Jan 31, 2011 12:07:08 PM
Immelt is tight with Obama and GE donated more to Obama than did Walmart.
Follow the money.
Posted by: drjohn | Feb 2, 2011 10:01:53 AM