Paul L. Caron

Monday, April 4, 2011

NY Times Lies About GE's Zero Income Tax Bill

G.E. Logo Shayna Leah, New York Times Gives False Information on General Electric's Zero Income Tax Bill:

It is hard to imagine that General Electric (GE), whose nuclear plants have been in the spotlight since the recent Japanese earthquake and subsequent tsunami, would have anything positive to say about that natural disaster, but the media uproar that followed it meant that the world's newspapers were distracted from the multinational corporation's recent SEC filing. That filing, Form 10-K, revealed that in 2010, for the second year in a row, General Electric paid zero federal income taxes.

The 258 page long PDF document was finally analyzed this week by reporters who latched onto phrases like "GE's effective tax rate is reduced because active business income earned and indefinitely reinvested outside the United States is taxed at less than the U.S. rate." The New York Times in particular took pleasure in writing a long-winded four-page diatribe that all but accused GE's tax department, led by John Samuels, a former Treasury official, of committing tax evasion in an effort to avoid paying the 35% federal income tax rate on tax profits.

What most readers of the New York Times, and anyone else not well versed in accounting rules and tax regulations, is likely unaware of, is that tax profits are different than book profits. There are expenses that can be deducted for accounting records but not for tax liabilities and vice versa. Major corporations like GE do complicated calculations each quarter to find out exactly what those differences are so that there are no ugly surprises when they report information to both their shareholders and the taxing authorities. ...

The most ridiculous part of the New York Times' report though was the moronic extrapolation of the statement "U.S. current tax provision on continuing operations" to mean that the $2.7 billion tax benefit listed on GE's accounting records was a check from the IRS. All this means is that during the time period covered, GE erroneously accrued an expense of $3.2 billion in income taxes. When they did not have to pay that income taxes, they reversed that expense.
The bottom line? GE did what it had to do in 2010 to remain in business, which is to obey the laws while staying competitive. The New York Times on the other hand failed to hire competent writers, editors or researchers in 2011.

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It is a characteristic of the journalism profession to not let an accurate explanation of the facts get in the way of a particular point of view. For the NYT article, the theme was "big corporations should pay more US income tax." A proper explanation of GE's tax situation would explain that GE's low effective tax rate was based on a number of things including the consolidated return rules, the active banking or finance exception to Subpart F (first enacted during the Clinton years and extended during recent Democratic controlled Congresses), net operating losses, and the US having the highest corporate tax rate in the industrialized world. Reading GE's 10-K one sees it is reads like pretty normal tax planning for an enterprise that operates in dozens of jurisdictions. Of course, none of that is as much fun as pillorying a multinational corporation.

Posted by: TexEcon | Apr 5, 2011 8:32:57 AM

Unlike GE, not all large corporations avoid paying taxes. There are some that pay a lot of taxes. Take the "evil" oil companies. Some of them structure their affairs so that they do pay some federal income taxes. The few that I have worked with have a culture that says they will pay taxes to avoid this very type of issue GE now faces.... They are afraid of losing the plethora of tax breaks for their industry, and increased non-tax regulation. My point is, GE opted not to follow such a policy, and now it is where it is. It paid no federal income tax and it must deal with the publicity for that decision. Wise up GE. Reducing your overall tax rate is not the only policy issue that your tax staff should be concerned about.

Posted by: gary | Apr 5, 2011 6:15:15 AM

The problem with the NYT article was that it focused solely on the federal income tax - which is only one of many sources of government revenue. I assume the writer chose it because every American (individual or corporation) has to come to terms with it. And now being tax season, the timing of the article was perfect.

The NYT article claims that GE didn't pay any income tax due to its army of in-house tax professionals and lobbyists. Most Americans do the same thing (although on a much smaller scale) when they hire tax professionals or use tax software to minimize their income tax liability. OK - so most Americans are not going to qualify for the R&D tax credit or the other very specialized tax benefits that GE lobbied for. But most Americans are not doing what GE is doing.

Finally, let's talk tax incidence. So GE paid no income tax - let's say they did. Is GE really paying it? Or is someone else paying it - through increased prices (lost income due to competition), layoffs (lost employee income and payroll taxes), or other cost efficiency measures (insert your favorite negative externality here)?

The income tax laws are complex because of its very political nature, it changes all the time. If the article is just exposing this complexity, it could have done it without publicly shaming GE while making some serious innuendos.

Posted by: Steven | Apr 4, 2011 10:58:27 PM

Nevermind that last comment of mine. It was ranting.

Posted by: Woody | Apr 4, 2011 9:20:30 PM

A NYT journalist, presumed to be competent and who twists the subject to the conclusion that he wants with an insufficient understanding of the subject, is being deceptive if not outright lying. There were plenty of CPAs he could have consulted if he deemed the subject complex and wanted to check his facts first. Likewise, the NYT said that Bush lied rather than had bad information, so we might as well be consistent with its policy of calling people liars.

It's interesting that liberals (1) attack whistleblowers who expose them and (2) excuse their sources of bad information rather focus on the correction of the article, in this case, which the NYT will never make even knowing the facts now.

Posted by: Woody | Apr 4, 2011 5:17:25 PM

The portion of Leah's article excerpted on TaxProf Blog is incomplete.

In response to the NY Times' assertion that GE did not pay any US taxes, Ms. Leah tells us: "With nearly 150,000 employees in the United States, GE pays millions in payroll taxes like employers of all sizes. GE also may pay income taxes to those states that it has a significant presence. ... They also likely pay franchise tax fees as well as sales tax to various states and cities." In other words, Ms. Leah does not actually disagree with the NY Times' principal assertion: that GE did not pay any US corporate income taxes.

Ms. Leah's ultimate point is correctly captured in her conclusion paragraph: "GE did what it had to do in 2010 to remain in business, which is to obey the laws while staying competitive." True. But the NY Times' ultimate point was NOT that GE did anything illegal; it was that our tax laws are structured so as to allow -- indeed, perhaps require -- GE to avoid paying taxes. Perhaps those laws should be changed.

Posted by: Theodore Seto | Apr 4, 2011 3:08:19 PM

I think the gist of the argument is lost on most, The point about taxable vs. non-taxable income,deductions, tax
renumeration,ect. is cleaver to hide the way corps pay taxes vs. the little guy.
Let's say I make $1000 a month
Now I pay my rent,food,utilities,car payment,insurance, ect.
There goes $900 1000-900=100 dollars left.
Take half of that and put away for future self investment.
$50 left over.
Now if you are a corp you pay your taxes on to $50 not the $1000 you started the month with.
35% of $50 = $17.50
Effective tax rate 1.75%

Gross income is the vision everyone See's for corps just like us except it is a convoluted argument to make

Posted by: achmed | Apr 4, 2011 2:14:42 PM

I think the title of this post is blatantly false. What did the Times say that was a "lie?" As the post notes, accounting for income taxes is complex, and most people don't fully understand it. The journalist apparently did not understand the deferred tax accrual and mistakenly reported that GE received a refund. Being wrong and lying are not the same thing. In fact, this post comes closer to lying than did the story in the Times.

Posted by: Robert Ricketts | Apr 4, 2011 2:09:44 PM

Yammons, since you had already made your mind up from the title without really reading the rebuttal, go back and see if you find anything about book/tax differences and the misinterpretation by the NYT.

Also in the past, the NYT has whined about two out of three corporations not paying taxes, without considering the passthroughs of corporate income to individuals, those corporations who do not make taxes and went out of business, and the double taxation of dividends. But, at least and unlike many Democratic politicians who are ignored by the NYT, GE paid what was legally required. Not only does the NYT get it wrong, as indicated, it is very selective in where it points fingers.

If only the NYT was as worried about government waste and giveaways as it is in wanting corporations to pay high taxes.

Posted by: Woody | Apr 4, 2011 12:54:05 PM

I don't recall seeing the word "evasion" in the article.... I thought it was about tax avoidance.... I didn't go back and check the article though.

To me, the issue seems to be that GE and their ilk contort the tax law by lobbying to change it so that it benefits them. When their antics are exposed, they then turn around and complain that the tax law is too complex. They made it complex. They benefit from it being complex. Their actions and position smacks of bad faith. It is immoral and anti-American, even if not illegal.

I thought the article was well written, on point, and a very important topic.

Posted by: Gizmo | Apr 4, 2011 12:26:56 PM

The gist of the NY Times piece was that GE made a lot of money (as far as what it reported publicly) and paid nothing in federal income taxes. The Times did not suggest that this was illegal. That all seems to be true, and unrebutted here.

Posted by: Yammons | Apr 4, 2011 11:39:51 AM